Business Transactions and the Accounting Equation

A business entity is an individual, association, or organization that engages in

Economic activities and controls specific economic resources. This definition
allows the personal and business finances of an owner to be accounted for
separately.

Business transactions are economic events that should be recorded because they
affect the financial position of the business enterprise. For a given transaction
to qualify to be recorded it has:
– to be related to the business enterprise
– to be measurable in terms of money
– to be completed / happened/ action.
THE ACCOUNTING ELEMENTS
Accounting equation provides a basic framework for recording the effects of
transactions on companies of all sizes and types. Three basic accounting elements
exist for every business entity: assets, liabilities, and owner’s equity. These
elements are defined below.
1. Assets
The resources owned by a business are its assets. These resources can be physical
items, such as cash and supplies, or intangibles that have value, such as patent
rights. Some other examples of assets include accounts receivable, prepaid
expenses (such as insurance), buildings, equipment, and land.
Liabilities and owner’s equity are the rights or claims against the resources a
business owns.. The rights or claims to the assets are divided into two types:
(1) The rights of creditors and
(2) The rights of owners.
The properties owned by business enterprise referred to as asset and the right or
claim of the properties are equities.
Hence, Asset (economic resource)= Equities (claims to economic resource)
E.g. if the asset owned by business is Br. 50,000 the equities in asset also br.
50,000.
 Equities also subdivided in to two: right creditors and right owners.
1. The right creditors represent debt of business and are called as liabilities.
2. The rights of owners are called owner equity.

The accounting equation

Asset = Liabilities + Owners Equity

This relationship is called the basic accounting equation. Assets must equal the
sum of liabilities and owner’s equity. Liabilities appear before owner’s equity in
the basic accounting equation because creditors have first rights to the assets or
they paid first if a business is liquidated.

The accounting equation applies to all economic entities regardless of size, nature
of business, or form of business organization. The equation provides the
underlying framework for recording and summarizing economic events.

NB.
 Assets, liabilities and owner's equity are the basic elements of the accounting
equation.
• The excess of assets over liabilities is owner's equity.
• Thus, assets are equal to liabilities plus owner's equity at all times.
• Any business transaction has to affect at least one of these elements.

2. Liabilities
 Liabilities are creditors’ claims on assets.
 They are usually shown before equity in this equation because
creditors’ claims must be paid before the claims of owners.
 Represent debts or obligations of the business that can be paid with
cash, goods, or services.
 The most common liabilities are accounts payable and notes payable.
An account payable is an unwritten promise to pay a supplier for assets purchased
or services received. Acquiring assets or services by promising to make payments
in the future is referred to as making a purchase “on account,” or “on credit. The
term payable refers to a liability that promises a future outflow of resources.

Examples are wages payable to workers, accounts payable to suppliers, notes

payable to banks, and taxes payable to the government. Cash received before
services are delivered creates a liability to perform the services. These future
service commitments are often called unearned revenues. Examples of
unearned revenues are magazine subscriptions received by a publisher and
tuition received by a college at the beginning of a term.

Formal written promises to pay suppliers or lenders specified sums of money at

definite future times are known as notes payable.
Owner’s Equity
 The ownership claim on total assets is owner’s equity.
 Owner’s Equity is equal to total assets minus total liabilities
 Since the claims of creditors must be paid before ownership claims, owner’s
equity is often referred to as net assets or residual equity.
 The owner’s equity is increased by amounts invested by the owner and is
decreased by withdrawals by the owner.
 In addition, the owner’s equity is increased by revenues and is decreased by
expenses.

Investments by Owner
 Investments by owner are the assets the owner puts into the business.
These investments increase owner’s equity. They are recorded in a
category called owner’s capital.
Revenues
 Revenues are the gross increases in owner’s equity as a result of selling
services or products to customers. Examples of revenues include fees
earned, fares earned, and commissions revenue, and rent revenue.
 Generally, revenues result from selling merchandise, performing services,
renting property, and lending money.
 Revenue from sales sale of merchandise is called sales.
 Revenue from providing services is called fees earned. For example, a
physician would record fees earned for services to patients.
 Other examples include rent revenue (money received for rent) and interest
revenue (money received for interest).
  Revenues usually result in an increase in an asset.

