Multiple choice

Profit leads to increase in

  1. assets

  2. capital

  3. both (1) and (2)

  4. neither (1) nor (2)
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Profit increases owner's equity (capital) by definition. Profit also increases assets - either cash received or receivables created. Accounting equation: Assets = Liabilities + Capital. When profit occurs, both sides increase - assets rise and capital (retained earnings) rises. 'Neither assets nor capital' would mean no profit at all.

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