Name: Shirlita Burnham

Course: ACC Principles of Account 2010

Topic: Accounting and the Business Equation (Chapter One)

Book: Horgren’s Accounting, the Financial Chapters 12th Edition

Exercises

E1-25

As the Manager of a Papa Sean’s restaurant, you must deal with a variety of business
transactions.

Question: Give an example of a transaction that has each of the following effects on the
accounting equation:

A. Increase one asset and decrease equity

Example: Cash purchases for certain machinery to be used in restaurant. (Purchasing

machinery would result in an increase in assets by using it in the business, with a
corresponding decrease in another asset by paying cash.)

B. Decrease an Assets and Decrease Equity

Example: Cash Dividend paid to Stockholders. (It has an effect decreasing assets
and equity because paying cash dividends to stockholders will decrease retained
earnings and cash.)

C. Decrease an Asset and Decrease a Liability.

Example: Payment on account to supplier of P’S Purchase. (Whenever P’S paid its
supplier for its purchases, cash would decrease, and the corresponding accounts
payable would also decrease.)

D. Increase an asset and increase equity.

Example: PS contributed cash as additional capital. (Cash Contribution has an effect

on assets and equity.)

E. Increase an asset and increase liability

 Example: Purchase of direct materials to be used in the restaurant on account.
(Whenever the company buys direct materials, it would increase its assets because it
will have future economic benefits for the company. If they buy on account,
corresponding liabilities will increase.

E 1-27

Question: Indicate the effects of the following business transactions on the accounting equations
for Shane’s Peanuts, a supplier of snack foods.

A. Shane’s Roasted Peanuts received cash from issuance of Common stock to

stockholders.

Answer: The transaction increases the balance of cash, an asset account and increases the
balance of S, capital, an equity account.

B. Cash Purchase of Land for a building site.

Answer: Increase Asset (Land) Decrease Asset (Cash). The Transaction increases the
balance of Land and decreases the balance of cash. The owner subsequently invested in
the business by purchasing Land by paying Cash. The Land invested resulted in increase
company resources as it is now owned by the business. This therefore will be debited to
the Land account equal to the amount purchased.

C. Paid Cash on Accounts Payable

Answer: Decrease Assets (Cash) Decrease liability (Accounts Payable). A journal

entry preparation must be balanced on both the debit and credit sides. If there’s a
decrease in the liabilities obligations, this will be debited to the account payable account
to the amount paid.

D. Purchased equipment; signed a note payable

Answer: Increase Assets (Equipment) Increase Liability (Notes Payable). A journal

entry preparation must be balanced on both the debit and credit sides.

E. Performed service for a customer.

Answer: Increase Asset (Accounts Receivable) Increase Equity (Service Revenue).

(To establish a valid claim from the customer for the services performed, the business
will record the amount by debiting the accounts receivable amount.)

F. Employees Worked for the week but will be paid next Tuesday
Answer: Increase Liability (Salaries Payable) Decrease Equity (Salaries Expense). At the end of
the week, the salaries are still unpaid to workers. To account for the transaction, this will be
debited to the salaries account for the actual salaries incurred by the business.

G. Received Cash from a customer on accounts receivable.

Answer: Increase asset (Cash) Decrease asset (Accounts Receivable). The owner of the
business received cash arising from the unpaid completed services for its customers. This will be
debited to the cash account.

H. Borrowed Money from the bank

Answer: Increase asset (Cash) Increase liability (Note payable). The owner of the business
received cash arising from the borrowed funds in the bank. This will be debited to the cash
account. A journal entry must be balanced on both the debit and credit sides.

I. Cash dividends paid to stockholders.

Answer: Decrease asset (Cash) Decrease equity (Sam, Withdrawals). The owner of the business
received cash from the business. This will be debited to S, withdrawal account.

J. Incurred utilities expense on account.

Answer: Increase Liability (Accounts Payable); Decrease equity (Utility Expense). The utilities
incurred will be recorded as a debt in the utilities expense account. As an expense account, this
increases the amount of total incurred by the business.
E 1-29

Question Analyze these events on the accounting equation of the medical practice of Caren
Smith, M.D., using the following Format.

Balance Sheet – Answer

Assets Liabilities Owner’s Equity______________________

Medical Accounts S, S, Service Salaries Rent Utilities

Date Cash + Supplies + Land = Payable + Capital – Withdrawals + Revenue - Expense - Expense - Expense

July 6 $68,000 $68,000

July 9 (56,000) $56,000

July 12 $1500 $,1500

July 15 (2,900) (1,300) (1,500) (100)

July 31 $13,000 $13,000

July 31 (1050) ________ ________ (1,050) _______ _________ _________ ______ _______ ______

$21,050 $1,500__ $56,000_ $450__ $68,000 $ 0_____ $13,000___ $1,300_ $1,500_ $(100)

The accounting equation shows the overall available resources of the business and determines
how much the business obligation is to the owner and its creditors.

Technically, the accounting equation shows the equality of the asset section and the liabilities
and owners sections. On July 6th, the owner made an initial investment in the business in the
form of cash. A journal entry is prepared by debiting the cash account and crediting the S,
capital account equal to the amount of cash investment.

Problems P1-46A
Analyze the effects of the preceding events on the accounting equation of Angela Peters,
Attorney. Prepare the following financial statements

Income Statement, Statement of retained earnings, Balance Sheet.

ANNETTE PACHELO, ATTORNEY

Statement of Cash Flows

Month Ended March 31, 2018

Cash Flow from operating activities: $6,100

Receipts:
Collections from customers
Payments:
To suppliers (2300)
Net cash provided by operating activities 3,800
Cash flows from investing activities: 0
Cash flows from financing activities
Owner contribution $73,000
Owner withdrawals (5,500)
Net cash provided by financing activities 67,500
Net increase in cash 71,300
Cash balance, March 1, 2018 0
Cash balance, March 31, 2018 71,300___

Problem P1-47
Analyze the effects of the transactions on the accounting equation of Top 40 using the format
presented above.
Assets Liabilities Equity

Cash + Accounts + Offices Supplies + Land = Accounts + M Capital + M, Withdrawals + Service Rev+ Rent Exp+ Advertising

Receivable Payable Expense

Bal $ 2600 $2,500 $ 16,000 $ 5,000 $ 13,600 $ 2,500

(a) 14,000 14,000 $

Bal $ 16,000 $ 2,500 $ 16,000 $ 5000 $ 27,600 $ 2,500

(b) 1,600 1,600

Bal $ 18,200 $ 2,500 $ 16,000 $ 5,000 $ 27,600 $ 4,100

(c) (5,000) (5,000)

Bal $ 13,200 $ 2,500 $ 16,000 $ 0$ 27,600 0 $ 4,100

(d) $ 1,200 1,200

Bal $ 13,200 $ 2,500 $ 1,200 $ 16,000 1,200 27,600 $ 4,100

(e) 2,300 2,300

Bal $ 15,500 $ 2,500 $ 1,200 $ 16,000 1,200 27,600 $ 6,400

(f) (1,500) (1,500)

Bal $ 14,000 $ 2,500 $