Drawings
 Drawings - Withdrawal of cash or other assets from an unincorporated
business for the personal use of the owner. An owner may withdraw
cash or other assets for personal use. We use a separate classification
called drawings to determine the total withdrawals for each accounting
period. Drawings decrease owner’s equity. They are recorded in a
category called owner’s drawings.
Expenses
 Expenses are the cost of assets consumed or services used in the process of
earning revenue. They are decreases in owner’s equity that result from
operating the business. Examples of typical expenses include wages
expense, rent expense, utilities expense, supplies expense, and miscellaneous
expense.

In summary, owner’s equity is increased by an owner’s investments and by

revenues from business operations. Owner’s equity is decreased by an owner’s
withdrawals of assets and by expenses.

Expanded accounting equation

Basic Assets = Liabilities + Owner’s equity

Equation
Expanded
accounting Assets = Liabilities + Owner’s Capital - Owner’s Drawings + Revenues -
Expenses
equation

ANALYZING BUSINESS TRANSACTIONS

The increases and decreases in each financial statement item are shown in an
account. An account is a record of increases and decreases in a specific asset,
liability, equity, revenue, or expense item. All business transactions can be stated
in terms of changes in the elements of the accounting equation.

Three basic questions must be answered when analyzing the effects of a business
transaction on the accounting equation.
These questions help address the steps in the
accounting process
1. What happened?
• understand the event that has taken place.
2. Which accounts are affected?
• Identify the accounts that are affected.
• Classify these accounts as assets, liabilities, or
owner’s equity.
3. How is the accounting equation affected?
• Determine which accounts have increased or
decreased.
• Make certain that the accounting equation remains
in balance after the transaction has been entered.

The following illustration will demonstrate types of transaction and the

accounting equation as follows:
Assume Mr. CHALLA established sole proprietorship business known as Gada
hotel.
Transaction a. Mr. Challa deposited Birr 10,000 in a bank account in the name of
Gada hotel.The effect of this transaction is to increase the asset (cash), left side
equation and to increase owner equity (capital) on the right hand side by the same
amount.
Assets = Liabilities + Owner’s Equity
Cash Challa Capital
10,000 10,000 Investment by Challa
Note that since Challa is the sole owner, Gada hotel is a proprietorship. Note,
Too, that the accounting equation shown above relates only to the business,
Gada hotel.
Transaction b:Mr. Challa purchase land, which is Birr 7500 in cash , is paid.
This transaction changes the composition of asset but not change the total amount.
Assets = Liabilities + Owner’s Equity
Cash + Land Challa Capital
(a) 10,000 10000 Investment
(b) - 7,500 7500
Bal. 2,500 7,500 10,000
Transaction c: Mr.Challa purchased gasoline, oil, and other supplies of 850 Birr
on account; this type of transaction is liability known as account payable.
Assets = Liabilities + Owner’s Equity
Cash + Supplies + Land Account Payable Challa Capital
Bal 2,500 7,500 10,000
(c) 850 850
Bal 2,500 850 7,500 850 10,000
Transaction d: Mr. Challa paid creditors 400 Birr. The effect of this is a
decrease to asset and liabilities.
Assets = Liabilities + Owner’s Equity
Cash + Supplies + Land Account Payable Challa Capital
Bal. 2,500 850 7,500 850 10,000
(d) - 400 -400
Bal. 2,100 850 7,500 450
10,000
Transaction e: Mr. Challa provided services to customers, earning fees of 4,500
Birr and receiving the amount in cash.
Assets = Liabilities + Owner’s Equity
Cash + Supplies + Land Account Payable Challa Capital
Bal. 2,100 850 7,500 450 10,000
(e) + 4,500 + 4,500 Fares
earned

