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Accounting Equation and Financial Concepts

Here is the trial balance for Edwards Co for January 2013: Trial Balance As of January 31, 2013 Debit Credit Cash $ 4,250 Accounts Receivable $ 250 Equipment 5,000 Supplies 200 Rent Expense 300 Service Revenue 1,000 Drawings 2,000 Owner's Capital 8,000 Note Payable 3,000 $15,000 $15,000

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59 views15 pages

Accounting Equation and Financial Concepts

Here is the trial balance for Edwards Co for January 2013: Trial Balance As of January 31, 2013 Debit Credit Cash $ 4,250 Accounts Receivable $ 250 Equipment 5,000 Supplies 200 Rent Expense 300 Service Revenue 1,000 Drawings 2,000 Owner's Capital 8,000 Note Payable 3,000 $15,000 $15,000

Uploaded by

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

Unit 2 Tutorial Worksheet

1. The accounting equation is often described as being very important in accounting. Explain the purpose of the accounting
Purpose of Accounting Equation:
It provides an easy way to verify the accuracy of bookkeeping and measures the profitability of the business.
The higher the proportion of assets provided by owners, the more solvent the company will be.

Two different forms the Accounting Equation can be written are:


Assets = Liabilities + Owner's Equity

Assets = Liabilities + [Owner's Equity + (Revenue - Expenses) - Drawings]

Where Owner's Equity: (Capital + Income - Expenses)

2. Distinguish between assets and liabilities and provide three (3) examples of each to support your arguments.
Assets are economic resources owned or controlled by an entity that will provide present and future benefit. Assets can be eit
Currents assets are assets that the business has currently, and has plans to convert into cash or use to generate earnings withi
However, Non-current assets/Fixed assets, are assets that are not expected to be used up in 1 year and are more concrete wit

3. Distinguish between income and expenses and provide three (3) examples of each to support your arguments.
Income/ Revenue are the business' earnings from providing goods or services to customers. They increase both Assets and Ow
Expenses are cost incurred by the business to generate revenue. They decrease Assets and Owner's Equity, and increase liabili

4. Suppose a business receives a bill for services rendered from one of its suppliers. The business will pay the supplier next m
When the business receives the bill from its supplier, explain how this affect the accounting equation in terms of increasing
With regards to the bill being received from the supplier, the business will have already gotten the services which will serve as
there will be a decrease in the owner's equity and an increase in the business' liabilities, as well as an increase in the suppliers

5. Suppose equipment is sold for cash in an amount equal to the cost of the equipment recorded on the books. How does th
decreasing assets, liabilities or owner’s equity?
In recording the effects of the sale of the equipment in the books, both assets and liabilities as well as owner's equity will rema

6. At the end of December 2014, a business shows the following balances in its general ledger. You are required to use this i

Trial Balance
as at December, 2014.
Debit ($) Credit ($)
Cash 5,000
Accounts Receivable 1,200
Accounts Payable 1,300
Capital 1,000
Supplies 200
Land 20,000
Service Revenue 35,500
Rent Expense 4,500
Salary Expense 6,000
Utility Expense 900
37,800 37,800

7. The following transactions relates to Edwards Co for the month of January 2013. You are required to record the journal en
and then prepare the trial balance for the company.
a. Edward Wilson invested $8,000 cash in his new landscaping business.
b. The business paid the first month's rent with $300 cash.
c. The business purchased equipment by paying $2,000 cash and executing a note payable for $3,000.
b. The business paid the first month's rent with $300 cash.
e. The business billed clients for a total of $1,000 for design services rendered.
f. The business received $750 cash from clients for services rendered above.
g. The owner took a withdrawal of $2,000.

General Journal
Account $ $
A. Dr. Cash 8,000
Cr. Capital 8,000
Owners' investment

B. Dr. Rent Expense 300


Cr. Cash 300
Business paid rent by cash

C. Dr. Equipment 5,000


Cr. Cash 2,000
Cr. Note Payable 3,000
purchased equipment

D. Dr. Supplies 200


Cr. Cash 200
purchase of supplies

E. Dr. Accounts Receivable 1,000


Cr. Service Revenue 1,000
Performed service on credit/account

F. Dr. Cash 750


Cr. Accounts Receivable 750
cash collected from clients

G. Dr. Drawings 2,000


Cr. Cash 2,000
Withdrawal for owner's personal use
LEDGER ACCOUNTS

DR CASH CR
Date Details $ Date Details $
a. Owner's Capital 8,000 b. Rent Expense 300
f. Accounts Receivable 750 c. Equipment 2,000
d. Supplies 200
g. Drawings 2,000
Bal c/d 4,250
8,750.00 8,750
Bal b/d $4,250.00

