An owner contributes cash to the business. How does this affect the accounting equation?

Answer 1

When an owner contributes cash to the business, it affects the accounting equation, which is:

Assets = Liabilities + Owner's Equity

In this scenario:

1. Assets increase because cash (an asset) is added to the business.
2. Owner's Equity also increases because the owner's contribution is considered an investment in the business.

Thus, if the owner contributes, for example, $10,000 in cash:

• Assets increase by $10,000 (cash).
• Owner's Equity increases by $10,000 (owner's contribution).

The accounting equation remains balanced, as both sides increase by the same amount:

Assets (increased by $10,000) = Liabilities (no change) + Owner's Equity (increased by $10,000).