Bal. 6,600 850 7,500 450 14,500

The effect of this transaction is increasing both the assets and owners’ equity.
Revenue from providing services is called fees earned. For example, a physician
would record fees earned for services to patients. Other examples include rent
revenue (money received for rent) and interest revenue (money received for
interest).
Instead of requiring the payment of cash at the time services are provided or goods
are sold, a business may accept payment at a later date. Such revenues are called
fees on account or sales on account. In such cases, the firm has an account
receivable, which is a claim against the customer. An account receivable is an
asset, and the revenue is earned as if cash had been received. When customers pay
their accounts, there is an exchange of one asset for another. Cash increases, while
accounts receivable decreases.
Transaction – f- Mr. Challa incurred the following expense and paid during the
month were wages Birr 1,125; rent Birr 850; utilities Birr 150; miscellaneous Birr
75. The effect of this transaction is reducing both asset and owner equity.
Assets = Liabilities + owner’s Equity
Cash + Supplies + Land Account Payable
Bal. 6,600 850 7,500 450 14,500
(f) -2,200 - 1,125 wage expense
-850 Rent expense
-150
Utilities exp.
-75 Miscel. Exp.
Bal 4,400 850 7500 450 12,300

Transaction – g –At the end of the month, the cost of the supplies on hand (not yet
used) is At the end of the month, the cost of the supplies on hand ( is 250 Birr . the
reminder (850- 250) has been used in the operation of the business. The effect of
this situation is decrease both asset and owner equity.

Assets = Liabilities + owner’s Equity

Cash + Supplies + Land Account Payable Challa Capital
Bal. 4,400 850 7500 450 12,300
(g) - 600 - 600
Bal. 4,400 250 7,500 = 450 11,700

Transaction – h – At the end of the month, Mr. Challa withdrawal from the
business 1000 Birr in cash for personal use. This transaction reduces the asset and
owner equity.
Assets = Liabilities + owner’s Equity

Cash + Supplies + Land Account Payable Challa Capital

Bal. 4,400 250 7,500 450 11,700
-1,000 -1,000
Bal 3,400 250 7,500 450 10,700

Summary of the above transaction presented as follows:

Assets = Liabilities + Owner’s Equity
Cash +supplies + Land Account payable + Challa Capital
(a) 10,000 10,000 Investment
(b) - 7,500 7500

2,500 7,500 10,000

(c) +850 +850
2,500 850 7,500 850 10,000
(d) -400 -400
2,100 850 7,500 450 10,000
(e) +4,500 +4,500 Fares earned
6,600 850 7,500 450 14,500
(f) -2,200 -1,125 Wages exp.
-850 Rent exp.

-150 Utility exp.

 -75 miscel. exp.

4,400 850 7,50 50 12,300

(g) -600 -600 Supplies exp
4,400 250 7,500 =450 11,700
-1,000 -1,000

Bal. 3,400 250 7,500 450 10,700

The following points apply for all types of business.
1. The effect of every transaction increased / or decreased one or more
accounting equation.
2. Equality of the two sides accounting equation should be maintained.
3. Owner equity.

Financial Statements
All financial statements should be identified by the name of the business, the title
of the statement, and the date or period of time. Financial statements are used to
evaluate the current financial condition of a business and to predict its future
operating results and cash flows. For example, bank loan officers use a business’s
financial statements in deciding whether to grant a loan to the business. Once the
loan is granted, the borrower may be required to maintain a certain level of assets
in excess of liabilities. The business’s financial statements are used to monitor this
level. Companies prepare four financial statements from the summarized
accounting data:

An income statement presents the revenues and expenses and resulting net
income or net loss for a specific period of time. The income statement reports the
revenues and expenses for a period of time, based on the matching concept. This
concept is applied by matching the expenses with the revenue generated during a
period by those expenses.

