For each transaction, indicate whether the related account would be classified as an (a) asset (b) liability (c) stockholders' equity to be reported in the balance sheet (d) revenue (e) expense to be reported in the income statement (f) dividend to be reported in the stockholders' equity. I have included my answers and would appreciate whatever you think of them. I just very recently started doing this stuff for the very first time and any guidance would be appreciated.
1. Sale of common stock to investors (f)
2. Equipment used for operations (a)
3. Amounts owed to employees salaries payable (e)
4. sales of services to customers revenue (d)
5. Cost of utilities expense (e)
6. Purchase of office supplies (e)
7. Research and developments cost expenses (e)
8. Land property used for operations (a)
9. Income tax payable (b)
10. Amount of interest owed on borrowing payable (c)
To determine whether the related account would be classified as an asset, liability, stockholders' equity, revenue, expense, or dividend, we need to understand the nature of each transaction and the category it belongs to. Let's evaluate each transaction:
1. Sale of common stock to investors: The sale of common stock represents an investment made by investors in the company. This would be classified as stockholders' equity (c). Your answer is correct.
2. Equipment used for operations: When equipment is used for operations, it represents an asset that the company owns and uses in its daily activities. This would be classified as an asset (a). Your answer is correct.
3. Amounts owed to employees (salaries payable): This represents an amount the company owes to its employees for their services. It would be classified as a liability (b). Your answer is incorrect.
4. Sales of services to customers: Sales of services represent revenue generated from providing services to customers. This would be classified as revenue (d). Your answer is correct.
5. Cost of utilities expense: The cost of utilities represents an expense incurred by the company to operate its facilities. This would be classified as an expense (e). Your answer is correct.
6. Purchase of office supplies: The purchase of office supplies represents an expense incurred by the company to support its operations. This would be classified as an expense (e). Your answer is correct.
7. Research and development costs: Research and development costs represent expenses incurred by the company in its efforts to develop new products or improve existing ones. This would be classified as an expense (e). Your answer is correct.
8. Land property used for operations: Land property used for operations represents an asset that the company owns and uses in its operations. This would be classified as an asset (a). Your answer is correct.
9. Income tax payable: Income tax payable represents the amount of income tax that the company owes to the government. This would be classified as a liability (b). Your answer is correct.
10. Amount of interest owed on borrowing: The amount of interest owed on borrowing represents an obligation to pay interest on borrowed funds. This would be classified as a liability (b). Your answer is incorrect.
Your answers are mostly correct, with two incorrect answers (transactions 3 and 10). Transaction 3 would be classified as a liability (salaries payable), and transaction 10 would also be classified as a liability (interest payable on borrowing). Keep in mind that liabilities represent amounts owed by the company, while stockholders' equity represents the ownership interest in the company.
1. Sale of common stock to investors - (f) incorrect, it should be (c) stockholders' equity. When companies sell common stock to investors, it increases their equity in the company, which is reported in the stockholders' equity section of the balance sheet.
2. Equipment used for operations - (a) correct. Equipment is an asset because it provides future economic benefits to the company.
3. Amounts owed to employees (salaries payable) - (b) incorrect, it should be (e) expense to be reported in the income statement. Salaries payable represents an obligation to pay employees, which is considered an expense when incurred.
4. Sales of services to customers - (d) correct. Sales of services to customers represents revenue and is reported in the income statement.
5. Cost of utilities - (e) correct. The cost of utilities is an expense and is reported in the income statement.
6. Purchase of office supplies - (a) incorrect, it should be (e) expense to be reported in the income statement. The purchase of office supplies is considered an expense when incurred.
7. Research and development costs - (e) correct. Research and development costs are expenses and are reported in the income statement.
8. Land property used for operations - (a) correct. Land is an asset because it provides future economic benefits to the company.
9. Income tax payable - (b) correct. Income tax payable represents an obligation to pay taxes to the government and is classified as a liability.
10. Amount of interest owed on borrowing - (b) incorrect, it should be (e) expense to be reported in the income statement. The amount of interest owed on borrowing is considered an expense when incurred.