The general manager of a business encounters many different types of business transactions. Provide an example of a transaction that would describe the effect on the accounting equation. Each situation is independent of the other situations.
a. The transaction would increase an asset account and increase a liability account.
b. The transaction would decrease an asset account and decrease the owner’s equity account.
c. The transaction would increase an asset account and increase owner’s equity account.
d. The transaction would decrease an asset account and decrease a liability account.
e. The transaction would increase one asset account and decrease another asset account.
f. The transaction would decrease one liability account and increase another liability account.
The general manager of a business encounters many different types of business transactions. Provide an example of a transaction that would describe the effect on the accounting equation. Each situation is independent of the other situations.
a. The transaction would increase an asset account and increase a liability account.
b. The transaction would decrease an asset account and decrease the owner’s equity account.
c. The transaction would increase an asset account and increase owner’s equity account.
d. The transaction would decrease an asset account and decrease a liability account.
e. The transaction would increase one asset account and decrease another asset account.
f. The transaction would decrease one liability account and increase another liability account.
To determine the effect on the accounting equation, we need to understand the basic structure of the equation. The accounting equation states that Assets = Liabilities + Owner's Equity. Each transaction affects these elements in a specific way.
a. For a transaction to increase an asset account (increase in assets), and increase a liability account (increase in liabilities), an example would be if the business takes out a loan from a bank and receives cash. This would increase both the cash (asset) account and the loan payable (liability) account.
b. For a transaction to decrease an asset account (decrease in assets) and decrease the owner's equity account (decrease in owner's equity), an example would be if the business owner withdraws cash from the business for personal use. This would decrease the cash (asset) account and the owner's equity account.
c. For a transaction to increase an asset account (increase in assets) and increase the owner's equity account (increase in owner's equity), an example would be if the business owner invests additional personal funds into the business. This would increase the cash (asset) account and the owner's equity account.
d. For a transaction to decrease an asset account (decrease in assets) and decrease a liability account (decrease in liabilities), an example would be if the business repays a portion of its outstanding loan. This would decrease the cash (asset) account and the loan payable (liability) account.
e. For a transaction to increase one asset account and decrease another asset account, an example would be if the business sells an outdated piece of equipment and uses the proceeds to purchase a new and improved piece of equipment. This would increase the cash (asset) account and decrease the old equipment (asset) account.
f. For a transaction to decrease one liability account and increase another liability account, an example would be if the business refinances its existing loan with a lower interest rate. This would decrease the old loan payable (liability) account and increase the new loan payable (liability) account.
Remember, in each of these examples, we are only focusing on the specific effect on the accounting equation, and there may be other accounts involved in the actual recording of the transaction in the accounting records.