Question

Which one of the following transactions will result in a change in the equity of an entity operating on a bank overdraft?

• A.

  Property bought on credit.

• B.

  A direct deposit of the salary of an employee into his/her bank account.

• C.

  A direct deposit in the bank account of an entity by a creditor in payment of his/her account.

• D.

  Receive money from a debtor in payment of his/her account.

• E.

  A cheque issued for payment of assets purchased for cash.

Answer 1

Solution:

Transaction B = A direct deposit of the salary of an employee into his/her bank account is the correct answer.

Explanation:

Only change in Income or Expense will affect the net Income which in turn affect the retained earnings. So, finally these retained earnings become the part of equity section which result in change in equity.

1) Transaction A = Property bought on credit.

Property (Debit) = Increase in Assets

Accounts Payable (Credit) = Increase in Liabilities

2) Transaction B = A direct deposit of the salary of an employee into his/her bank account.

Salary Expense (Debit) = Increase in Expenses (Decrease in Equity)

Bank (Credit) = Decrease in Asset

3) Transaction C = A direct deposit in the bank account of an entity by a creditor in payment of his/her account.

Accounts Payable (Debit) = Decrease in Liabilities

Bank (Credit) = Decrease in Asset

4) Transaction D = Received payment from a debtor in payment of his/her account.

Bank (Debit) = Increase in Asset

Accounts Receivable (Credit) = Decrease in Asset

5) Transaction E = A cheque issued for payment of assets purchased for cash.

Fixed Assets (Debit) = Increase in Asset

Bank (Credit) = Decrease in Asset

Conclusion: So, from above explanation only transaction B results in change in expenses which indirectly results in change in equity.