Chapter 2, Problem 7AP

To determine

Write a memo to the instructor describing each step of the six-step measurement process for each of the three transactions.

Explanation of Solution

External events:

External events are the events which involves an exchange transaction between the two parties, which is between a company, and another entity. Examples of external transactions include borrowing of cash from bank, purchase of inventory, and sale to a customer.

There are six steps involved to measure the external transaction. They are as follows:

Step1: Identify the accounts that are affected by an external transaction using the source documents.

Step 2: Impact of the transactions on the accounting equations should be analyzed.

Step 3: Transaction which results in a debit or credit to account balances should be assessed.

Step 4: The assessed transactions which are resulted in debit or credit is then recorded in journal.

Step 5: The transactions which are recorded in journal are posted to the general ledger.

Step 6: At last, the Trial balance is prepared.

MEMO

From: ABC

To: The Instructor

Date: 17^th May

Subject: Transaction Analysis

Respected sir/madam,

Each step of the six-step measurement process for each of the three transactions is described as follows:

a. Decorating services provided on account to one of its clients for $500.

Step 1: Identify the accounts that are affected by an external transaction.

• Accounts Receivable (Asset)
• Service Revenue (Equity)

Step 2: Impact of the transactions on the accounting equation:

$\begin{array}{c}\text{Asset}=\text{Liability}+\text{Owners'Equity}\\ +\$500\left(\text{Accounts Receivable}\right)=+\$500\left(\text{Service Revenue}\right)\end{array}$

Step 3: Assess the transaction which results in a debit or credit to account balances should be assessed.

• Accounts receivable is an asset account, and it has increased. Hence, debit accounts receivable account.
• Service revenue is a revenue account. It is one of the components of stockholders’ equity account. Service revenue is increased, which increases the revenue account, and in turn increases the stockholders’ equity account. Hence, credit service revenue account.

Step 4: Journal Entry:

Record the following journal entry in the general journal:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Accounts Receivable		500
	Service Revenue			500
	(To record the revenues earned)

Table (1)

Step 5: The transactions which are recorded in journal are posted to the general ledger.

Step 6: At last, the Trial balance is prepared.

b. Paid $1,200 for an employee’s salary in the current period.

Step 1: Identify the accounts that are affected by an external transaction.

• Salaries expense (Equity)
• Cash (Asset)

Step 2: Impact of the transactions on the accounting equation:

$\begin{array}{c}\text{Asset}=\text{Liability}+\text{Owners'Equity}\\ -\text{\$1,200}\left(\text{Cash}\right)=-\$1,200\left(\text{Salaries Expense}\right)\end{array}$

Step 3: Assess the transaction which results in a debit or credit to account balances should be assessed.

• Salaries expense is an expense account. It is one of the components of stockholders’ equity account Salaries expense is increased, which increases the expense account, and in turn decreases the stockholders’ equity account. Hence, debit service revenue account.
• Cash is an asset account, and it has increased. Hence, credit cash account.

Step 4: Journal Entry:

Record the following journal entry in the general journal:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Salaries Expense		1,200
	Cash			1,200
	(To record the payment of salary expenses)

Table (2)

Step 5: The transactions which are recorded in journal are posted to the general ledger.

Step 6: At last, the Trial balance is prepared.

c. Purchased office equipment for $2,700 cash.

Step 1: Identify the accounts that are affected by an external transaction.

• Equipment (Asset)
• Cash (Asset)

Step 2: Impact of the transactions on the accounting equation:

$\begin{array}{c}\text{Asset}=\text{Liability}+\text{Owners'Equity}\\ +\$2,700\left(\text{Equipment }\right)=\\ -\$2,700\left(\text{Cash}\right)=\end{array}$

Step 3: Assess the transaction which results in a debit or credit to account balances should be assessed.

• Equipment is an asset account, and it has increased. Hence, debit Equipment account.
• Cash is an asset account, and it has increased. Hence, credit cash account.

Step 4: Journal Entry:

Record the following journal entry in the general journal:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Equipment		2,700
	Cash			2,700
	(To record the purchase of equipment for cash)

Table (3)

Step 5: The transactions which are recorded in journal are posted to the general ledger.

Step 6: At last, the Trial balance is prepared.

Regards,

ABC.