When a sole trader puts £5,000 of their own money into the business, which two accounts are affected?

When a sole trader puts £5,000 of their own money into the business, which two accounts are affected?

• A. Cash increases; Capital increases
• B. Cash increases; Drawings increases
• C. Cash decreases; Capital decreases
• D. Cash decreases; Drawings decreases

Answer: (A)

Bringing personal money into the business increases the cash asset and also increases the owner's equity (capital). In double-entry terms, you debit the cash account to show the asset rise and credit the capital account to reflect the higher owner stake. This is different from drawings, where money is taken out by the owner, which would decrease cash and reduce capital. So the two accounts affected are cash (increases) and capital (increases).

Bringing personal money into the business increases the cash asset and also increases the owner's equity (capital). In double-entry terms, you debit the cash account to show the asset rise and credit the capital account to reflect the higher owner stake. This is different from drawings, where money is taken out by the owner, which would decrease cash and reduce capital. So the two accounts affected are cash (increases) and capital (increases).