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What is the effect of a partner's loan to the firm on the capital accounts?

Practice Questions

Q1
What is the effect of a partner's loan to the firm on the capital accounts?
  1. Increase in capital account
  2. Decrease in capital account
  3. No effect on capital account
  4. Transfer to drawings account

Questions & Step-by-Step Solutions

What is the effect of a partner's loan to the firm on the capital accounts?
  • Step 1: Understand that a partner's loan is money that a partner gives to the business.
  • Step 2: Recognize that this loan is considered an investment in the business.
  • Step 3: Know that when a partner invests money into the business, it increases the capital account.
  • Step 4: Conclude that the capital account reflects the total amount of money invested by the partners.
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