Question

Describe how the following business transactions affect the three elements of the accounting equation (assets=liabilities+stockholders equity)
a. invested cash in business in exchange for capital stock
b. purchases supplies for cash
c. purchased supplies on account
d. received cash for services performed
e. paid for utilities used in business

Answer 1

Answer:

a) Assets and stockholders equity will increase

b) Cash will decrease, supplies will increase but assets will remain the same and so will liabilities and stockholders equity because an asset is being exchanged for an asset.

c) Assets and liabilities both will increase.

d) Assets and stockholders equity will increase.

e) Both assets and liabilities will decrease.

Explanation:

a) invested cash in business in exchange for capital stock

In this Transaction cash which is an asset is being added or injected to an asset so the assets of the business will increase. Secondly because cash is being exchanged for capital stock the stockholders equity will increase by the same amount that assets are increasing and this will balance the equation.

b) Cash which is an asset is being used to buy supplies which are also an asset so assets will remain the same and the other side of the equation will also remain the same.

c) Supplies which is an asset is being bought so assets will increase, the supplies are bought on account which is a liability so liability will increase by the same amount.

4) Cash which is an asset is being added to the business so assets will increase and owners equity will increase because now the owners have more capital.

5) Assets will decrease because cash is being used to pay for utilities, liabilities will also decrease because money that was owed is no longer owed now.