Question

Indicate how the following transactions will affect the basic Accounting Equation:

1. Purchased equipment for cash
2. Purchased Supplies on account
3. Paid Cash for janitorial services
4. Paid Accounts payable in full
5. Invested cash in the business.

Answer 1

Basic accounting equation : ASSETS = LIABILITIES + EQUITY

1. Purchased equiment for cash: This transaction will affect asset side only. Equipment(asset) will increase and cash(asset) will decrease for the same amount.

journal entry:

Equipment dr

Cash

2.Purchased supplies on account: This transaction affects both asset side and liability side. Supplies(asset) will increase and accounts payable(liability) will increase since cash is not paid

journal entry:

Supplies dr

Accounts payable.

3.Paid Cash for janitorial services: This transaction will affect both asset side and equity side. Cash(asset) will decrease and equity side will decrease by the same amount.

Let me make it clear. The equity side is divided into two; common stock and retained earnings. Retained earnings section of equity will increase by revenue earned and it will decrease by each expense. cash paid for janitorial service is an expense and the retained earnings will decrease. So, equity side also decrease.

journal entry;

janitorial expense dr

Cash

4.Paid accounts payable in full: This transaction will affect asset side and liabilities side. Accounts payable is a liabilitiy and it is paid by cash fully. So, accounts payable(liability) will decrease and cash(asset) also decreases.

journal entry;

Accounts payable dr

Cash

5.Invested cash in business: This transaction will affect asset side and equity side. Cash(asset) will increase and common stock (equity) will increase.

journal entry;

Cash dr

Common stock

indications in tabular form:

Transaction	ASSETS	=	LIABILITIES	+	EQUITY
					Common stock	+	Retained earnings
1.	-cash
	+equipment
2.	+supplies		+accounts payable
3.	-cash						-janirorial expense
4.	-cash		-accounts payable
5.	+cash				+common stock

Note: The retained earnings will increase by revenue and decrease by expenses. But revenue and expense accounts can't be considered as equity accounts.