The income statement also reports the excess of the revenue over the expenses
incurred. This excess of the revenue over the expenses is called net income or net
profit. If the expenses exceed the revenue, the excess is a net loss. Net income for a
period has the effect of increasing owner’s equity (capital) for the period, whereas
a net loss has the effect of decreasing owner’s equity (capital) for the period. The
order in which the expenses are listed in the income statement varies among
businesses. One method is to list them in order of size, beginning with the larger
items. Miscellaneous expense is usually shown as the last item, regardless of the
amount. The income statement is sometimes referred to as the statement of
operations, earnings statement, or profit and loss statement.

Revenue are increase owner equity from delivering goods and services to
customer or client.
Expense are decrease owner equity that result from operation
So, Expense is one of the generating revenue of the organization.
The difference between revenue and expense result net income / loss.
 The excess of revenue over expense is net income or net profit.
 If expense exceeds the revenues, the excess is net loss.
Generally, it answers the question ‘how well did the company perform during the
period.”

2. An owner’s equity statement summarizes the changes in owner’s equity for a

specific period of time. It is prepared after the income statement because the net
income or net loss for the period must be reported in this statement. Similarly, it is
prepared before the balance sheet, since the amount of owner’s equity at the end of
the period must be reported on the balance sheet. Because of this, the statement of
owner’s equity is often viewed as the connecting link between the income
statement and balance sheet.

3. A balance sheet reports the assets, liabilities, and owner’s equity at a specific
date.

Also called statement of financial position

Assets are properties owned by business entity.

The statement of cash flows consists of three sections,

(1) operating activities

(2) investing activities, and
(3) (3) financing activities.
1. Cash Flows from Operating Activities -This section reports a summary of
cash receipts and cash payments from operations. The net cash flow from
 operating activities will normally differ from the amount of net income for
the period . This difference occurs because revenues and expenses may not
be recorded at the same time that cash is received from customers or paid to
creditors. Operating activities are the principal revenue-producing
activities of the enterprise and other activities that are not investing or
financing activities. Example
a. Cash inflow –collection of receivable, sale on merchandise on cash, collection
of interest revenue, collection of dividend from investment in other co.
b. Cash outflow- payment for creditors for purchase inventory or supplies and
other payment for business operating costs, payment for interest on debit.
2. Cash Flows from Investing Activities

This section reports the cash transactions for the acquisition and sale of
relatively permanent assets. Are the acquisition and disposal of long-term
assets and other investments not included in cash equivalents?
It include: purchase or sale of productive asset like: building, equipment or
machine, land, truck, furniture or fixture, etc. and purchase or sale of other
companies debt or equity long term securities.

3. Cash Flows from Financing Activities

This section reports the cash transactions related to cash investments by the
owner, borrowings, and cash withdrawals by the owner. For the corporation
form of business this includes payment of dividend to stockholder, issuance of
equity or debt securities; repayment of loan principal. Generally, it answer the
question “how much the cash did the company generate and spend during
the period.” NB: the cash balance at the beginning period is added to the
increase or decrease in cash for the period to obtain the cash balance at the end
of the period.
Gada Hotel
Income Statement
For Month Ended August 31, 2007
Fees Earned Birr 4,500
Operating Expenses :
Wages Expenses Birr 1,125
Rent Expenses 850
Supplies Expenses 600
Utilities Expenses 150
Miscellaneous Expenses 75
 Total Expenses 2,800
Net Income Birr 1,700
Gada Hotel
Statement of Owner’s Equity
For Month Ended August 31, 2007
Investment During the Month Birr
10,000
Net Income for the Month Birr
1,700
Less: Withdrawal 1,000
Increase in Owner’s Equity 700
Mr. Challa Capital, August 31, 2007 Birr 10,700

Gada Hotel
Balance Sheet
August 31, 2007
Assets
Cash Birr 3,400
Supplies 250
Land 7,500
Total Assets Birr 11,150
Liabilities
Account Payable Birr 450
Owner’s Equity
Mr. Challa Capital Birr 10,700
Total Liabilities and Owner’s Equity Birr 11,150

Gada Hotel
Statement of Cash Flow
For Month Ended August 31, 2007
Cash Flows from Operating Activities:
Cash Received from Customers Birr 4,500
Deduct: Cash Payments for Expenses And 2,600
 Payment to Creditor
Net Cash Flow from Operating Activities Birr 1,900
Cash Flows from Investing Activities:
Cash Payments for Acquisition of Land (7,500)
Cash Flows from Financing Activities:

