Question

Borrowing cash from a bank would result in which of the following?

• A. A debit to cash and a credit to notes payable
• B. A debit to notes payable and a credit to cash.
• C. A debit to both cash and notes payable.
• D. A debit to cash and a credit to additional paid-in capital.

Answer 1

The correct option is A

A debit to cash and a credit to notes payable

Option a. A debit to cash and a credit to notes payable

Explanation: An organisation that borrows cash from a bank to meet its short-term liabilities has to pay the banks or money lenders the principal amount with interest. This transaction leads to an increase in the organisation’s debt obligations and hence in the books of accounts, cash is debited and notes payable is credited.