When Rosemary deposits $2,000 into her business account, how does it affect her personal equity?

• A. It decreases her equity
• B. It has no effect on equity
• C. It increases her equity
• D. It directly affects her liabilities

Answer: (C)

When Rosemary deposits $2,000 into her business account, it increases her equity because this transaction represents an investment of her personal funds into her business. In accounting terms, equity reflects the owner's interest in the business, which is affected by contributions made by the owner.

By depositing this amount, Rosemary is essentially transferring her personal wealth into the business, which increases the total assets of the business. Since equity is calculated as total assets minus total liabilities, an increase in assets due to her deposit will directly lead to an increase in her equity. This is a crucial concept in understanding the relationship between personal investments in a business and how they impact overall equity.

In this case, the deposit does not create an increase in liabilities nor does it leave equity unaffected; it clearly enhances her equity by the amount of the deposit.