Cash Received as Owner’s Investment Birr

10,000
Deduct: Cash Withdrawal by Owner 1,000
Net Cash Flow from Financing Activities 9,000
Net Cash Flow And August 31,2007 Cash Birr 3,400
Balance

FINANCIAL STATEMENT FOR CORPORATION

Business enterprises with a large amount of asset are usually organized as
corporation and owners is called stockholders. The financial statements of
corporation are statement of cash flow balance sheet and retained earnings
statement.
If Gada Hotel had been owned by corporation; the only change on the financial
statement will be the retained earnings statement of owner equity and the balance
sheet account of owner equity should be stockholder equity.
a. Retained earnings are reporting changes in the stockholder equity are on the
changes in retained earnings, or the net income retained in the business.
Changes in the amount of earning retained in the business would have resulted
from
1. Net Income
2. Distribution of earnings called Dividend to the owners.
b. Balance sheet is the only difference of Balance sheet of sole proprietorship and
corporation is the stock holder equity section.
c. Statement cash flow the only difference b/n cash flow statement of corporation
and sole proprietorship is on the financing activity section, the cash received as
investment of stockholder arises from the sale of capital stock and cash
payment to stock holder are in the form of dividend.
d. Income statement is the summary of revenue and expense of the business
entities for the specific period of time, such as a month or a year.
The excess of revenue over expense is net income or net profit.
If expense exceeds the revenues, the excess is net loss.
Illustration 2

Transaction (1). Investment by Owner.

Lati opened a computer programming service called Biftu Computer center .

On September 1, 2012, he invested 15,000 Birr cash in the business. This
transaction results in an equal increase in assets and owner’s equity. The asset Cash
increases 15,000 Birr, and owner’s equity identified as Owner’s Capital increases
15,000 Birr.

Transaction (2). Purchase of Equipment for Cash.

Biftu Computer center purchases computer equipment for7, 000 cash Birr . This
transaction results in an equal increase and decrease in total assets, though the
composition of assets changes. Cash decreases 7,000 Birr, and the asset Equipment
increases 7,000 Birr.

Transaction (3). Purchase of Supplies on Credit.

 Biftu Computer center purchases for Birr1,600 from Ebba Supply Company
computer paper and other supplies expected to last several months. Ebba agrees to
allow Biftu Computer center to pay this bill in October. This transaction is a
purchase on account (a credit purchase). Assets increase because of the expected
future benefits of using the paper and supplies, and liabilities increase by the
amount due Ebba Company.

Total assets are now Birr16, 600. This total is matched by a Birr1, 600 creditor’s
claim and a Birr15, 000 ownership claims.

Transaction (4). Services Provided for Cash. Biftu Computer center receives
Birr1, 200 cash from customers for programming services it has provided. This
transaction represents Biftu Computer center principal revenue-producing
activity. Recall that revenue increases owner’s equity.
Transaction (5). Purchase of Advertising on Credit.

Biftu Computer center receives a bill for

$250 from the Reporter News for advertising but postpones payment until a later
date. This transaction results in an increase in liabilities and a decrease in owner’s
equity. The specific categories involved are Accounts Payable and expenses
(specifically, Advertising Expense). The effect on the equation is:
Owner’s equity decreases when Biftu Computer center incurs the expense.
Expenses are not always paid in cash at the time they are incurred. When Biftu
Computer center pays at a later date, the liability Accounts Payable will
decrease, and the asset Cash will decrease [see Transaction (8)]. The cost of
advertising is an expense (rather than an asset) because the company has used the
benefits. Advertising Expense is included in determining net income.

