Show the effect of each transaction on the individual accounts of the expanded accounting equation: Assets=Liabilities +Owner's Equity (Capital-Drawing+Revenues-Expenses). After each transaction, show the new account total.
Prepare Income Statement, Balance Sheet, and Statement of Owner's Equity
a. Cash 18000
b Office supplies 4600: 2000 cash 2600 credit
c. Prepaid Insurance 1200
d. Revenues 3300: 1300 cash 2000 credit
e. Paid cash on Office supplies 2300
f. Rent 750
g. Draw 100
I am completely confused by every word of this. I thought I had it figured out but then I ended up with the wrong total. Can someone please give me an idea of where to start and help me understand or try to understand this a little better. Thank you so much.
Crystal,
The basic accounting formula is "What you have" must equal "Where it came from." Use that instead of debits and credits and you can work through almost anything. "What you have" things are pluses, and "Where it came from" are minuses. You got something, and you gave up something to get it.
This list of transactions looks like it starts with "What you got" ... $18,000. So where did it come from ... equity or debt?
The second transaction looks like you got $4,600 worth of office supplies. and it came from $2,000 cash and $2,600 credit.
And so on.
Lay out out each transaction in what your instructor will call a "Tee" account with a "Tee" for each "What you have" and each "Where it came from" type of thingy. Making sure each transaction (#a through #g) balance, or add up to zero ... remember the pluses and minuses I mentioned above.
If there is only one thing mentioned (as in #g ... Draw), then you have to figure out whether it is an increase in things you got in that category (account) or an increase in what you gave up (Where it came from) and then figure the most appropriate thing it came from or the most appropriate thing you got for it.
Thank you so much for responding to my question. After I posted the question and worked on the problems for about 4 hours I finally finished it all by myself. I was so proud. I hate Accounting and Math...they are my worst subjects so when I did it by myself and figured it out I was so pleased. I see having more problems in the future though ;-)
To understand and analyze the effect of each transaction on the individual accounts of the expanded accounting equation, let's break it down step-by-step:
Step 1: Initial Account Totals
Before we start, let's assume that the initial account totals are as follows:
- Cash: $0
- Office Supplies: $0
- Prepaid Insurance: $0
- Revenues: $0
- Expenses: $0
- Owner's Equity (Capital): $0
- Drawing: $0
- Liabilities: $0
Now, let's go through each transaction and see how it affects the accounts and the overall equation:
a. Cash 18000
- Increase in the Cash account by $18,000
New Cash account total: Cash $18,000
b. Office supplies 4600: 2000 cash 2600 credit
- Increase in the Office Supplies account by $4,600
- Decrease in the Cash account by $2,000
- Increase in the Accounts Payable (Liabilities) account by $2,600
New Office Supplies account total: Office Supplies $4,600
New Cash account total: Cash $16,000
New Accounts Payable (Liabilities) account total: Accounts Payable $2,600
c. Prepaid Insurance 1200
- Increase in the Prepaid Insurance account by $1,200
New Prepaid Insurance account total: Prepaid Insurance $1,200
d. Revenues 3300: 1300 cash 2000 credit
- Increase in the Revenues account by $3,300
- Increase in the Cash account by $1,300
- Increase in Accounts Receivable (Liabilities) account by $2,000
New Revenues account total: Revenues $3,300
New Cash account total: Cash $17,300
New Accounts Receivable (Liabilities) account total: Accounts Receivable $2,000
e. Paid cash on Office supplies 2300
- Decrease in the Cash account by $2,300
- Decrease in the Accounts Payable (Liabilities) account by $2,300
New Cash account total: Cash $15,000
New Accounts Payable (Liabilities) account total: Accounts Payable $300
f. Rent 750
- Increase in the Rent Expense account by $750
- Decrease in the Cash account by $750
New Rent Expense account total: Rent Expense $750
New Cash account total: Cash $14,250
g. Draw 100
- Increase in the Drawing account by $100
- Decrease in the Cash account by $100
New Drawing account total: Drawing $100
New Cash account total: Cash $14,150
Now, let's prepare the financial statements based on the data:
1. Income Statement:
Revenues: $3,300
Expenses: Rent Expense ($750)
Net Income: $2,550
2. Statement of Owner's Equity:
Owner's Equity (Capital) at the beginning: $0
Add: Net Income: $2,550
Less: Drawing: ($100)
Owner's Equity (Capital) at the end: $2,450
3. Balance Sheet:
Assets:
- Cash: $14,150
- Office Supplies: $4,600
- Prepaid Insurance: $1,200
Total Assets: $19,950
Liabilities:
- Accounts Payable: $300
- Accounts Receivable: $2,000
Total Liabilities: $2,300
Owner's Equity:
- Owner's Equity (Capital): $2,450
Therefore, the final expanded accounting equation would be:
Assets ($19,950) = Liabilities ($2,300) + Owner's Equity ($2,450)
It's important to note that these calculations assume that this is the only information provided and no other transactions have taken place.
