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You start a business by putting in $10,000 of your own cash, then borrow a further $10,000 from a bank. What does the accounting equation show after the borrowing?
AAssets $10,000, liabilities $10,000, equity $0
BAssets $10,000, liabilities $0, equity $20,000
CAssets $20,000, liabilities $20,000, equity $0
DAssets $20,000, liabilities $10,000, equity $10,000
Answer & Solution
Correct answer: D. Assets $20,000, liabilities $10,000, equity $10,000
1. Start from assets equal liabilities plus owners' equity.
2. Putting in $10,000 of your own cash gives assets of $10,000, liabilities of $0 and owners' equity of $10,000.
3. Borrowing $10,000 from the bank brings in cash, so assets rise by $10,000 to $20,000.
4. The same loan is a debt you must repay, so liabilities rise by $10,000 to $10,000.
5. Owners' equity is untouched by the loan and stays at $10,000, because you invested nothing further.
6. The equation reads $20,000 equals $10,000 plus $10,000, which balances.
7. The trap is treating the loan as an increase in your own stake, which would wrongly push equity to $20,000.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.3 Basic Accounting Procedures_
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