Question

Bombeck Inc. has the following transactions during August of the current year. Indicate (a) the effect on the accounting equation and (b) the debit-credit analysis. Aug. 1 Opens an office as a financial advisor, investing $5,000 in cash in exchange for common stock. 4 Pays insurance in advance for 6 months, $1,800 cash. 16 Receives $1,900 from clients for services performed. 27 Pays secretary $1,000 salary.

Answer 1

Answer: Please see answers in explanation column

Explanation:

Date     Accounts titles and explanation       Debit             Credit

Aug 1           Cash                                              $5000  

                  Common Stock                                               $5000  

--Since this is an  investment by the owner of the business . When the business  is gaining cash, it is being  debited as it is an asset which is always debited with increase. Also there will be an increase in the owner's  Equity Account leading to crediting the Common stock (equity) account.

Date     Accounts titles and explanation       Debit             Credit

Aug 4  Prepaid Insurance                                $1800  

                          Cash                                                                   $1800

--The insurance paid in 6 months advance is an asset for the business. As stated above when asset increases, it is debited in the account journal So,  prepaid insurance account is being debited . Also,since cash is being reduced as it is used for payment for insurance, it is credited in the accounts journal.

Date     Accounts titles and explanation       Debit             Credit

Aug 16  Cash                                                      $1,900

                           Service Revenue                                            $1,900

--The amount of $1,800 is the revenue for service rendered and since it is an equity account which increased revenue,  we credit it.  Also, since cash is being received, because it is an asset, debit is recorded on  the cash account.

Date     Accounts titles and explanation    Debit                      Credit

Aug 27  Salary Expense                               $1000

                           Cash                                                                    $1000  

--Payment of salary is an expense to any business and paid from the business Cash Account causing a decrease in the Cash, since Cash is referred to an asset , because of its decrease, we credit the Cash Account. Also, the salary expense account is debited because it is  increasing