DR OWNER'S CAPITAL CR
Date Details $ Date Details $
Bal c/d 8,000 a. Cash 8,000
8,000 8,000
Bal b/d 8,000

DR ACCOUNTS RECEIVABLE CR
Date Details $ Date Details $
e. Service Revenue 1,000 f. Cash 750
Bal c/d 250
1,000 1,000
Bal b/d 1,000

DR SERVICE REVENUE CR
Date Details $ Date Details $
Bal c/d 1,000 e. Accounts Receivable 1,000
1,000 1,000
Bal b/d 1,000

DR RENT EXPENSE CR
Date Details $ Date Details $
b. Cash 300 Bal c/d 300
300 300
Bal b/d 300

DR EQUIPMENT CR
Date Details $ Date Details $
c. Cash 2,000 Bal c/d 5,000
c. Note Payable 3,000
5,000 5,000
Bal b/d 5,000

DR NOTE PAYABLE CR
Date Details $ Date Details $
Bal c/d 3,000 c. Equipment 3,000
3,000 3,000
Bal b/d 3,000

DR SUPPLIES CR
Date Details $ Date Details $
d. Cash 200 Bal c/d 200
200 200
Bal b/d 200

DR DRAWINGS CR
Date Details $ Date Details $
g. Cash 2,000 Bal c/d 2,000
2,000 2,000
Bal b/d 2,000

EDWARDS CO.
TRIAL BALANCE
as at January, 2013

DEBIT ($) CREDIT ($)


Cash 4,250
Capital 8,000
Accounts Receivable 250
Rent Expense 300
Equipment 5,000
Supplies 200
Drawings 2,000
Note Payable 3,000
Service Revenue 1,000
12,000 12,000
8. Kids Play Workings:
a) Cash: $6,600 + $2,000 = $8,600 less supplies of $1400 = $7200
b) Accounts Receivable increase by $1,000, Accounts Payable decrease by $1,000
c) Supplies increase by $1,400
d) Motor Vehicle = $84,300
e) Salary decrease by $500

Kids Play
Adjusted Trial Balance
as at June 30th, 2013

DR ($) CR ($)
Cash 7,200
Accounts Receivable 9,000
Supplies 2,000
Motor Vehicle 84,300
Accounts Payable 54,000
Marlon Morgan: Capital 50,700
Marlon Brown: Withdrawal 2,300
Service Revenue 4,500
Salary 3,600
Rent 800
109,200 109,200

9. Required: 1. Record each transaction in the journal. Use the letters to identify the transactions. 2. Post the entries to the

Wills Environmental Consulting


General Journal
Date Transactions/Accounts Debit ($) Credit ($)
a. Dr. Cash 25,000
Dr. Building 30,000
Cr. Capital 55,000
Owner's investment

b. Dr. Office Supplies 2,100


Cr. Accounts Payable 2,100
purchased supplies on account

c. Dr. Office Furniture 18,000


Cr. Cash 18,000
paid for office furniture
d. Dr. Salary/Wages 2,200
Cr. Cash 2,200
paid employee's salary

e. Dr. Accounts Receivable 5,100


Cr. Service Revenue 5,100
performed consulting service on account

f. Dr. Account Payable 800


Cr. Cash 800
paid on the accounts payable in transaction (B)

g. Dr. Advertising 600


Cr. Accounts Payable 600
advertising expense will be paid in the near future

h. Dr. Cash 1,600


Cr. Accounts Payable 1,600
performed consulting service and received cash

i. Dr. Cash 1,200


Cr. Accounts Payable 1,200
received cash on account

j. Dr. Rent on equipment 700


Dr. Utilities 400
Cr. Cash 1,100
made a compound entry for cash expenses

k. Dr. Drawings 3,000


Cr. Cash 3,000
withdrawal for personal use.