Transaction (6). Services Provided for Cash and Credit. Biftu Computer center
provides $3,500 of programming services for customers. The company receives
cash of $1,500 from customers, and it bills the balance of $2,000 on account. This
transaction results in an equal increase in assets and owner’s equity.
Biftu Computer center earns revenues when it provides the service, and
therefore it recognizes $3,500 in revenue. In exchange for this service, it received
$1,500 in Cash and Accounts Receivable of $2,000. This Accounts Receivable
represents customers’ promise to pay $2,000 to Biftu Computer center in the
future. When it later receives collections on account, Biftu Computer center will
increase Cash and will decrease Accounts Receivable

Transaction (7). Payment of Expenses. Biftu Computer center pays the following
expenses in cash for September: store rent $ 600, salaries and wages of employees
$ 900, and utilities $ 200. These payments result in an equal decrease in assets and
expenses. Cash decreases $ 1,700, and the specific expense categories (Rent
Expense, Salaries and Wages Expense, and Utilities Expense) decrease owner’s
equity by the same amount. The effect of these payments on the equation is:
Transaction (8). Payment of Accounts Payable. Biftu Computer center pays its
$250 Reporter News bill in cash. The company previously [in Transaction (5)]
recorded the bill as an increase in Accounts Payable and a decrease in owner’s
equity

Transaction (9). Receipt of Cash on Account. Biftu Computer center receives

$600 in cash from customers who had been billed for services [in Transaction (6)].
This does not change total assets, but it changes the composition of those assets.
Transaction (10). Withdrawal of Cash by Owner. Lati withdraws $1,300 in cash
from the business for his personal use. This transaction results in an equal decrease
in assets and owner’s equity. Both Cash and Owner’s Drawings decrease $1,300.

The effect of a cash withdrawal by the owner is the opposite of the

effect of an investment by the owner. Owner’s drawings are not
expenses. Expenses are incurred for the purpose of earning
revenue. Drawings do not generate revenue. They are a
disinvestment. Like owner’s investment, the company excludes
owner’s drawings in determining net income.

Summary of Transactions
 Biftu Computer center

Biftu Computer center

Biftu Computer center

 Biftu Computer center

Self exercise
Jameson, Attorney-at-Law, is a proprietorship owned and operated by Cecil

Jameson. On July 1, 2005, Cecil Jameson, Attorney-at-Law, has the following

assets and liabilities: cash, $1,000; accounts receivable, $3,200; supplies, $850;
land, $10,000; accounts payable, $1,530. Office space and office equipment are
currently being rented, pending the construction of an office complex on land
purchased last year. Business transactions during July are summarized as follows:

a. Received cash from clients for services, $3,928.

b. Paid creditors on account, $1,055.

c. Received cash from Cecil Jameson as an additional investment, $3,700.

d. Paid office rent for the month, $1,200.

e. Charged clients for legal services on account, $2,025.

f. Purchased office supplies on account, $245.

g. Received cash from clients on account, $3,000.

h. Received invoice for paralegal services from Legal Aid Inc. for July (to be paid
on August 10), $1,635.

i. Paid the following: wages expense, $850; answering service expense, $250;
utilities

expense, $325; and miscellaneous expense, $75.

j. Determined that the cost of office supplies on hand was $980; therefore, the cost

of supplies used during the month was $115.

k. Jameson withdrew $1,000 in cash from the business for personal use.
Instructions
i. Determine the amount of owner’s equity (Cecil Jameson’s capital) as of July

1, 2005.
ii. State the assets, liabilities, and owner’s equity as of July 1 in equation form
similar to that shown in this chapter. In tabular form below the equation,
indicate the increases and decreases resulting from each transaction and the
new balances after each transaction. Explain the nature of each increase and
decrease in owner’s equity by an appropriate notation at the right of the
amount.
i. Prepare an income statement for July, a statement of owner’s equity for
July, and a balance sheet as of July 31, 2005.
1. A profit-making business operating as a separate legal entity and in which ownership is
divided into shares of stock is known as a:
A. proprietorship. C. partnership.
B. service business. D. corporation.
2. The resources owned by a business are called:
A. assets.
B. liabilities.
C. the accounting equation.
D. owner’s equity.
3. A listing of a business entity’s assets, liabilities, and owner’s equity as of a specific date
is:
A. a balance sheet.
B. an income statement. C. a statement of owner’s equity.
D. a statement of cash flows.
4. If total assets increased $20,000 during a period and total liabilities increased $12,000
during the same period, the amount and direction (increase or decrease) of the change
in owner’s equity for that period is:
A. a $32,000 increase. C. an $8,000 increase.
B. a $32,000 decrease. D. an $8,000 decrease.
5. If revenue was $45,000, expenses were $37,500, and the owner’s withdrawals were
$10,000, the amount of net income or net loss would be:
A. $45,000 net income. C. $37,500 net loss.
B. $7,500 net income. D. $2,500 net loss.

