Accounting: What the Numbers Mean
Accounting: What the Numbers Mean
11th Edition
ISBN: 9781259535314
Author: David Marshall, Wayne William McManus, Daniel Viele
Publisher: McGraw-Hill Education
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Chapter 4, Problem 4.1ME
To determine

Concept Introduction:

Accounting Equation:

Accounting equation represents the mathematical relationship between assets, liabilities and equity. According to this equation, assets are equal to the sum of liabilities and equity. The formal for basic accounting equation is as follows:

  Assets = Liabilities + Equity

To Indicate:

The effect of transactions on accounting equation

Expert Solution & Answer
Check Mark

Answer to Problem 4.1ME

The effect of transactions on accounting equation is shown as follows;

    Transaction / AdjustmentA =L +SENet Income
    a.++
    b.+/-
    c.+/-
    d.+/-+
    e.+/-+
    f.--
    g.+-
    h.--

Explanation of Solution

The effect of transactions on accounting equation is explained as follows:

    Transaction / AdjustmentA =L +SENet Income
    a.Issuance of Common stock for Cash shall increase Cash (Assets) and Common Stock (Equity)
    ++
    b.Payment of Advance rent shall increase the Prepaid Rent (Asset) and decrease the Cash (Asset)
    +/-
    c.Purchase of equipment for Cash shall Increase Equipment (Assets) and Decrease the Cash (Assets)
    +/-
    d.Purchase of inventory for cash and on account shall increase the asset (Inventory), Decrease the cash (Asset) and increase the Accounts Payable (Liability)
    +/-+
    e.Sale of Inventory on profit shall increase Revenue (Net Income), Accounts Receivable (Assets), Decrease the Inventory (Assets)
    +/-+
    f.Payment of Salaries to employees shall Decrease the Net Income and Decrease the Cash (Asset)
    --
    g.Accrual of wages shall increase the Expense (Reducing net Income) and increase the Wages Payable (Liability)
    +-
    h.Adjusting the Prepaid Rent shall result in decrease in Prepaid Rent (Assets) and Decrease in Net Income (Expense)
    --

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