MODULE 1

THE ACCOUNTING EQUATION

Demonstration Problem 1

Clean-Rite Service

This example analyzes the transactions for Clean-Rite Service for March 2000. The example lists the types of accounts affected by each transaction to show that the accounting equation remains in balance after every transaction.

1.Lisa used $500 of her own money to start Clean-Rite Service.

2.Lisa's company borrowed $1,500 from her dad.

3.Clean-Rite Service paid $400 for a used vacuum cleaner and shampoo machine.

4. Clean-Rite Service purchased a used truck for $1,000 from Fuller Trucks Inc. She signed a note

payable for $1,000.

5.Clean-Rite Service paid $115 for cleaning supplies.

6.During the first half of March, Clean-Rite Service performed $450 of cleaning services.

Customers paid $200 in cash and promised the remaining payment by March 30.

7.The company paid the utility bill of $100.

8.Clean-Rite Service used $80 of the cleaning supplies.

9.$250 was collected from customers for services performed previously.

10.Lisa's company paid back $500 to her dad.

11.Lisa withdrew $100 from the business.

Transaction

Number

/

Assets

/

Liabilities

/

Owners’ Equity

1 / increase / increase
2 / increase / increase
3 / increase
decrease
4 / increase / increase
5 / increase
decrease
6 / increase / increase
7 / decrease / decrease
8 / decrease / decrease
9 / Increase
decrease
10 / decrease / decrease
11 / decrease / decrease

Practice Assignment 1

Downtown Fitness Center

This example requires you to analyze the transactions for Downtown Fitness Center for September 2000.

1. Debbie invested $10,000 of her own money in the business.

2. Downtown Fitness Center borrowed $35,000 from People's Cooperative Bank.

3. Purchased equipment for $10,000. Paid cash.

4. Purchased supplies for $200. Paid cash.

5. Customers paid $4,500 for services provided in September.

6. Paid the utility bill of $105 for September.

7. Paid employees salaries of $1,500 for September.

8.Supplies costing $90 were used in September.

9. Rent of $600 was paid for September.

Transaction
Number /

Assets

/

Liabilities

/

Owners’ Equity

1 / increase / increase
2 / increase / increase
3 / increase
decrease
4 / increase
decrease
5 / increase / increase
6 / decrease / decrease
7 / decrease / decrease
8 / decrease / decrease
9 / decrease / decrease

Practice Assignment 2

Miller Graphics

This example requires you to analyze the transactions for Miller Graphics for September 2000.

1.John Miller invested $12,500 of his own money to start Miller Graphics.

2.Miller Graphics borrowed $8,000 from Westside Bank.

3.Purchased equipment for $7,000. Paid cash.

4.Purchased supplies for $600. Paid cash.

5.Customers paid $5,500 for services provided in September.

6.Paid employees salaries of $1,500 for September.

7.Rent of $600 was paid for September.

8.John withdrew $500 from the business.

Transaction
Number /
Assets
/
Liabilities
/
Owners’ Equity
1 / increase / increase
2 / increase / increase
3 / increase
decrease
4 / increase
decrease
5 / increase / increase
6 / decrease / decrease
7 / decrease / decrease
8 / decrease / decrease

Homework Problem 1

Super Subs

This assignment lists some typical transactions for Super Subs for March 2000. You have to specify the types of accounts affected by each transaction and show that the accounting equation remains in balance after every transaction.

1.The owners started Super Subs by investing $15,000.

2.$10,000 was borrowed from a bank by signing a two year note.

3.$12,000 was paid for equipment.

4.Goods were sold for $1,500.

5.$200 was paid for utilities.

6.Employees were paid wages of $1,200 for March.

7.$700 was paid for rent for March.

8.$500 was distributed to owners.

Transaction Number /
Assets
/
Liabilities
/
Owners’ Equity
1 / increase / increase
2 / increase / increase
3 / increase
decrease
4 / increase / increase
5 / decrease / decrease
6 / decrease / decrease
7 / decrease / decrease
8 / decrease / decrease

Homework Problem 2

Mark Turner, CPA

This assignment lists some typical transactions for Mark Turner, CPA for August 2000. You have to specify the types of accounts affected by each transaction and show that the accounting equation remains in balance after every transaction.

1.Mark Turner invested $12,000 in the business.

2.$20,000 was borrowed from Boston Bank.

3.A computer was purchased for $2,000.

