If a company issues 20,000 ordinary shares which are sold at $4 per share,the effect on the accounting equation is:

Question

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When a company issues ordinary shares, it increases its cash balance by the amount of cash received from the sale of shares. At the same time, the company's shareholders' equity increases by the same amount since the company now has more equity investors. The correct entry, therefore, is to increase both cash and shareholders' equity by $80,000. Option A is incorrect because the entry on both sides of the accounting equation would be decreasing, which would not balance the equation. Option B is incorrect because issuing shares does not increase liabilities. Option D is incorrect because an accounting entry is required to reflect the transaction.

If a Company Issues 20,000 Ordinary Shares Which Are Sold