ACCA Financial Accounting (F3) Certification 2025 – 400 Free Practice Questions to Pass the Exam

When Y transfers her car valued at $5,000 into her taxi business, this transaction reflects her investment into the business. The car becomes an asset of the business, and to record this, the car account must be debited to signify an increase in assets. The corresponding credit entry recognizes that there has been an increase in capital or equity contributed by Y to the business.

In this transaction, debiting the Car account increases the asset side of the balance sheet, reflecting the addition of a tangible asset (the car) to the company. At the same time, crediting the Capital account acknowledges that Y has contributed this asset to the business, representing an owner’s equity increase.

Therefore, the correct accounting entry shows the car being recorded as an asset, with the capital account reflecting the owner's contribution, accurately capturing the nature of the transaction. This aligns with fundamental accounting principles, which require that all transactions be recorded in a way that reflects the dual effect on the accounting equation.