What is the effect of issuing common stock for cash on the basic accounting equation?

• A. Assets increase by 7,000; Liabilities increase by 7,000
• B. Assets increase by 7,000; Equity increases by 7,000
• C. Liabilities increase by 7,000; Equity increases by 7,000
• D. Assets increase by 7,000; Equity decreases by 7,000

Answer: (B)

Issuing common stock for cash increases both assets and stockholders’ equity. When cash is received, the asset side goes up, and the equity side goes up because owners are contributing capital to the company. There is no effect on liabilities, since this is not borrowing. If the cash received is 7,000, assets rise by 7,000 and equity rises by 7,000, keeping the accounting equation in balance. (The typical journal entry is a debit to Cash for 7,000 and a credit to Common Stock and/or Additional Paid-In Capital for 7,000.)