Question

Problem 3 – Recording Transaction in the Expanded Accounting Equation

Cora Crouse began Cora’s Cleaning Service on April 1, 20XX as a proprietorship. The following transactions occurred during the first month of operations.

April 1	Cora invested $10,000 of equipment and $15,000 cash in the business.
April 1	Paid the office rent for April in cash in the amount of $1,000.
April 4	Purchased $5,000 of equipment, paying $2,500, with the balance due in 20 days.
April 10	Billed a client for $4,000 for services rendered during April.
April 15	Purchased on account a $200 ad in the local newspaper for April.
April 20	Received cash (full payment) from the client billed April 10.
April 24 April 28 April 30	Paid for the equipment that was purchased on April 4. Paid salaries to employees a totaling $2,000. Cora withdrew $3,000 cash from the business.

Required:

      Complete the following table to record the transactions as they affect the accounting equation. Show the effects on the accounting equation by placing a + sign if the adjustment increases or a - sign if the adjustment decreases the accounting equation element. Compute totals for each account and compute final totals for the accounting equation.

           -----------------Assets------------------ = Liabilities + --------Owner’s Equity-------------

Date	Cash	Accounts Receivable	Equipment	Accounts Payable	Crouse, Capital	Revenue	Expense
4/1
4/1
4/4
4/10
4/15
4/20
4/24
4/28
4/30
Totals

       Total Assets: $__________ Total Liabilities and Equity: $__________

Answer 1

Solution:

The Accounting Equation for a Sole Proprietorship is:

Assets = Liabilities + Owner's Equity

Thus, the financial position of a Company is determined by 3 factors:

1) Assets: What the firm owns. Eg: Cash, Accounts Receivable, Inventory, Land, Buildings, etc.

2) Liabilities: What the firm owes to others. Eg: Bonds payable, Salary payable, Accounts payable, etc.

3) Owner's Equity: Assets - Liabilities. It also represents amount invested by owners plus cumulative net income of the firm that has not been withdrawn.

The Table is completed as follows:

Date	Assets			Liabilities	Owner's Equity
	Cash	Accounts Receivable	Equipment	Accounts Payable	Crouse, Capital	Revenue	Expense
4/1	+ $ 15,000		+ $ 10,000		+ $ 25,000 (10,000 + 15,000)
4/1	- $ 1,000						- $ 1,000
4/4	- $ 2,500		+ $ 5,000	+ $ 2,500
4/10		+ $ 4,000				+ $ 4,000
4/15				+ $ 200			- $ 200
4/20	+ $ 4,000	- $ 4,000
4/24	- $ 2,500			-$ 2,500
4/28	- $ 2,000						- $ 2,000
4/30	- $ 3,000				- $ 3,000
Totals	+ $ 8,000	+ $ 0	+ $ 15,000	+ $ 200	+ $ 22,000	+ $ 4,000	- $ 3,200

Total Assets: Cash + Accounts Receivable + Equipment

= $ 8,000 + $ 0 + $ 15,000

= $ 23,000

Total Liabilities and Equity: Liabilities + Owner's Equity

= Accounts Payable + Crouse, Capital + Revenue - Expense

= $ 200 + $ 22,000 + $ 4,000 - $ 3,200

= $ 23,000

Thus, Total Assets = Total Liabilities + Total Owner's Equity = $ 23,000.