Question

T5: CASH signed  a contract with a local carpenter to build a fence to enclose the backyard. The carpenter charges $250 per hour and expects the fence to take 10 hours to complete. He will begin work next month.

Explain the impact of transaction 5 on the Fundamental Equation of Accounting. That is what assets, liabilities and/or net assets are affected by the transaction. Be sure to include the dollar amount involved. Your answer can be descriptive and need not be in the context of a ledger but it must clearly demonstrate your understanding of the impact.

Answer 1

SL no.	Incidents	Accounting treatment
1	Signing a contract with local carpenter	a. Sigining of a contract is not an accounting transaction.
		b. According to the fundamental principles of accounting, there is no accounting treatment for the above incident.
		c. No journal entry is required
2	Fixing a charge $ 250 per hour	a. No wrok is started, no advance is received and no invoice is raised.
		b. There is no accounting transaction is happened.
		c. again no journal entry is required.
3	When work is started and complete, invoice for the work is received.	a. An invoice of the above work received an amount $ 2,500
		b. To be recorded the invoice of the work performed.
		c. The first journal entry would be to record the invoice and second entry for payment against the invoice.
		1. Debit carpenter expenses   $ 2,500
		Credit expenses payable                $ 2,500
		2. Debit Expense Payable    $ 2,500
		Credit Cash                                      $ 2,500