Question

Below are various transactions that a local corporation had occur during the month. For each transaction, indicate the transaction's effect on the company's accounting equation by selecting either increase, decrease, or no effect for each area of the accounting equation. Do not leave any of the fields below blank. Note: If the transaction were to cause an increase and decrease to the same area of the accounting equation, "no effect" should be chosen as the overall effect to that area. A. Received $50,000 in cash from the sale of its common stock to stockholders. B. Borrowed $20,000 from the local bank by signing a note promising to pay back the $20,000 loan plus interest in two years. C. Paid $8,000 for the purchase of equipment. D. Provided services to customers for $5,000 on account. E. Received $5,000 from the customers in "D" above. F. Paid $1,200 for one year's worth of insurance in advance. G. Paid $800 to employees for salaries. H. Purchased supplies costing $1,400 on account.

Answer 1

Answer:

Explanation:

As per accounting equation,

Assets =  Liabilities + Owners Equity

Following would be the effect of the transactions:

A. Received $50,000 in cash from sale of common stock

This transaction would increase the assets as cash is an asset at the same time it would increase capital or owners equity by the same amount.

So this will cause an increase in amount on both sides by $50,000

B. Borrowed $20,000 from the local bank by signing a note promising to pay loan plus interest in 2 years

This would result into an increase in the liability by the money borrowed at the same time would increase cash balance i.e the assets.

Thus it will increase the accounting equation by $20,000.

C. Paid $8000 for the purchase of an equipment

This increases the assets balance at the same time reduces the cash balance. Since both equipment and cash are assets, the net effect of the transaction on equation would be NO EFFECT.

D. Provided services to customer on account

This would increase debtors or accounts receivables balance and at the same time would increase sales.

So the effect would be an increase on the assets side of the equation. Also since this represents a credit sale, this would increase the profits which would form part of reserves which in turn increases the owners equity.

Thus, an increase in assets and owners equity which shall increase the equation by $5000

E. Received $ 5000 from customers above

This shall increase cash balance and at the same time reduce debtors balance by $5000. Since both are assets, the transaction will have NO EFFECT.

F. Paid $1,200 for one years worth of insurance in advance

Premium paid in advance is a prepaid expense and an asset. This shall increase prepaid expenses and at the same time reduce cash by the same time so it will have NO EFFECT on the equation.

G. Paid $800 to employees for salaries

This reduces the profits by $800 i.e owners equity and at the same time reduce cash (an asset).

So the equation will decrease by $800.

H. Purchased supplies costing $1,400 on account

This refers to credit purchases which shall increase the purchases balance which in return would reduce profits and hence owners equity. At the same time it will create a liability for creditors which shall increase the balance of liabilities by the same amount. So NO CHANGE