Which ofthe following will bethe effect oftaking of a loan from the bank by an entity? A. Increase in assets and decrease in liabilities B. Increase in both assets and liabilities C. Decrease in assets and increase in liabilities D. Decrease in both liabilities and equity E. Increase in both liabilities and equity
Question
Which ofthe following will bethe effect oftaking of a loan from the bank by an entity? A. Increase in assets and decrease in liabilities B. Increase in both assets and liabilities C. Decrease in assets and increase in liabilities D. Decrease in both liabilities and equity E. Increase in both liabilities and equity
Solution
The correct answer is B. Increase in both assets and liabilities.
Here's why:
When an entity takes a loan from a bank, it receives cash which is an asset. So, the entity's assets increase.
At the same time, the loan is a liability because it is an amount that the entity owes and will have to pay back to the bank in the future. So, the entity's liabilities also increase.
Therefore, taking a loan from a bank results in an increase in both assets and liabilities for the entity.
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