Financial Accounting: 1.2 Basic Transactions and the Equation

Bikram Yoga Natick had previously purchased the yoga mat for $25 and recorded it as inventory.How would the expense and outflow of inventory impact the accounting equation?

the sale decreases assets (inventory) by $25 and because the cost of goods sold is an expense, it decreases owners' equity by $25

Why do revenues and expenses impact the owners' equity section of the accounting equation?

we consider both contributed capital and profit generated to impact the owners' equity section of the accounting equation.

30 days after the purchase, Cardullo's paid cash to the vendor. How will the accounting equation be affected when the payment is made?

30 days later, at the time of the payment, cash is an asset, so the payment in cash decreases assets by $500. The obligation to pay was a liability, so the payment in cash decreases liabilities by $500.

At the end of January, Bikram Yoga Natick recognizes the expense for the first month of the subscription. What will be the impact on the accounting equation?

After one month, there is a decrease in assets (prepaid expense) of $10, as one month's worth of subscription benefits are used up (one month's worth of magazines were received). Bikram Yoga Natick also recognizes one month's worth of expense, which means there is a decrease in owners' equity of $10.

Henry's Consulting LLP recently purchased a new office building to house their operations. They paid $500,000, all through a bank loan (mortgage) which was supplied at the closing. How will this purchase impact the accounting equation?

Assets increase because the building (an asset) is added to the books. Liabilities increase because the money for the building came from a loan which will have to be paid back in the future.

How would the loan impact the accounting equation?

Assets increase because the loan provides the business with more cash. Liabilities also increase because the business now has the obligation to pay back the loan at some point in the future.

Suppose they purchased the shelving for $5,000 cash.How would this impact the accounting equation?

Assets increase because the shelving (an asset) is recorded, but assets also decrease because their cash was reduced by the $5,000 purchase price.

Cardullo's needs to show that the inventory was sold and recognize an expense for the cost of goods sold for $400. How will such a recognition impact the accounting equation?

At the same time, the sale decreases assets (inventory) by $400. The cost of goods sold is an expense, so it decreases owners' equity by $400.

Cardullo's purchased four 24-unit cases of Nutella for a total of $500. The business bought the Nutella on credit, and they will not pay until 30 days later. First, how will the accounting equation be affected at the time of the purchase?

At the time of the purchase, inventory is an asset, so assets increase by $500. The obligation to pay within 30 days is a liability, so liabilities increase by $500.

Qingji Corp., an oil separator manufacturer, received an advance payment of $50,000 on Aug. 1 for an order of five oil separators. Qingji Corp. delivered the five oil separators on Nov 1. How will the accounting equation be impacted when this advance payment was recorded on Aug. 1?

Cash, an asset, increases by $50,000. Because Qingji Corp. has not earned the $50,000 and they are obligated to deliver the oil separators, liabilities are increased.

Cardullo's sold a jar of Chuao Spicy Maya Hot Chocolate to a customer for $18.How would the cash receipt and revenue from this sale impact the accounting equation?

Cash, an asset, increases when Cardullo's receives the $18 from the customer. The owners' equity of Cardullo's also increases by the same amount as it is revenue. Note that this is only the revenue side of the transaction. The expense related to the outflow of inventory will come next.

Charlie Longbottom is excited to get his new web storage site up and running. He purchased two new servers for $5,000 each that he will install in his server room. Charlie was given 30 days credit terms for the servers. How will this purchase impact the accounting equation?

Charlie acquired the asset (the servers) which is an increase in assets. The obligation to pay later is a liability, which also increases.

Suppose Cardullo's gift cards expire after one year. A customer had a gift card for $100, of which he used $75 to purchase gourmet cheeses. At the end of the year, the card expires with $25 unredeemed. How do you think Cardullo's should account for the unredeemed amount?

Cold Call

Lastly, Cardullo's received payment from Cambridge Savings Bank 30 days after the initial purchase.How would the accounting equation be impacted when the payment is received?

Finally, the receipt of payment increases assets (cash) by $700. The receipt of payment also decreases assets (accounts receivable) by $700.

Cardullo's sold $700 of gift baskets to Cambridge Savings Bank. Cambridge Savings Bank has 30 days to pay for this order after they receive it.First, how will the recognition of the receivable and revenue for the transaction impact the accounting equation at the time of the sale to Cambridge Savings Bank?

First, the sale increases assets (accounts receivable) by $700. The sale also increases revenue, which increases owners' equity by $700.

Simon's Shoe Store (SSS) purchased 500 pairs of shoes from their sports shoe supplier, Feet of Endurance (FOE), for $20,000. SSS is a good customer of FOE so they were given 30 days to pay for the shoes. The 30 days expired and SSS paid FOE for the shoes. How will this payment impact the accounting equation on the books of SSS?

Payment of the outstanding balance to FOE reduces cash (an asset) and discharges (reduces) the liability.

