Question

On 1 September 2019, Pink Boutique had total assets of $77,000 and total liabilities of $12,000. During the month, the company sold watches and purses on credit for $35,000, and paid expenses in cash totaling $21,000. Additionally, there was a cash outflow of $8,000 towards prepayment of an expense that will be incurred by the business during October 2019. Based only on this information and assuming no further transactions, how much is the business’s equity at the end of the month, that is, on 30 September?

Answer 1

Accounting equation = ASSETS = LIABILITIES + EQUITY

So, Equity = Assets - Liabilities

Assets = $77,000

Liabiltiites = $12,000

So, Equity = Assets - Liabilities = $77,000 - $12,000 = $65,000

So, business's equity at the beginning of the year is $65,000.

Now let's analyze the transactions and how they affect accounting equation to find business's equity at the end of the month.

Transactions	ASSETS	=	LIABILITIES	+	EQUITY
Opening balance	77,000	=	12,000	+	65,000
1.Sold watches and purses for credit	85,000(accounts receivable)	=		+	85,000(revenue)
2.Paid expenses in cash	-21,000(cash)	=		+	-21,000(expenses)
3. Prepayment of expense by cash	8,000(prepaid expense:current asset) -8,000(cash)	=		+
Balance on september 30	141,000	=	12,000	+	129,000

See, the business's equity at the end of the month is $129,000.

The opening balance $65,000 is increased by sales of $85,000 and decreased by expenses of $21,000.

Prepayment of expense only affect asset account and don't affect equity.