Question

On June 1 of the current year, Chad Wilson established a business to manage rental property. He completed the following transactions during June:

a. Opened a business bank account with a deposit of $30,000 from personal funds.
b. Purchased office supplies on account, $1,800.
c. Received cash from fees earned for managing rental property, $10,000.
d. Paid rent on office and equipment for the month, $4,500.
e. Paid creditors on account, $1,250.
f. Billed customers for fees earned for managing rental property, $16,800.
g. Paid automobile expenses (including rental charges) for the month, $750, and miscellaneous expenses, $980.
h. Paid office salaries, $4,000.
i. Determined that the cost of supplies on hand was $680; therefore, the cost of supplies used was $1,120.
j. Withdrew cash for personal use, $7,500.

Required:
Indicate the effect of each transaction and the balances after each transaction.

Answer 1

Answer:

a.

Assets = Increase $30,000

Liability = No effect

Equity = Increase $30,000

Balances : Cash = $30,000 , Capital = $30,000

b.

Assets = Increase $1,800

Liability = Increase $1,800

Equity = No effect

Balances : Office Supplies $1,800, Trade Payables $1,800

c.

Assets = Increase $10,000

Liability = No effect

Equity = Increase $10,000

Balances : Cash = $40,000, Revenue Earned $10,000

d.

Assets = Decrease $4,500

Liability = No effect

Equity = Decrease $4,500

Balances : Rent Expense $4,500, Cash $35,000

e.

Assets = Decrease $1,250

Liability = Decrease $1,250

Equity = No effect

Balances : Trade Payables $550, Cash $33,750

f.

Assets = Increase $16,800

Liability = No effect

Equity = Increase $16,800

Balances : Revenue Earned $26,800 , Trade Receivables $16,800

g.

Assets = Decrease $1,730

Liability = No effect

Equity = Decrease $1,730

Balances : Automobile expenses $750 , Miscellaneous expenses $980, cash $33,000

h.

Assets = Decrease $4,000

Liability = No effect

Equity = Decrease $4,000

Balances : Office salaries $4,000, cash $29,000

i.

Assets = Decrease $1,120

Liability = No effect

Equity = Decrease $1,120

Balances : Office Supplies $680, Supplies expenses $1,120

j.

Assets = Decrease $7,500

Liability = No effect

Equity = Decrease $7,500

Balances : Cash $21,500, Drawings $7,500

Explanation:

When required to give the effect of transactions, always remember the Accounting Equation : Assets = Equity + Liability

Transactions will affect one or more elements of the this equation. Here is a simple approach to arrive at the effects :

Step 1  : The initial step is to identify the Accounts affected.

Step 2 : Classify the Accounts as either Assets, Liabilities or Equity (Capital and Profit)

Step 3 : Give the Effect (Increase, Decrease or No Effect) on the Elements of the equation.