Which statement best describes the impact of loan proceeds on the accounting equation?

Which statement best describes the impact of loan proceeds on the accounting equation?

• A. Assets increase; Liabilities increase
• B. Assets decrease; Liabilities increase
• C. Assets increase; Equity increase
• D. Assets decrease; Liabilities decrease

Answer: (A)

Receiving loan proceeds increases cash, which is an asset, and it also creates a debt, which is a liability. In the accounting equation (Assets = Liabilities + Equity), this means both sides rise by the same amount, keeping the equation balanced. The entry is a debit to cash (increase) and a credit to a loan payable (increase). Equity isn’t affected at the moment of the loan’s receipt, though interest later would affect equity as an expense. So the description that assets increase and liabilities increase best captures the immediate impact of a loan.

Receiving loan proceeds increases cash, which is an asset, and it also creates a debt, which is a liability. In the accounting equation (Assets = Liabilities + Equity), this means both sides rise by the same amount, keeping the equation balanced. The entry is a debit to cash (increase) and a credit to a loan payable (increase). Equity isn’t affected at the moment of the loan’s receipt, though interest later would affect equity as an expense. So the description that assets increase and liabilities increase best captures the immediate impact of a loan.