4.$150 was paid for office supplies.

5.Services were performed for clients for $3,500. The customers paid cash.

6.Rent of $650 was paid for August

7.Employee wages of $1,000 were paid for August.

  1. Mark withdrew $1,000 for personal expenses.

Transaction Number /
Assets
/
Liabilities
/
Owners’ Equity
1 / increase / increase
2 / increase / increase
3 / increase
decrease
4 / increase
decrease
5 / increase / increase
6 / decrease / decrease
7 / decrease / decrease
8 / decrease / decrease

Homework Problem 3

Anderson Architects

This assignment lists some transactions for Anderson Architects for September 2000. You have to specify the types of accounts affected by each transaction and show that the accounting equation remains in balance after every transaction.

1.Jeff invested $6,000 to start Anderson Architects.

2.$7,500 was borrowed from a bank.

3.Purchased furniture for $3,500 cash.

4.Paid $125 for utilities.

5.Provided services for $2,800 to customers for cash.

6.Purchased supplies for $130. Paid cash.

7.$600 was paid for rent.

8.John withdrew $500 from the business.

Transaction Number /
Assets
/
Liabilities
/
Owners’ Equity
1 / increase / increase
2 / increase / increase
3 / increase
decrease
4 / decrease / decrease
5 / increase / increase
6 / increase
decrease
7 / decrease / decrease
8 / decrease / decrease

Homework Problem 4

Bookworld

This assignment lists some typical transactions for Bookworld for November 2000. You have to specify the types of accounts affected by each transaction and show that the accounting equation remains in balance after every transaction.

1.The owners started Bookworld by investing $6,500 in the business.

2.$2,500 was borrowed from a bank.

3.Purchased a computer for $2,500 cash.

4.Paid $125 for utilities.

5.Employees were paid $1,200 for salaries.

6.Purchased supplies for $125. Paid cash.

7.$800 was paid for rent.

8.The owners withdrew $500 from the business.

Transaction Number /
Assets
/
Liabilities
/
Owners’ Equity
1 / increase / increase
2 / increase / increase
3 / increase
decrease
4 / decrease / decrease
5 / decrease / decrease
6 / increase
decrease
7 / decrease / decrease
8 / decrease / decrease

Homework Quiz

Questions 1 - 4: Warren is beginning his new business and needs to evaluate several alternatives prior to consulting with his potential investors. He has asked for your help in this analysis. Each question should be considered independently.

  1. Warren expects total liabilities will increase by $40,000 during the first year and owner's equity will increase by $10,000 during the same period. The amount and direction (increase or decrease) of the period's change in total assets is:

a.$40,000 increase

b.$40,000 decrease

c.$50,000 increase

d.$50,000 decrease

2. Warren projects total liabilities will decrease by $24,000 during the next year and owner's equity will increase by $18,000 during the same period. The amount and direction (increase or decrease) of the period's change in total assets is:

a.$6,000 increase

b.$6,000 decrease

c.$24,000 increase

d.$21,000 decrease

3. Warren must pay $15,000 to a vendor for merchandise purchased previously. He asks you to determine the impact of this transaction on the accounting equation. You respond:

a.Decrease one asset, increase another asset
b.Decrease an asset, decrease a liability
c.Increase an asset, decrease a liability
d.Increase an asset, increase owner's equity

4. Warren expects total assets will decrease by $74,000 during the coming month and owner's equity will increase by $48,000 during the same period. The amount and direction (increase or decrease) of the period's change in total liabilities is:

a.$26,000 decrease
b.$74,000 increase
c.$148,000 increase
d.$122,000 decrease

5. The basic accounting equation, Assets = Liabilities + Owner's Equity may also be expressed as:

a.Owner's Equity = Assets - Liabilities
b.Assets = Equities - Liabilities
c.Assets + Liabilities = Owner's Equity
d.Assets + Owner's Equity = Liabilities

6. A transaction that increases an asset account may also:

a.Decrease owner's equity
b.Decrease another asset
c.Decrease a liability
d.None of the above

7. The price of goods or services sold to customers is called a(n):

a.expense
b.liability
c.revenue
d.asset

8. A business's claim against a customer for a sale made on account is called a(n):

a. revenue
b. account payable
c. expense
d. account receivable

9. Owner's equity is decreased by:

a. owner's investments
b. expenses
c. revenues
d. liabilities

10. The purchase of supplies on account affects the basic accounting equation by:

a. increasing assets and decreasing liabilities
b. increasing assets and increasing owner's equity
c. increasing assets and increasing liabilities
d. increasing liabilities and decreasing owner's equity

