When a company borrows cash by signing a note payable, what is the effect on the accounting equation?

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

Answer: (A)

When you borrow cash by signing a note payable, you receive cash, which increases assets. At the same time, you incur a promissory note (a liability) that you must repay, so liabilities increase as well. Since one asset and one liability rise by the same amount, the accounting equation stays balanced, and equity remains unchanged because no owner investment or earnings occurred yet. For example, borrowing $10,000 would increase cash by $10,000 and increase notes payable by $10,000.