LEDGER ACCOUNTS

DR CASH CR
DATE DETAILS $ DATE DETAILS $
A. Owner's Capital - Cash 25,000 C. Office Furniture 18,000
H. Accounts Payable 1,600 D. Salary 2,200
I. Accounts Payable 1,200 F. Accounts Receivable 800
J. Expenses 1,100
K. Drawings 3,000
Bal c/d 2,700
27,800 27,800
Bal b/d 2,700

DR BUILDING CR
DATE DETAILS $ DATE DETAILS $
A. Owner's Capital - Building 30,000 Bal c/d 30,000
30,000 30,000
Bal b/d 30,000

DR CAPITAL CR
DATE DETAILS $ DATE DETAILS $
Bal c/d 55,000 A. Cash 25,000
Building 30,000
55,000 55,000
Bal b/d 55,000

DR OFFICE SUPPLIES CR
DATE DETAILS $ DATE DETAILS $
B. Accounts Payable 2,100 Bal c/d 2,100
2,100 2,100
Bal b/d 2,100

DR ACCOUNTS PAYABLE CR
DATE DETAILS $ DATE DETAILS $
B. Office Supplies 2,100
G. Advertising 600
Bal c/d 5,500 H. Cash 1,600
I. Cash 1,200
5,500 5,500
Bal b/d 5,500

DR OFFICE FURNITURE CR
DATE DETAILS $ DATE DETAILS $
C. Cash 18,000 Bal c/d 18,000
18,000 18,000
Bal b/d 18,000

DR SALARY CR
DATE DETAILS $ DATE DETAILS $
D. Cash 2,200 Bal c/d 2,200
2,200 2,200
Bal b/d 2,200

DR ACCOUNTS RECEIVABLE CR
DATE DETAILS $ DATE DETAILS $
E. Service revenue 5,100
F. Cash 800 Bal c/d 5,900
5,900 5,900
Bal b/d 5,900

DR SERVICE REVENUE CR
DATE DETAILS $ DATE DETAILS $
Bal c/d 5,100 E. Accounts Receivable 5,100
5,100 5,100
Bal b/d 5,100

DR ADVERTISING CR
DATE DETAILS $ DATE DETAILS $
G. Accounts Payable 600 Bal c/d 600
600 600
Bal b/d 600

DR DRAWINGS CR
DATE DETAILS $ DATE DETAILS $
K. Cash 3,000 Bal c/d 3,000
3,000 3,000
Bal b/d 3,000

DR EXPENSES CR
DATE DETAILS $ DATE DETAILS $
J. Cash 1,100 Bal c/d 1,100
1,100 1,100
Bal b/d 1,100

Wills Environmental Consulting


Trial Balance
as at June 30th, 2008
ACCOUNT DEBIT ($) CREDIT ($)
Cash 2,700
Building 30,000
Capital 55,000
Office Supplies 2,100
Office Furniture 18,000
Salaries 2,200
Accounts Receivable 5,900
Accounts Payable 5,500
Service Revenue 5,100
Advertising 600
Expenses 1,100
Drawings 3,000
65,600 65,600

10. Record the following transactions in General Journal format. Include appropriate narrations.
a. Paid advertising expenses, $1,260.
b. Provided services worth $500 to customers on account.
c. Purchased office equipment on account for $4,000.
d. Angie McDonald, the owner, withdrew $700 cash from the business
e. Received $250 from customers who were previously billed in (2) above.
f. Purchased land in exchange for $36,000 cash.

GENERAL JOURNAL
DATE DETAILS ($) ($)
A. Dr. Advertising Expense 1,260
Cr. Cash 1,260
(Paid advertising expenses)

B. Dr. Accounts Receivable 500


Cr. Service Revenue 500
(Provided services on account)

C. Dr. Office Equipment 4,000


Cr. Accounts Payable 4,000
(Purchased office equipment on account)

D. Dr. Drawings 700


Cr. Cash 700
(owner withdrew cash for personal use)
E. Dr. Cash 250
Cr. Accounts Payable 250
(Received $250 as part payment for services rendered in part (B))

F. Dr. Land 36,000


Cr. Cash 36,000
(Purchased land for $36,000 cash)
he purpose of the accounting equation and state two different forms or ways in which it can be written

he business.

your arguments.
ture benefit. Assets can be either current or non-current.
use to generate earnings within a 12 month period. Eg. Cash, accounts receivable/debtors, inventory.
ear and are more concrete within the business. Eg. Land, building, machinery.

