Question

During the month, a company enters into the following transactions:

• Borrows $8,750 of cash from the bank by signing a formal agreement to repay the loan in 2 years.
• Buys $6,900 of new equipment on account.
• Pays off $4,900 of accounts payable.
• Pays off $2,450 of notes payable.

Required:

1. Show the effect of these transactions on the basic accounting equation.

2. Prepare the journal entries that would be used to record the transactions.

Answer 1

The fundamental Accounting equation also called as Balanace sheet equation represents the relationship between Assests, liabilities and equity of person or business. It is the foundation for the double entry booking system. For each transactions total debits equal to total credits. It can be expressed further more in this format

Assests = Owners equity + Liabilities

Borrowed $8 750 cash from bank results into increases In cash Balanace in debit side and increases in liability of loan from bank in Liabilities side

Buys a new equipment for $6900 which resulted into change in internal side of ASSEST cash is decrease and equipment's value increases

Pays off paid $4900 of accounts payable which resulted into reduction in liability of accounts payable and reduction in cash balance from both Assests and liabilities sides

Pays off $2 450 of notes payable which resulted into reduction in liability of notes payable and reduction in cash balance from both sides liabilities and Assests

Journal entries for the above transactions

For loan taken from bank

Cash A/c Dr. $8,750

Loan from Bank A/ c $8,750

For acquisition of equipment

Equipment A/c Dr $6900

Cash A/c . $6900

For pays off Account payable

Accounts payable A/c Dr $4900

Cash A/c $4900

For pays off notes payable

Notes payable A/c Dr $2450

Cash A/c . $2450.