Question

alberta company accepts a credit card as payment for $450 of services provided for the customer. the credit card company charges a 4% fee for handling the transaction. how does this this transaction affect the elements of the financial statements

Answer 1

Answer:

Both assets and equity are reduced by $18.

Explanation:

The accounting equation shows the relationship between the elements of a balance sheet which are assets liabilities and equity. This may be expressed mathematically as

Assets = Liabilities + Equity

While assets include fixed assets, cash, inventories, account receivables etc, liabilities include accounts payable, loans payable, accrued expenses etc.

Equity which represents the amount owed to the owners of the business includes retained earnings (which is the accumulation of the net income/loss over the years less dividends paid) and common shares.

the acceptance of a a credit card as payment for $450 of services provided for the customer does not affect the accounting equation as it is an increase and a corresponding decrease in assets. However, the charges a 4% fee for handling the transaction which is equivalent to

= 4% * $450

= $18

Is an expense to the company, this reduces the asset. The entries requires for this transaction is

Debit Cash and cash equivalent $432

Debit Credit card charge (p/l) $18

Credit Accounts receivable $450

Hence assets reduces by $18 and equity reduces by $18.