rt your arguments.
y increase both Assets and Owner's Equity. Eg. Rent revenue, sales, interest earned, discount received.
er's Equity, and increase liabilities. Eg. Utilities, salaries, supplies used.

ss will pay the supplier next month.


uation in terms of increasing or decreasing assets, liabilities, or owner’s equity?
he services which will serve as an increase in the assets. However, when the business decides to pay the supplier,
as an increase in the suppliers owner's equity.

ed on the books. How does this sale affect the accounting equation in term of increasing or

well as owner's equity will remain the same. There will be no change as the amount taken out is the same amount put back into the accoun

You are required to use this information to prepare the company’s trial balance..
quired to record the journal entries for these transactions in the general journal, post them to the ledger accounts
ns. 2. Post the entries to the ledger accounts. 3. Prepare the trial balance of Wills Environmental Consulting at June 30, 2008
ount put back into the accounts.
ng at June 30, 2008

Common questions

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An owner's withdrawal from the business, commonly termed 'drawings,' decreases both the cash (asset) and the owner's equity. This transaction is a reflection of capital put into personal use, reducing the overall equity in the business without affecting the profit or loss accounts, as such withdrawals are not considered business expenses .

This transaction represents a compound entry as it involves multiple accounts: a $2,000 decrease in cash (asset), a $5,000 increase in equipment (asset), and a $3,000 increase in note payable (liability). Such entries illustrate the simultaneous effect on multiple components of the accounting equation, demonstrating that assets can increase through both cash payments and incurrence of liabilities, maintaining the balance of the equation .

Achieving a balanced trial balance is crucial as it indicates that all recorded transactions have been accurately entered into the accounting system, ensuring that total debits equal total credits. This balance is fundamental in preparing financial statements, signifying that the books are mathematically correct, thus reducing the risk of errors in the financial records, though it does not guarantee the absence of qualitative errors or fraud .

Classifying assets into 'current' and 'non-current' helps an organization effectively manage resources by tracking liquidity and planning for long-term investments. Current assets, such as cash, accounts receivable, and inventory, are those that the business expects to convert into cash or use within a year. They reflect liquidity levels crucial for meeting near-term liabilities. Non-current assets like land, buildings, and machinery are utilized over a longer period and reflect a company's investment in sustaining operational capacity .

When a business performs services on credit, it impacts the accounts receivable (asset) account by increasing its balance, reflecting the future cash inflow expected from clients. Concurrently, it increases the service revenue (income) account, enhancing the overall revenue base for the period. This transaction highlights a temporary shift in liquidity while contributing to the company's profitability .

Upon receiving a bill for services rendered, before payment, there is an increase in liabilities and a decrease in the owner's equity due to the incurred but unpaid expenses recorded. This transaction reflects the obligation created by receiving the services, which increases the accounts payable (liabilities) and reduces the net worth of owner's equity until the payment is settled .

When equipment is sold at its book value, the accounting equation is unaffected in terms of the total balance because the decrease in assets due to the sale is offset by the increase in cash from the sale. Therefore, there is no net change in the accounting equation, and both liabilities and owner's equity remain unchanged .

The primary purpose of the accounting equation is to provide an easy way to verify the accuracy of bookkeeping and measure the profitability and solvency of a business. The equation forms the foundation for the balance sheet, ensuring that assets are balanced with liabilities and owner's equity. A higher proportion of assets provided by owners suggests greater solvency, indicating a financially stable and solvent company .

Income, also known as revenue, refers to the earnings a business receives from providing goods or services, which increases both assets and owner's equity, boosting the financial standing of the business. Examples include rent revenue, sales, and interest earned. Expenses are the costs incurred in the process of generating revenue, which decrease assets and owner's equity while increasing liabilities, thus potentially reducing the company's profitability. Examples of expenses include utilities, salaries, and supplies used .

Adjustments in the trial balance are used to ensure that a company's financial statements accurately reflect all economic events of a given period. In Kids Play's adjusted trial balance, adjustments such as increasing accounts receivable and decreasing accounts payable show adjustments for accruals and deferrals, aiding in representing an accurate snapshot of financial activities and obligations. These adjustments reflect a true representation of revenue earned and expenses incurred over the period, ensuring compliance with accounting principles .

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