TRANSACTION (1).
INVESTMENT BY OWNER
Ray Neal starts a smartphone app development company which he names Softbyte. On
September 1, 2017, he invests $15,000 cash in the business. This transaction results in an equal
increase in assets and owner’s equity.
TRANSACTION (2). PURCHASE OF EQUIPMENT FOR CASH
Softbyte purchases computer equipment for $7,000 cash. This transaction results in an equal
increase and decrease in total assets, though the composition of assets changes.
TRANSACTION (3). PURCHASE OF SUPPLIES ON CREDIT
Softbyte purchases for $1,600 from Mobile Solutions headsets and other computer accessories
expected to last several months. Mobile Solutions agrees to allow Softbyte to pay this bill in
October. This transaction is a purchase on account (a credit purchase). Assets increase because
of the expected future benefits of using the headsets and computer accessories, and liabilities
increase by the amount due to Mobile Solutions.
TRANSACTION (4). SERVICES PERFORMED FOR CASH
Softbyte receives $1,200 cash from customers for app development services it has performed.
This transaction represents Softbyte’s principal revenue-producing activity. Recall that revenue
increases owner’s equity.
TRANSACTION (5). PURCHASE OF ADVERTISING ON CREDIT
Softbyte receives a bill for $250 from the Daily News for advertising on its online website but
postpones payment until a later date. This transaction results in an increase in liabilities and a
decrease in owner’s equity.
TRANSACTION (6). SERVICES PERFORMED FOR CASH AND CREDIT
Softbyte performs $3,500 of app development services for customers. The company receives
cash of $1,500 from customers, and it bills the balance of $2,000 on account. This transaction
results in an equal increase in assets and owner’s equity.
TRANSACTION (7). PAYMENT OF EXPENSES
Softbyte pays the following expenses in cash for September: office rent $600, salaries and
wages of employees $900, and utilities $200. These payments result in an equal decrease in
assets and owner’s equity.
TRANSACTION (8). PAYMENT OF ACCOUNTS PAYABLE
Softbyte pays its $250 Daily News bill in cash. The company previously [in Transaction (5)]
recorded the bill as an increase in Accounts Payable and a decrease in owner’s equity.
TRANSACTION (9). RECEIPT OF CASH ON ACCOUNT
Softbyte receives $600 in cash from customers who had been billed for services [in Transaction
(6)]. Transaction (9) does not change total assets, but it changes the composition of those assets.
TRANSACTION (10). WITHDRAWAL OF CASH BY OWNER
Ray Neal withdraws $1,300 in cash from the business for his personal use. This transaction
results in an equal decrease in assets and owner’s equity.
Transaction Analysis:
1. Ray Neal starts a smartphone app development company which he names Softbyte. On
September 1, 2017, he invests $15,000 cash in the business.
2. Softbyte purchases computer equipment for $7,000 cash.
3. Softbyte purchases for $1,600 from Mobile Solutions headsets and other computer
accessories expected to last several months. Mobile Solutions agrees to allow Softbyte
to pay this bill in October. This transaction is a purchase on account (a credit purchase).
4. Softbyte receives $1,200 cash from customers for app development services it has
performed.
5. Softbyte receives a bill for $250 from the Daily News for advertising on its online
website but postpones payment until a later date.
6. Softbyte performs $3,500 of app development services for customers. The company
receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.
7. Softbyte pays the following expenses in cash for September: office rent $600, salaries
and wages of employees $900, and utilities $200.
8. Softbyte pays its $250 Daily News bill in cash.
9. Softbyte receives $600 in cash from customers who had been billed for services.
10. Ray Neal withdraws $1,300 in cash from the business for his personal use.
Illustration 1-8 demonstrates some significant facts:
1. Each transaction is analyzed in terms of its effect on: (a) The three components of the
basic accounting equation. (b) Specific items within each component.
2. The two sides of the equation must always be equal.
Practice Problem:
1. Selected transactions for Fabulous Flora Company are listed below.
i. Made cash investment to start business.
ii. Purchased equipment on account.
iii. Paid salaries.
iv. Billed customers for services performed.
v. Received cash from customers billed in (4).
vi. Withdrew cash for owner’s personal use.
vii. Incurred advertising expense on account.
viii. Purchased additional equipment for cash.
ix. Received cash from customers when service was performed.
Requirements:
List the numbers of the above transactions and describe the effect of each transaction on assets,
liabilities, and owner’s equity.
2. Joan Robinson opens her own law office on July 1, 2017. During the first month of
operations, the following transactions occurred.
i. Joan invested $11,000 in cash in the law practice.
ii. Paid $800 for July rent on office space. 3. Purchased equipment on account $3,000.
iii. Performed legal services to clients for cash $1,500.
iv. Borrowed $700 cash from a bank on a note payable.
v. Performed legal services for client on account $2,000.
vi. Paid monthly expenses: salaries and wages $500, utilities $300, and advertising $100.
vii. Joan withdrew $1,000 cash for personal use.
Requirements:
(a) Prepare a tabular summary of the transactions.
(b) Prepare the income statement, owner’s equity statement, and balance sheet at July 31, 2017,
for Joan Robinson, Attorney.