Chapter 4, Problem 4.1ME

To determine

Concept Introduction:

Accounting Equation:

Accounting equation represents the mathematical relationship between assets, liabilities and equity. According to this equation, assets are equal to the sum of liabilities and equity. The formal for basic accounting equation is as follows:

  $\text{Assets = Liabilities + Equity}$

To Indicate:

The effect of transactions on accounting equation

Answer to Problem 4.1ME

The effect of transactions on accounting equation is shown as follows;

Transaction / Adjustment	A =	L +	SE	Net Income
a.	+		+
b.	+/-
c.	+/-
d.	+/-	+
e.	+/-			+
f.	-			-
g.		+		-
h.	-			-

Explanation of Solution

The effect of transactions on accounting equation is explained as follows:

Transaction / Adjustment		A =	L +	SE	Net Income
a.	Issuance of Common stock for Cash shall increase Cash (Assets) and Common Stock (Equity)	+		+
b.	Payment of Advance rent shall increase the Prepaid Rent (Asset) and decrease the Cash (Asset)	+/-
c.	Purchase of equipment for Cash shall Increase Equipment (Assets) and Decrease the Cash (Assets)	+/-
d.	Purchase of inventory for cash and on account shall increase the asset (Inventory), Decrease the cash (Asset) and increase the Accounts Payable (Liability)	+/-	+
e.	Sale of Inventory on profit shall increase Revenue (Net Income), Accounts Receivable (Assets), Decrease the Inventory (Assets)	+/-			+
f.	Payment of Salaries to employees shall Decrease the Net Income and Decrease the Cash (Asset)	-			-
g.	Accrual of wages shall increase the Expense (Reducing net Income) and increase the Wages Payable (Liability)		+		-
h.	Adjusting the Prepaid Rent shall result in decrease in Prepaid Rent (Assets) and Decrease in Net Income (Expense)	-			-