First, you have to categorize each transaction as financial, operating, or investment. THEN, determine if the total assets increases, decreases, or stays the same. THEN, determine if the total income decreases, increases, or stays the same. THEN determine what financial statement each transaction is on (income statement, balance statement, statement of owner's equity, cash flow, balance statement). It can be on more than one financial statement!
a. Buck began his business by depositing $25,000 into the business checking account. He received common stock in exchange.
b. The company provided services to customers for $30,000 cash.
c. The company paid travel expenses in the amount of $1,000 cash.
d. The company borrowed $5,000 from the bank for operating capital.
e. The company purchased $275 worth of office supplies (for future use) from Office Market for cash.
f. During the month, the company paid cash of $5,000 for operating expenses.
g. The company paid monthly rent on the retail space in the amount of $1,250.
h. The company paid the staff $4,200.
i. The company declared and paid a dividend of $1,000 to the owner, John Buck.
j. On the last day of the month, Buck's purchased equipment costing $6,250 by signing a note payable with the bank.
a. Transaction: Financial - Common stock
Total Assets: Increases
Total Income: Stays the same
Financial Statement: Balance Sheet, Statement of Owner's Equity
b. Transaction: Operating - Services provided for cash
Total Assets: Increases
Total Income: Increases
Financial Statement: Income Statement, Balance Sheet
c. Transaction: Operating - Cash payment for travel expenses
Total Assets: Decreases
Total Income: Stays the same
Financial Statement: Balance Sheet, Cash Flow Statement
d. Transaction: Financial - Borrowing from the bank
Total Assets: Increases
Total Income: Stays the same
Financial Statement: Balance Sheet
e. Transaction: Operating - Cash purchase of office supplies
Total Assets: Decreases
Total Income: Stays the same
Financial Statement: Balance Sheet, Cash Flow Statement
f. Transaction: Operating - Cash payment for operating expenses
Total Assets: Decreases
Total Income: Stays the same
Financial Statement: Balance Sheet, Cash Flow Statement
g. Transaction: Operating - Cash payment for rent
Total Assets: Decreases
Total Income: Stays the same
Financial Statement: Balance Sheet, Cash Flow Statement
h. Transaction: Operating - Cash payment for staff wages
Total Assets: Decreases
Total Income: Stays the same
Financial Statement: Balance Sheet, Cash Flow Statement
i. Transaction: Financial - Dividend payment to the owner
Total Assets: Decreases
Total Income: Decreases
Financial Statement: Balance Sheet, Statement of Owner's Equity
j. Transaction: Investment - Purchase of equipment on credit
Total Assets: Increases
Total Income: Stays the same
Financial Statement: Balance Sheet, Cash Flow Statement
To categorize each transaction and determine the impact on total assets and income, as well as identify the financial statement(s) involved, you can follow these steps for each transaction:
Step 1: Categorize the transaction
a. Buck began his business by depositing $25,000 into the business checking account. He received common stock in exchange.
- This transaction is a financial transaction. It is the initial capital investment in the business, which results in a transfer of cash to the business checking account.
b. The company provided services to customers for $30,000 cash.
- This transaction is an operating transaction. It involves the provision of services to customers in exchange for cash.
c. The company paid travel expenses in the amount of $1,000 cash.
- This transaction is an operating transaction. It involves the payment of expenses (travel expenses) in cash.
d. The company borrowed $5,000 from the bank for operating capital.
- This transaction is a financial transaction. It involves borrowing money from the bank, resulting in an increase in cash (assets).
e. The company purchased $275 worth of office supplies (for future use) from Office Market for cash.
- This transaction is an operating transaction. It involves the purchase of office supplies for cash.
f. During the month, the company paid cash of $5,000 for operating expenses.
- This transaction is an operating transaction. It involves the payment of operating expenses in cash.
g. The company paid monthly rent on the retail space in the amount of $1,250.
- This transaction is an operating transaction. It involves the payment of rent in cash.
h. The company paid the staff $4,200.
- This transaction is an operating transaction. It involves the payment of staff salaries/wages in cash.
i. The company declared and paid a dividend of $1,000 to the owner, John Buck.
- This transaction is a financial transaction. It involves the payment of dividends to the owner, resulting in a decrease in cash (assets).
j. On the last day of the month, Buck's purchased equipment costing $6,250 by signing a note payable with the bank.
- This transaction is a financial transaction. It involves the purchase of equipment, which increases the value of assets, and the creation of a note payable liability to the bank.
Step 2: Determine the impact on total assets
For transactions involving cash:
- If cash is received, total assets increase.
- If cash is paid, total assets decrease.
For transactions not involving cash:
- Determine if the transaction involves an increase or decrease in other assets, such as equipment, supplies, etc. Adjust total assets accordingly.
Step 3: Determine the impact on total income
- For revenue (e.g., services provided), total income increases.
- For expenses (e.g., operating expenses), total income decreases.
Step 4: Identify the financial statement(s) involved
- Income Statement: Transactions involving revenue and expenses are reported on the income statement.
- Balance Sheet: Transactions affecting assets, liabilities, and equity are reported on the balance sheet.
- Statement of Owner's Equity: Transactions involving changes in the owner's equity (e.g., capital investment, dividends) are reported on the statement of owner's equity.
- Cash Flow Statement: Transactions involving cash flow (inflow or outflow) are reported on the cash flow statement. This statement combines information from the income statement and balance sheet.
Please note that some transactions may affect multiple financial statements.