11. Howard renders legal services to Dorothy, who promises to pay him within the next month. How does this affect the basic accounting equation for Howard's enterprise?

a. increase assets and increase liabilities
b. decrease assets and increase owner's equity
c. increase assets and increase owner's equity
d. increase liabilities and decrease owner's equity

12. As of September 1 of the current year, the assets and liabilities of Ben Chase, CPA, are as follows: Cash, $8,000; Accounts Receivable, $16,400; Supplies, $52,100; Accounts Payable, $13,060. What is the amount of Owner's Equity (Ben Chase's capital) as of September 1 of the current year?

a. $61,340
b. $63,440
c. $84,500
d. $97,560

13. As of December 1 of the current year, the assets and liabilities of Perri Mason, ESQ are as follows: Cash, $16,000; Accounts Receivable, $32,800; Supplies, $???; Accounts Payable, $32,000; Perri Mason, Capital, $43,000. What is the amount of Supplies as of December 1 of the current year?

a. $26,200
b. $32,400
c. $48,800
d. $75,000

14. Given the information presented below, determine the missing amount for each of the following:

Assets / Liabilities / Owner's Equity
(i) / ? / $12,000 / $6,000
(ii) / $20,000 / ? / $14,000
(iii) / $33,000 / $25,000 / ?

a. $18,000 $8,000 $48,000
b. $18,000 $6,000 $ 8,000
c. $ 6,000 $6,000 $48,000
d. $ 6,000 $8,000 $ 6,000

15. Transactions that affect owner's equity include:

a. owner's investments, owner's withdrawals, revenues, and expenses
b. owner's investments and owner's withdrawals
c. owner's investments, revenues, and expenses
d. owner's withdrawals, revenues, and expenses

Questions 16 - 20: Rob, a sole proprietor, is assessing his deli's performance for the current month. He asks for your input. Consider each question independently.

16. Rob sold goods to customers totaling $75,000 for the month. $60,000 was received in cash and the customers promised to pay the remaining $15,000 in the next 10 days. Rob withdrew $10,000 from the business for personal use. The revenue for the month is:

a. $85,000
b. $60,000
c. $65,000
d. $75,000

17. Rob sold goods to customers totaling $75,000 for the month. $60,000 was received in cash and the customers promised to pay the remaining $15,000 in the next 10 days. Rob paid $30,000 to vendors for food supplies used to generate this revenue and withdrew $10,000 from the business for personal use. The change in Rob's capital account was a:

a. $15,000 decrease
b. $35,000 increase
c. $45,000 increase
d. $60,000 increase

18. Rob sold goods to customers totaling $75,000 for the month. $60,000 was received in cash and the customers promised to pay the remaining $15,000 in the next 10 days. Rob received payment on the full accounts receivable balance. This $15,000 receipt had the following impact on his accounts:

a. A $15,000 decrease in cash
b. No increase in total assets
c. A $15,000 increase in accounts receivable
d. A $15,000 increase in total assets

19. Rob sold goods to customers totaling $75,000 for the month. He paid $15,000 in rent and $65,000 for food supplies; invested an additional $5,000 in the business and withdrew $10,000. The change in Rob's capital account was a:

a. $15,000 decrease
b. $10,000 decrease
c. $ 5,000 decrease
d. $10,000 increase

20. Rob sold goods to customers totaling $75,000 for the month. He paid $15,000 in rent and $65,000 for food supplies; invested an additional $5,000 in the business and withdrew $10,000. Rob's beginning capital account totaled $25,000. Rob's ending capital account balance was:

a. $15,000
b. $10,000
c. $ 5,000
d. $10,000

21.Resources owned by a business are called:

a. assets

b. liabilities

c. revenues

d. owners' equity

  1. Rick started a business by investing $10,000. This transaction:

a. increased liabilities

b. increased assets and equity

c. increased liabilities and equity

d. increased assets and liabilities

23. Which of the following transactions decreases assets and liabilities?

a. owner invested money in the business

b. a business purchased equipment and paid cash

c. a business purchased equipment on credit

d. a business repaid money to a creditor

24. Liabilities increase when a business:

a. receives money from owners

b. borrows money

c. earns revenue

d. repays a creditor

25.Amounts owed to creditors are called:

