Question

Matthew Martin, the sole stockholder of Innovation Consulting, started the business by investing $40,000 cash in exchange for common stock. Identify the general journal entry below that Innovation Consulting will make to record the transaction.
a. Cash 40,000
Common Stock 40,000

b. Common Stock 40,000
Cash 40,000

c. Accounts Receivable 40,000
Cash 40,000

d. Investments 40,000
Common Stock 40,000

e. Cash 40,000
Note Payable 40,000

Answer 1

Answer:

a. Cash $40,000

Common Stock $40,000

Explanation:

When the owners of a business or sole stockholder provides cash to run the activities of the business in exchange for common stock, such cash is recognized as equity.

To the business, an assets has been added in form of cash, but then, this asset results in an obligation not to a 3rd party but to the owner of the business.

Hence assets and equity are said to have increased as a result of this transaction.

The required entries are debit cash and credit common stock.