2. Duane Mays established an insurance agency on July 1 of the current year and completed the
following transactions during July:
a. Opened a business bank account with a deposit of $18,000 from personal funds.
b. Purchased supplies on account, $950.
c. Paid creditors on account, $575.
d. Received cash from fees earned on insurance commissions, $4,250.
e. Paid rent on office and equipment for the month, $1,200.
 f. Paid automobile expenses for month, $600, and miscellaneous expenses, $375.
g. Paid office salaries, $1,500.
h. Determined that the cost of supplies on hand was $225; therefore, the cost of supplies
used was $725.
i. Billed insurance companies for sales commissions earned, $6,350.
j. Withdrew cash for personal use, $2,000.

Instructions
i. Indicate the effect of each transaction and the balances after each transaction, using the
following tabular headings:
Assets = Liabilities + Owner’s Equity
Cash + Accounts Receivable + Supplies = Accounts Payable + Duane Mays, Capital
Explain the nature of each increase and decrease in owner’s equity by an appropriate
notation at the right of the amount.
ii. Briefly explain why the owner’s investment and revenues increased owner’s equity, while
withdrawals and expenses decreased owner’s equity.
1. The amounts of the assets and liabilities of Zemen Travel Service at April 30, 2006, the
end of the current year, and its revenue and expenses for the year are listed below.
The capital of Adem Abate, owner, was $50,000 at May 1, 2005, the beginning of the
current year, and the owner withdrew $30,000 during the current year.
Accounts payable $ 12,200 Supplies $ 3,350
Accounts receivable 31,350 Supplies expense 7,100
Cash 53,050 Taxes expense 5,600
Fees earned 263,200 Utilities expense 22,500
Miscellaneous expense 2,950 Wages expense 131,700
Rent expense 37,800
Instructions
1. Prepare an income statement for the current year ended April 30, 2006.
2. Prepare a statement of owner’s equity for the current year ended April 30, 2006.
3. Prepare a balance sheet as of April 30, 2006.
Young has started his own business, Home and Away Inspections

The transactions for the month of September 2006 are as follows:

(a) On the first day of the month, Young invested cash by making a deposit in a
bank account for the business, $15,000.

(b) Paid rent for September, $300.

(c) Bought a used truck for cash, $8,000.

(d) Purchased tools on account from Crafty Tools, $3,000.

(e) Paid electricity bill, $50.

(f) Paid two-year premium for liability insurance on truck, $600.

(g) Received cash from clients for services performed, $2,000.

(h) Paid part-time assistant (wages) for first half of month, $200.

(i) Performed inspection services for clients on account, $1,000.

(j) Paid telephone bill, $35.

(k) Bought office supplies costing $300. Paid $100 cash and will pay the balance
next month, $200.

(l) Received cash from clients for inspections performed on account in (i), $300.

(m) Paid part-time assistant (wages) for last half of month, $250.

(n) Made partial payment on tools bought in (d), $1,000.

(o) Earned additional revenues amounting to $2,000: $1,400 in cash and $600 on
account.

(p) Young withdrew cash at the end of the month for personal expenses, $500.
Instructions
1. Prepare an income statement for the current year ended September 30, 2006.
2. Prepare a statement of owner’s equity for the current year ended September 30, 2006.
3. Prepare a balance sheet as of September 30, 2006.