Rebuilt Rods purchased 200 gallons of premium auto paint to be used in its auto restoration service. The total cost of the paint was $10,000. Rebuilt Rods bought the paint on credit, with payment due within thirty days. How will the accounting equation be affected at the time of the purchase?

Rebuilt Rods now has 200 gallons of premium auto paint which will be treated as inventory and used in their business to generate revenues. This means an increase in assets. At the same time, Rebuilt Rods now owes $10,000 to the supplier of the paint. This obligation increases liabilities.

Cardullo's Gourmet Shoppe in Harvard Square received an invoice from their accounting firm for $5,000 for tax work the firm completed. Cardullo's plans to make payment in 30 days. How would this invoice impact the accounting equation of Cardullo's?

Since Cardullo's plans to pay the invoice in 30 days, they would enter the invoice as a payable thereby increasing liabilities. Since this invoice is for service that has been received, it represents an expense of the business and expenses reduce owners' equity.

P&P Accountants, an audit firm, bills $35,000 to AQG Industries for audit work performed related to the annual audit. P&P requests payment in 15 days. How would this impact the accounting equation of P&P?

Since P&P has already performed the services, they now have a claim to receive payment, called accounts receivable, which is an asset. So assets increase by $35,000. At the same time, this represents revenue for P&P and revenue increases owners' equity.

Wanting to raise more capital for the business, Dave's Designs decided to allow 2 new equity investors into the business. Each new investor paid $20,000. How will their investment impact the accounting equation?

The assets of the business are increased by the amount of cash received ($20,000 from each investor), and because the source of those resources is the new owners, owners' equity is also increased.

How would Maria's contribution impact the accounting equation?

The assets of the business increase by the amount of cash Maria contributed. And because the funds were contributed by the owner, owners' equity also increases.

Chocolate sold by Cardullo's was purchased for $8 from their supplier. How would the transfer of inventory to the customer and the expense from the sale impact the accounting equation?

The cost of the hot chocolate that was purchased would have been previously recorded in the inventory account. When the hot chocolate was sold, an asset (inventory) would have decreased by the cost of the hot chocolate. The reduction in assets is an expense related to the sale of the hot chocolate and expenses decrease owners' equity. Note that this is only the expense side of the transaction. The revenue related to the sale was covered above.

Suppose they purchased $500 of meats and cheeses for the deli, and paid in cash at the time of the purchase.How would this impact the accounting equation?

The inventory asset of Cardullo's increases by the amount of the purchase. Assets also decrease because Cardullo's paid cash to the supplier.

Cardullo's sold a $100 gift card to a customer. How would this transaction impact the accounting equation at the time of the sale?

The sale of the gift card increases assets (cash) by $100. The gift card represents an obligation to provide goods to a customer in the future, so the sale also increases liabilities (deferred revenue) by $100.

Kevin owns a food truck that sells only items that contain bacon. Kevin leased the grill that he uses on his truck to cook his products. He paid $1,200 on January 1, which allows him to use the grill for an entire year. Using the accrual accounting method, how would the transaction impact the accounting equation?

Under the accrual method, the future benefits of the prepayment are recognized as an asset, prepaid rent, and the increase in this asset offsets the reduction in cash (an asset).

Tom's T.V.'s sold one of their premium products, a new 60" flat screen 3D T.V. to a customer who paid $2,000 in cash. How would the receipt of payment from this sale impact the accounting equation?

When the TV is sold, cash (an asset) would be increased. The owner's equity of Tom's T.V. is increased by the amount of cash that is received from the customer because it represents revenue.

Bikram Yoga Natick records the subscriptions as a prepaid expense when they are paid. How will the transaction impact the accounting equation?

When the subscription fees are paid, Bikram Yoga Natick increases assets (prepaid expense) by $120. The prepaid expense is an asset because it will provide a benefit in the future (magazines that will be received). The payment also decreases assets (cash) by $120 because the subscription was paid for with cash.

expenses mean...?

a decrease in owners' equity.

revenues mean...?

an increase in owners' equity

If the equipment is purchased with cash,

assets will increase to reflect the new equipment obtained by the business, but assets will also decrease because cash will have been paid out to the vendor of the equipment.

If the equipment was purchased on credit

assets will increase to reflect the new equipment obtained by the business, but liabilities would increase to show the obligation to pay

business can fund its resources, or assets, through three different sources

borrowings, which is liabilities. contributed capital, which is owners' equity. by successfully generating a profit. Any profit generated by the business belongs to the owners of the business and could either be distributed to the owners through dividends or be reinvested in the business through the retained earnings account.

when Cardullo's sells a package

it records both the revenue from the sale and the expense associated with the sale (the cost of purchasing inventory) in the same accounting period, when the product is sold.

The matching principle

requires that a company match its expenses to the related revenues in the accounting period to which they relate.

Bikram Yoga Natick sold a yoga mat to a customer for $40. How would the cash receipt and revenue from this transaction impact the accounting equation?

the cash receipt increases assets (cash) by $40. The sale also increases revenue by $40, which increases owners' equity.