Chapter 1, Problem 3BE

Transactions

Interstate Delivery Service is owned and operated by Katie Wyer. The following selected transactions were completed by Interstate Delivery during May:

1. 1. Received cash in exchange for common stock, $18,000.
2. 2. Paid advertising expense, $4,850.
3. 3. Purchased supplies on account, $2,100.
4. 4. Billed customers for delivery services on account, $14,700.
5. 5. Received cash from customers on account, $8,200.

Indicate the effect of each transaction on the following accounting equation elements: Assets, Liabilities, Common Stock, Dividends, Revenue, and Expense. To illustrate, the answer to (1) follows:

(1) Asset (Cash) increases by $18,000; Common Stock increases by $18,000.

To determine

Analyze the Business transactions by indicating their effects on accounting equation.

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relation between resources or assets of a company and claims of resources to creditors and owners. Accounting equation is expressed as shown below:

$\begin{array}{c}\text{Assets = Liabilities + Owners' Equity}\\ \text{Assets = Liabilities+}\left\{\left(\begin{array}{l}\text{Owners' }\\ \text{investments}\end{array}\right)-\left(\begin{array}{l}\text{Owners' }\\ \text{withdrawals}\end{array}\right)\text{+}\left(\begin{array}{l}\left(\text{Revenues}\right)\text{–}\\ \left(\text{Expenses}\right)\end{array}\right)\right\}\end{array}$

1.

Transaction: Cash of $18,000 received from owner.

Accounting equation effect:

  $\begin{array}{c}\text{Assets = Liabilities+}\left\{\left(\begin{array}{l}\text{Owners' }\\ \text{investments}\end{array}\right)-\left(\begin{array}{l}\text{Owners' }\\ \text{withdrawals}\end{array}\right)\text{+}\left(\begin{array}{l}\left(\text{Revenues}\right)\text{–}\\ \left(\text{Expenses}\right)\end{array}\right)\right\}\\ \text{Cash =}\text{KW,Capital}\\ \text{+\$18,000 =}\text{+\$18,000}\end{array}$

Therefore, Asset (Cash) increases by $18,000; Owners’ equity (KW, Capital) increases by $18,000.

2.

Transaction: Paid cash of $4,850 for on advertising expenses.

Accounting equation effect:

  $\begin{array}{c}\text{Assets = Liabilities+}\left\{\left(\begin{array}{l}\text{Owners' }\\ \text{investments}\end{array}\right)-\left(\begin{array}{l}\text{Owners' }\\ \text{withdrawals}\end{array}\right)\text{+}\left(\begin{array}{l}\left(\text{Revenues}\right)\text{–}\\ \left(\text{Expenses}\right)\end{array}\right)\right\}\\ \text{Cash =}\text{Advertising Expense}\\ \text{–\$4,850 =}\text{–\$4,850}\end{array}$

Therefore, Asset (Cash) decreases by $4,850; Owners’ equity (Advertising Expense) decreases by $4,850.

3.

Transaction: Purchased supplies of $2,100 on account.

Accounting equation effect:

  $\begin{array}{c}\text{Assets = Liabilities +}\left\{\left(\begin{array}{l}\text{Owners' }\\ \text{investments}\end{array}\right)-\left(\begin{array}{l}\text{Owners' }\\ \text{withdrawals}\end{array}\right)\text{+}\left(\begin{array}{l}\left(\text{Revenues}\right)\text{–}\\ \left(\text{Expenses}\right)\end{array}\right)\right\}\\ \\ \text{Supplies =}\left(\begin{array}{l}\text{Accounts }\\ \text{Payable}\end{array}\right)\\ \text{+\$2,100 =}+\text{\$2,100}\end{array}$

Therefore, Asset (Supplies) increases by $2,100; Liabilities (Accounts Payable) increases by $2,100.

4.

Transaction: Performed services of $14,700 on account.

Accounting equation effect:

  $\begin{array}{c}\text{Assets = Liabilities+}\left\{\left(\begin{array}{l}\text{Owners' }\\ \text{investments}\end{array}\right)-\left(\begin{array}{l}\text{Owners' }\\ \text{withdrawals}\end{array}\right)\text{+}\left(\begin{array}{l}\left(\text{Revenues}\right)\text{–}\\ \left(\text{Expenses}\right)\end{array}\right)\right\}\\ \\ \left(\begin{array}{l}\text{Accounts }\\ \text{Receivable}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Delivery }\\ \text{Service Fee}\end{array}\right)\\ \text{+\$14,700 =}\text{+\$14,700}\end{array}$

Therefore, Asset (Accounts Receivable) increases by $14,700; Owners’ equity (Delivery Service Fee) increases by $14,700.

5.

Transaction: Received $8,200 for services performed on account.

Accounting equation effect:

  $\begin{array}{c}\text{Assets = Liabilities+}\left\{\begin{array}{l}\left(\begin{array}{l}\text{Owners' }\\ \text{investments}\end{array}\right)-\left(\begin{array}{l}\text{Owners' }\\ \text{withdrawals}\end{array}\right)\text{+}\\ \left(\begin{array}{l}\left(\text{Revenues}\right)\text{–}\\ \left(\text{Expenses}\right)\end{array}\right)\end{array}\right\}\\ \text{Cash}\text{+}\left(\begin{array}{l}\text{Accounts }\\ \text{Receivable}\end{array}\right)\text{ =}\\ \text{+\$8,200 + –\$8,200 =}\end{array}$

Therefore, Asset (Cash) increases by $8,200; Asset (Accounts Receivable) decreases by $8,200.