Chapter 1, Problem 10E

To determine

Concept Introduction:

Accounting equation - The accounting equation is the foundation of the double entry accounting. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the company’s shareholders. Thus, the accounting equation is:

$Assets=Liabilities+ShareholderEquity$

Moreover, the balance sheet is a complex display of this equation.

To determine: The explanation from a through j that best describes the transactions 1 through 5.

Explanation of Solution

Any purchase or sale by an accounting equity has an equal effect on both sides of the equation, or has offsetting effects on the same side of the equation. Keeping this accounting equation in mind, the solution is as mentioned below:

1.$\begin{array}{l}Assets=Liabilities+Equity\\ Cash+\text{Accounts Receivable}+OfficeSupplies+Officefurniture=AccountsPayable+ZenCapital+\mathrm{Re}venues\\ \$40,000+\$0+\$0+\$0=\$0+\$40,000+\$0\end{array}$

The above equation tells that the company only has$40,000 cash which is financed from the capital. And this situation is best explained by the Option d, stating the owner invested $40,000 cash in the business.

2.$\begin{array}{l}Assets=Liabilities+Equity\\ Cash+\text{Accounts Receivable}+OfficeSupplies+Officefurniture=AccountsPayable+ZenCapital+\mathrm{Re}venues\\ \$38,000+\$0+\$3,000+\$0=\$1,000+\$40,000+\$0\end{array}$

From the above equation, we can interpret that the Company had $40,000 cash, out of which it spent $2,000 and is left with $38,000 cash in hand. From those $2,000 cash, it bought office supplies worth $3,000 by borrowing $1,000. This equation is best described in the Option e, stating that the company purchased office supplies for $3,000 by paying $2,000 cash and putting $1,000 on credit.

3.$\begin{array}{l}Assets=Liabilities+Equity\\ Cash+\text{Accounts Receivable}+OfficeSupplies+Officefurniture=AccountsPayable+ZenCapital+\mathrm{Re}venues\\ \$30,000+\$0+\$3,000+\$8,000=\$1,000+\$40,000+\$0\end{array}$

The above equation explains that the company spent $8,000 cash more to buy office furniture, which in turn reduced the cash in hand to $30,000. And this is best explained by the Option a, stating that the company purchased office furniture for $8,000 cash.

4.$\begin{array}{l}Assets=Liabilities+Equity\\ Cash+\text{Accounts Receivable}+OfficeSupplies+Officefurniture=AccountsPayable+ZenCapital+\mathrm{Re}venues\\ \$30,000+\$6,000+\$3,000+\$8,000=\$1,000+\$40,000+\$6,000\end{array}$

The equation mentioned above shows that the company made credit sales for $6,000, which increased the accounts receivable on the asset side and revenues on the equity side. This is better explained by the Option f, which states that the company billed a customer $6,000 for services provided.

5.$\begin{array}{l}Assets=Liabilities+Equity\\ Cash+\text{Accounts Receivable}+OfficeSupplies+Officefurniture=AccountsPayable+ZenCapital+\mathrm{Re}venues\\ \$31,000+\$6,000+\$3,000+\$8,000=\$1,000+\$40,000+\$7,000\end{array}$

In this equation, the cash in hand increased by $1,000 with $1,000 increase in revenue, which implies that the company sold services of $1,000 in cash. This equation is best explained in the Option h, which states that the company provided services for $1,000 cash.