Explanation Accounting equation : Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below: Assets = Liabilities + Stockholders' Equity Following are the effects on accounting equation of the adjusting journal entries: a. Interest payable is a liability. Hence, there is no effect on the asset account. Interest payable is a liability. There is an increase in liability. Hence, the liability will be increased by $700. Interest expense is an expense account which is a component of stockholders’ equity . In this transaction there is an increase in expense account which decreases the stock holders’ equity. Hence, the stock holders’ equity will be decreased by $700. b. Unearned revenue is a liability. Hence, there is no effect on the asset account. Unearned revenue is a liability. There is a decrease in liability. Hence, the liability will be decreased by $3,200. Rent revenue is a revenue account which is a component of stockholders’ equity. There is an increase in the revenue account which increases the stockholders’ equity. Hence, the stockholders’ equity will be increased by $3,200. Working note: ( Unearned revenue = Total amount × 4 6 ( September − December ) = $ 4 , 800 × 4 6 = $ 3 , 200 ) c. Accounts receivable is an asset. There is an increase in the asset. Hence, the asset account will be increased by $3,300. Accounts receivable is an asset. Hence, there is no effect on the liability account. Service revenue is a revenue account which is a component of stockholders’ equity. There is an increase in the revenue account which increases the stockholders’ equity. Hence, the stockholders’ equity will be increased by $3,300. d. Prepaid insurance is an asset. There is a decrease in asset account. Hence, the asset account will be decreased by $700. Prepaid insurance is an asset. Hence, there is no effect on the liability account. Insurance expense is an expense account which is a component of stockholders’ equity

5th Edition

ISBN: 9780078025914

Author: Fred Phillips Associate Professor, Robert Libby, Patricia Libby

Publisher: McGraw-Hill Education

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Financial Transaction Analysis

The transaction analysis is done with the help of the accounting equation. The basic accounting equation is alternatively known as the balance sheet equation is based on the double-entry system which says that for each transaction happening in a business…

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Chapter 4, Problem 4.3CP

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The effects on accounting equation of the adjusting journal entries.

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