For each of the following items, give an example of a business transaction that has the described effect on the accounting equation:
Increase an asset and increase a liability.
Increase one asset and decrease another asset.
Decrease an asset and decrease owner's equity.
Decrease an asset and decrease a liability.
Increase an asset and increase owner's equity.
To give an example of a business transaction for each scenario, the accounting equation needs to be considered. The accounting equation is:
Assets = Liabilities + Owner's Equity
1. Increase an asset and increase a liability:
Example Transaction: A business takes out a loan for $10,000. This increases the liability (loan payable) and also increases the cash asset.
2. Increase one asset and decrease another asset:
Example Transaction: A business sells a piece of equipment for $5,000 and uses that cash to purchase a new computer for $4,000. This increases the cash asset by $1,000 and decreases the equipment asset by $5,000.
3. Decrease an asset and decrease owner's equity:
Example Transaction: The business pays a $500 dividend to its owner. This decreases the cash asset by $500 and decreases the owner's equity by the same amount.
4. Decrease an asset and decrease a liability:
Example Transaction: A business repays a $2,000 loan. This decreases the cash asset by $2,000 and decreases the liability (loan payable) by the same amount.
5. Increase an asset and increase owner's equity:
Example Transaction: The business invests $20,000 of the owner's personal funds into the company. This increases the cash asset by $20,000 and increases the owner's equity by the same amount.
It is important to note that these are just examples to illustrate the concept of each scenario. The actual amounts and specific nature of transactions may vary depending on the business and its circumstances.