a. assets

b. liabilities

c. revenues

d. owners' equity

26.The accounting equation states that:

a. assets = liabilities + owners' equity

b. assets + liabilities = owners' equity

c. liabilities = owners' equity- assets

d. assets = owners' equity-liabilities

27.Tony's Landscaping Service purchased a truck for $2,500. $1,000 was paid in cash and a note

payable was signed for the balance. As a result of this transaction liabilities:

a. increased by $1,500

b. decreased by $1,500

c. increased by $2,500

d. did not change

28.Tony's Landscaping Service purchased a truck for $2,500. $1,000 was paid in cash and a note

payable was signed for the balance. As a result of this transaction total assets:

a. increased by $1,500

b. decreased by $1,500

c. increased by $2,500

d. did not change

29.A business has $25,000 in assets and $10,000 in liabilities. The owners' equity is:

a. $35,000

b. $10,000

c. $15,000

d. $0

30.A business owes $15,000 to creditors. The owners' equity is $10,000. The amounts of

assets are:

a. $25,000

b. $5,000

c. $15,000

d. $10,000

MODULE 1

TRANSACTION ANALYSIS

Demonstration Problem

Clean-Rite Service

1. Lisa used $500 of her own money to start Clean-Rite Service.

2. Lisa's company borrowed $1,500 from her dad.

3. Clean-Rite Service purchased a used truck for $1,000 from Fuller Trucks Inc. Lisa paid $250 down and signed a note payable for the balance.

4. Clean-Rite Service paid $115 for cleaning supplies.

5. During the first half of March, Clean-Rite Service performed $450 of cleaning services. Customers paid $200 in cash and promised the remaining payment by March 30.

6. Clean-Rite Service used $80 of the cleaning supplies.

7. $250 was collected from customers for services performed previously.

8. Lisa's company paid back $500 to her dad.

9. Lisa withdrew $100 from the business.

Transaction Number /

Cash

/ Accounts Receivable /

Supplies

/

Trucks

/ Accounts Payable / Notes Payable / Owners’ Equity
1 / 500 / 500
2 / 1,500 / 1,500
3 / (250) / 1,000 / 750
4 / (115) / 115
5 / 200 / 250 / 450
6 / (80) / (80)
7 / 250 / (250)
8 / (500) / (500)
9 / (100) / (100)

Practice Assignment 1

Frozen Delite

Frozen Delite is known for its line of low fat ice creams and frozen yogurts. This assignment lists some typical transactions for Frozen Delite for August 1997. You have to specify the types of accounts affected by each transaction and show that the accounting equation remains in balance after every transaction.

1.The owners started Frozen Delite by investing $12,000.

2.$8,000 was borrowed from a bank by signing a two year note.

3.Furniture was purchased for $4,200 on credit.

4.Inventory of $2,100 was purchased on credit.

5.Goods were sold for $3,200. The customers paid cash.

6.The cost of the inventory sold in the previous transaction was $1,800.

7.$200 was paid for utilities.

8.Employees were paid wages of $1,100 for March.

9.$1,500 was paid for the inventory purchased previously.

10.$700 was paid for rent for March.

Transaction Number /

Cash

/ Accounts Receivable /

Inventory

/

Furniture

/ Accounts Payable / Notes Payable / Owners’ Equity
1 / 12,000 / 12,000
2 / 8,000 / 8,000
3 / 4,200 / 4,200
4 / 2,100 / 2,100
5 / 3,200 / 3,200
6 / (1,800) / (1,800)
7 / (200) / (200)
8 / (1,100) / (1,100)
9 / (1,500) / (1,500)
10 / (700) / (700)

Practice Assignment 2

Gifts Galore

This assignment lists some typical transactions for Gifts Galore for May 2000. You have to specify the types of accounts affected by each transaction and show that the accounting equation remains in balance after every transaction.

1.The owners started Gifts Galore by investing $15,000.

2.$5,000 was borrowed from a bank by signing a two-year note.

  1. Inventory of $1,600 was purchased on credit.
  2. Supplies were purchased for $180.

5.Goods were sold for $2,000. The customers paid cash.

6.The cost of the inventory sold in the previous transaction was $1,100.

7.$600 was paid for rent.

8.Employees were paid wages of $1,100 for March.

