Answer:
1. No net effect on asset, liabilities, and equity.
2. No net effect on asset, liabilities, and equity. The transaction is between two asset accounts.
3. A net increase in asset and an increase equity (profit posted to retained earnings). No effect on liabilities.
4. An increase in liabilities (note payable) and an increase in assets (building). No effect on equity.
Explanation:
Considering the transactions;
1. Paying rent for the next three months - This is an exchange of cash for a current asset ( prepaid) expense hence there is no net effect on asset, liabilities, and equity. The transaction is between two asset accounts.
2. Purchase of furniture on account - This is between the cash account and fixed asset. A credit to cash and a debit to fixed asset hence the net effect on asset is nil. Again, no net effect on asset, liabilities, and equity. The transaction is between two asset accounts.
3. Sale of equipment for cash at a gain
: Here, the effect of this transaction is a debit to cash, a lower credit to fixed asset (equipment account) and the differential as a credit to gain on disposal of asset. This has a net increase in asset and an increase equity (profit posted to retained earnings).. No effect on liabilities.
4. Issuance of a long-term note payable in exchange for a building - For this transaction, a credit goes to long-term note payable, a debit to fixed asset (building). Hence the effect is an increase in liabilities (note payable) and an increase in assets (building). No effect on equity.
