Question

You opened a new business last month with an investment of $10,000 in cash. At that time you analyzed the transaction and determined that the initial investment would be recorded as an increase of $10,000 in the asset account "Cash" and an increase of $10,000 in the owner's equity account "My Name, Capital".

This week your business has just purchased new computer equipment for $5,000. The computer store gave you credit for the $5,000 owed, which you will pay next month. As a new accountant, you are considering how to analyze and record this transaction. Explain how you would approach this analysis. In your response include the steps in transaction analysis and apply the steps to this transaction. Be sure to include an explanation of the accounting elements and the accounts affected and show how this single transaction would appear in the accounting equation chart.

Answer 1

In the given question, it is a sole properitor business in which capital invested by owner is $10000 and recently purchased a new computer equipment.

Steps required:

• To check whether the computer equipment has been purchased for business purpose or for personal purpose
• If for business purpose, the new computer equipment needs to be capitalised.
• Accordingly the depreciation would be recorded periodically on the basis of depreciation method being selected.

Accounting chart

Assets = Liabilities + shareholder's equity

Computer equipment($5000) = Accounts payable($5000) + 0

Entry

Computer Equipment DR $5000

To Accounts payable $5000