9.$1,600 was paid for the inventory purchased previously.

10.Supplies costing $100 were used in May.

Transaction Number /

Cash

/

Inventory

/

Supplies

/ Accounts Payable / Notes Payable / Owners’ Equity
1 / 15,000 / 15,000
2 / 5,000 / 5,000
3 / 1,600 / 1,600
4 / (180) / 180
5 / 2,000 / 2,000
6 / (1,100) / (1,100)
7 / (600) / (600)
8 / (1,100) / (1,100)
9 / (1,600) / (1,600)
10 / (100) / (100)

Assignment 1

Rainbow Paints Incorporated

This assignment lists some typical transactions for Rainbow Paints Inc. for March 2000. You have to specify the types of accounts affected by each transaction and show that the accounting equation remains in balance after every transaction.

1.The owners started Rainbow Paints Inc. by investing $10,000.

2.$15,000 was borrowed from a bank by signing a two year note.

3.$12,000 was paid for equipment.

4.Inventory of $5,000 was purchased on credit.

5.Goods were sold for $2,200. The customers paid cash.

6.The cost of the inventory sold in the previous transaction was $1,200.

7.$200 was paid for utilities.

8.Employees were paid wages of $2,000 for March.

9.$1,500 was paid for the inventory purchased previously.

10.$700 was paid for rent for March.

Transaction Number / Cash / Accounts Receivable / Inventory / Equipment / Accounts Payable / Notes Payable / Owners’ Equity
1 / 10,000 / 10,000
2 / 15,000 / 15,000
3 / (12,000) / 12,000
4 / 5,000 / 5,000
5 / 2,200 / 2,200
6 / (1,200) / (1,200)
7 / (200) / (200)
8 / (2,000) / (2,000)
9 / (1,500) / (1,500)
10 / (700) / (700)

Assignment 2

Coreira’s Landscaping Service

This assignment lists some typical transactions for Coreira's Landscaping Service for October 2000. You have to specify the types of accounts affected by each transaction and show that the accounting equation remains in balance after every transaction.

1.Gilbert Coreira invested $7,500 in the business.

2.$15,000 was borrowed from a bank by signing a three year note.

3.Equipment was purchased for $12,000. $5,000 was paid in cash and a note was signed

for the remaining amount.

4.Supplies were purchased for $250.

5.Landscaping services were performed for $1,200. The customer paid cash.

6.Landscaping services were performed on credit for $1,800.

7.Employee wages of $1,000 were paid for October.

8.$750 was collected from customers for services provided previously.

Transaction Number / Cash / Accounts Receivable / Supplies / Equipment / Accounts Payable / Notes Payable / Owners’ Equity
1 / 7,500 / 7,500
2 / 15,000 / 15,000
3 / (5,000) / 12,000 / 7,000
4 / (250) / 250
5 / 1,200 / 1,200
6 / 1,800 / 1,800
7 / (1,000) / (1,000)
8 / 750 / (750)

Assignment 3

Total System Solutions Incorporated

This assignment lists some typical transactions for Total System Solutions Inc. for August 2000. You have to specify the types of accounts affected by each transaction and show that the accounting equation remains in balance after every transaction.

1.The owners invested $25,000 to start Total System Solutions Inc.

2.$20,000 was borrowed from Pioneer Bank.

3.Furniture was purchased on credit for $4,800.

4.Office supplies were purchased for $150.

5.Services were performed for clients for $6,600. Of this amount, $2,400 was collected in cash.

6.Paid a salary of $1,000 to the secretary for August.

7.$2,000 was paid for the furniture purchased previously.

8.Supplies worth $80 were used during the month.

9.$1,000 was collected from customers for services provided previously on credit.

Transaction Number / Cash / Accounts Receivable / Supplies / Furniture / Accounts Payable / Notes Payable / Owners’ Equity
1 / 25,000 / 25,000
2 / 20,000 / 20,000
3 / 4,800 / 4,800
4 / (150) / 150
5 / 2,400 / 4,200 / 6,600
6 / (1,000) / (1,000)
7 / (2,000) / (2,000)
8 / (80) / (80)
9 / 1,000 / (1,000)

Assignment 4

Web Designs

Web Designs sets up home pages for businesses on the World Wide Web. This assignment lists some typical transactions for Web Designs for May 2000. You have to specify the types of accounts affected by each transaction and show that the accounting equation remains in balance after every transaction.