To analyze the effect of each transaction on the individual accounts of the expanded accounting equation, let's break down each transaction and update the account totals accordingly:
1. Cash 18,000:
- Increase in the asset account 'Cash' by 18,000.
- New account total for 'Cash': 18,000.
2. Office supplies 4,600 - 2,000 cash, 2,600 credit:
- Increase in the asset account 'Office supplies' by 4,600.
- Decrease in the asset account 'Cash' by 2,000.
- Increase in the liability account 'Accounts payable' (or 'Creditors') by 2,600.
- New account total for 'Office supplies': 4,600.
- New account total for 'Cash': 16,000.
- New account total for 'Accounts payable': 2,600.
3. Prepaid Insurance 1,200:
- Increase in the asset account 'Prepaid Insurance' by 1,200.
- New account total for 'Prepaid Insurance': 1,200.
4. Revenues 3,300 - 1,300 cash, 2,000 credit:
- Increase in the revenue account 'Revenues' by 3,300.
- Increase in the asset account 'Cash' by 1,300.
- Increase in the liability account 'Accounts receivable' (or 'Debtors') by 2,000.
- New account total for 'Revenues': 3,300.
- New account total for 'Cash': 17,300.
- New account total for 'Accounts receivable': 2,000.
5. Paid cash for Office supplies 2,300:
- Decrease in the asset account 'Cash' by 2,300.
- Decrease in the asset account 'Office supplies' by 2,300.
- New account total for 'Cash': 15,000.
- New account total for 'Office supplies': 2,300.
6. Rent 750:
- Increase in the expense account 'Rent' by 750.
- Decrease in the asset account 'Cash' by 750.
- New account total for 'Rent': 750.
- New account total for 'Cash': 14,250.
7. Draw 100:
- Increase in the expense account 'Owner's Drawings' by 100.
- Decrease in the asset account 'Cash' by 100.
- New account total for 'Owner's Drawings': 100.
- New account total for 'Cash': 14,150.
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To prepare the financial statements, you need to summarize the changes to owner's equity based on the transactions above:
Statement of Owner's Equity:
- Beginning owner's equity: Capital (assumed to be zero) + Drawing (assumed to be zero) = 0 + 0 = 0
- Add revenues: 3,300
- Subtract expenses: Rent (750)
- Subtract drawing: Draw (100)
- Ending owner's equity/capital: 3,300 - 750 - 100 = 2,450
Income Statement:
- Revenues: 3,300
- Expenses: Rent (750)
- Net Income: Revenues - Expenses = 3,300 - 750 = 2,550
Balance Sheet (Assets = Liabilities + Owner's Equity):
- Assets: Cash (14,150) + Office supplies (2,300) + Prepaid Insurance (1,200) = 17,650
- Liabilities: Accounts payable (2,600) + Accounts receivable (2,000) = 4,600
- Owner's Equity (capital): 2,450 (from the Statement of Owner's Equity)
Now, you have the information needed to prepare the Income Statement, Balance Sheet, and Statement of Owner's Equity.