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CMA Foundation · Fundamentals of Financial and Cost Accounting · Journal and Ledger

Under the modern approach of the accounting equation (Assets = Liabilities + Capital), which of the following increases the capital of the owner?

Interest received on investments increases the owner's capital because it is income that raises profit, and profit is added to capital. Salaries and drawings reduce capital, while loan repayment only reduces an asset and a liability without touching capital.

  1. APayment of salaries
  2. BInterest received on investmentsCorrect
  3. CWithdrawal of cash by the proprietor
  4. DRepayment of a loan

Explanation

Income such as interest received increases capital through profit. Salaries are expenses and reduce capital, and drawings also reduce capital. Repaying a loan lowers both cash and liabilities and does not affect capital.

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