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Understanding the Accounting Equation

This document contains 9 exercises that provide examples of accounting transactions and ask the reader to determine how the transactions affect the accounting equation. The exercises cover topics such as classifying companies as service, merchandise or manufacturing businesses, calculating stockholders' equity, identifying accounting elements, explaining how different types of transactions affect the accounting equation, analyzing the impact of specific transactions on assets, liabilities and equity, and indicating the accounting effect of sample business transactions.

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Osama Hashem
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38 views3 pages

Understanding the Accounting Equation

This document contains 9 exercises that provide examples of accounting transactions and ask the reader to determine how the transactions affect the accounting equation. The exercises cover topics such as classifying companies as service, merchandise or manufacturing businesses, calculating stockholders' equity, identifying accounting elements, explaining how different types of transactions affect the accounting equation, analyzing the impact of specific transactions on assets, liabilities and equity, and indicating the accounting effect of sample business transactions.

Uploaded by

Osama Hashem
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Introduction to Accounting and Business

Exercise 1
The following is a list of well-known companies.
1. Boeing
2. Citigroup Inc.
3. The Walt Disney Company
4. Dow Chemical Company
5. eBay Inc.
6. FedEx
7. Ford Motor Company
8. Gap Inc.
9. Dell
10. Hilton Hospitality, Inc.
11. Procter & Gamble
12. BP
13. Walmart Stores, Inc.

Indicate whether each of these companies is primarily a service, merchandise, or


manufacturing business.

Exercise 2
The total assets and total liabilities of Dollar Tree Inc. and Target Corporation are shown
below.

Determine the stockholders’ equity of each company.

Exercise 3
Determine the missing amount for each of the following:

Exercise 4
Indicate whether each of the following is identified with (1) an asset, (2) a liability, or
(3) stockholders’ equity:
a. accounts payable
b. cash
c. fees earned
d. land
e. supplies
f. wages expense
Exercise 5
Describe how the following business transactions affect the three elements of the accounting
equation.
a. Invested cash in business.
b. Paid for utilities used in the business.
c. Purchased supplies for cash.
d. Purchased supplies on account.
e. Received cash for services performed.

Exercise 6
a. A vacant lot acquired for $180,000 is sold for $440,000 in cash. What is the effect of the
sale on the total amount of the seller’s (1) assets, (2) liabilities, and (3) stockholders’ equity?
b. Assume that the seller owes $69,000 on a loan for the land. After receiving the $440,000
cash in (a), the seller pays the $69,000 owed. What is the effect of the payment on
the total amount of the seller’s (1) assets, (2) liabilities, and (3) stockholders’ equity?
c. Is it true that a transaction always affects at least two elements (Assets, Liabilities, or
Stockholders’ Equity) of the accounting equation? Explain.

Exercise 7
Indicate whether each of the following types of transactions will either (a) increase
stockholders’
equity or (b) decrease stockholders’ equity:
1. expenses
2. issuing capital stock in exchange for cash
3. dividends
4. revenues

Exercise 8
The following selected transactions were completed by Reuben’s Delivery Service during
October:
1. Received cash from owner in exchange for capital stock, $20,000.
2. Purchased supplies for cash, $900.
3. Paid rent for October, $3,000.
4. Paid advertising expense, $2,500.
5. Received cash for providing delivery services, $23,100.
6. Billed customers for delivery services on account, $41,750.
7. Paid creditors on account, $4,500.
8. Received cash from customers on account, $36,200.
9. Determined that the cost of supplies on hand was $175 and $725 of supplies had been
used during the month.
10. Paid dividends, $1,000.
Indicate the effect of each transaction on the accounting equation by listing the numbers
identifying the transactions, (1) through (10), in a column, and inserting at the right
of each number the appropriate letter from the following list:
a. Increase in an asset, decrease in another asset.
b. Increase in an asset, increase in a liability.
c. Increase in an asset, increase in stockholders’ equity.
d. Decrease in an asset, decrease in a liability.
e. Decrease in an asset, decrease in stockholders’ equity.
Exercise 9
Cecil Jameson, Attorney-at-Law, is organized as a corporation and operated by Cecil
Jameson.

On July 1, 2013, the company has the following assets, liabilities, and capital stock:
cash, $1,000; accounts receivable, $3,200; supplies, $850; land, $10,000; accounts payable,
$1,530; capital stock, $10,000. Office space and office equipment are currently being rented,
pending the construction of an office complex on land purchased last year. Business
transactions during July are summarized as follows:
a. Received cash from clients for services, $3,928.
b. Paid creditors on account, $1,055.
c. Received cash from Cecil Jameson as an additional investment in exchange for capital
stock, $3,700.
d. Paid office rent for the month, $1,200.
e. Charged clients for legal services on account, $2,025.
f. Purchased supplies on account, $245.
g. Received cash from clients on account, $3,000.
h. Received invoice for paralegal services from Legal Aid Inc. for July (to be paid on
August 10), $1,635.
i. Paid the following: wages expense, $850; utilities expense, $325; answering service
expense, $250; and miscellaneous expense, $75.
j. Determined that the cost of supplies on hand was $980; therefore, the cost of supplies
used during the month was $115.
k. Paid dividends, $1,000.

Indicate the effect of each transaction and the balances after each transaction

Common questions

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Selling a vacant lot for $440,000, which was originally acquired for $180,000, increases the company's assets by $260,000. The original cost of the lot ($180,000) is replaced by cash received ($440,000). If there are no liabilities attached specifically to the lot, the increase in assets directly enhances the stockholders' equity by the same amount .

Paying off a liability decreases the corresponding liability on the balance sheet and also decreases the asset used to make the payment, typically cash. The overall stockholders' equity remains unchanged as the transaction does not impact a company's earnings or investments .

When cash is received for services performed, assets increase due to the cash inflow, and stockholders' equity also increases because of the corresponding increase in revenues reflected in the income statement .

Expenses, such as rent or utilities, decrease a company’s stockholders' equity by reducing net income, which feeds into retained earnings. On the balance sheet, they typically result in a decrease in assets if paid in cash. If an expense is accrued or deferred, it can temporarily create liability until settled .

Purchasing supplies for cash will result in a decrease in one asset (cash) and an increase in another asset (supplies), leaving liabilities and stockholders' equity unchanged since the transaction is not funded by debt or equity .

Recognizing service revenue on account increases both assets, in terms of accounts receivable, and stockholders' equity through the increase in retained earnings from revenues earned. Liabilities remain unchanged as there is no immediate cash exchange involved .

Paying dividends results in a decrease in assets, as cash is disbursed to shareholders, and a corresponding decrease in stockholders' equity, specifically in retained earnings. This reflects the distribution of profits back to investors rather than reinvesting in the company .

Issuing new capital stock in exchange for cash increases stockholders' equity because it represents an infusion of funds from investors in exchange for ownership stakes in the company. The equity increases as the company gains assets (cash) without taking on liabilities .

Dividends decrease a company's stockholders' equity because they are distributions of earnings to shareholders, reducing the retained earnings portion of equity .

Yes, every transaction involving an asset will affect at least one other element of the accounting equation because the equation must always remain balanced. For example, if an asset is acquired, it is either offset by a liability or a positive contribution to equity, or converted from another asset .

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