Fresh capital introduction will increasea)Capital and Liabilitiesb)Liabilities and equityc)Assets and Capitald)Assets and LiabilitiesCorrect answer is option 'D'. Can you explain this answer?

Question

Answer

When capital was introduced in the business then it will result in increase in cash (I.e assets) and it will also results in capital....... so correct answer is c

Answer

D

Answer

When capital is introduced, there is increase in cash/bank (asset) and capital. So, the correct answer is C

Answer

Introduction
When fresh capital is introduced into a business, it has an impact on various elements of the financial structure. The increase in capital has a direct effect on assets and liabilities, but the impact on equity is indirect. In this case, the correct answer is option 'D', which states that fresh capital introduction will increase assets and liabilities.

Explanation
Fresh capital refers to new funds that are invested in a business. This could come from various sources such as the owners, shareholders, or external investors. When fresh capital is introduced, it has the following effects:

1. Increase in Assets
Assets are the resources owned by a business that have economic value. When fresh capital is introduced, it becomes part of the business's assets. This is because the capital is typically used to acquire new assets or increase the value of existing assets. For example, the funds may be used to purchase new machinery, expand the business premises, or invest in inventory. As a result, the total value of assets increases.

2. Increase in Liabilities
Liabilities are the obligations of a business to repay debts or fulfill other financial commitments. When fresh capital is introduced, it often leads to an increase in liabilities. This is because the capital is typically obtained through borrowing or issuing debt instruments such as bonds or loans. The funds received increase the business's debt, resulting in higher liabilities. These liabilities need to be repaid over time, usually with interest.

3. Indirect Impact on Equity
Equity represents the ownership interest in a business. It is calculated as the difference between assets and liabilities (Equity = Assets - Liabilities). When fresh capital is introduced, it directly affects assets and liabilities, but the impact on equity is indirect. The increase in assets (due to the fresh capital) increases the value of equity. However, since liabilities also increase, the net effect on equity depends on the magnitude of the increase in assets compared to the increase in liabilities.

Conclusion
In summary, the introduction of fresh capital into a business has a direct impact on assets and liabilities. It increases the value of assets and leads to an increase in liabilities. The impact on equity is indirect, as it depends on the net effect of the increase in assets compared to the increase in liabilities. Therefore, the correct answer to the question is option 'D' - Fresh capital introduction will increase assets and liabilities.

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