48PGB - Horngren'S Financial And Managerial Accounting

Question

Cosmo Thomas started a new business, Thomas Gymnastics, and completed the following transactions during December: Dec. 1 Received \(19,000 cash from Thomas in exchange for common stock. 2 Received \)3,800 cash from customers for services performed. 5 Paid \(300 cash for office supplies. 9 Performed services for a customer and billed the customer for services rendered, \)4,500. 10 Received \(150 invoice for utilities due in two weeks. 15 Paid for advertising in the local paper, \)350. 20 Paid utility invoice received on Dec. 10. 25 Collected cash in full from customer billed on Dec. 9. 28 Paid rent for the month, \(2,600. 28 Paid \)1,200 to assistant for wages. 30 Received \(1,600 cash from customers for services performed. 31 Cash dividends of \)3,000 were paid to stockholders. Analyze the effects of the transactions on the accounting equation of Thomas Gymnastics using a format similar to Exhibit 1-6.

Step-by-Step Solution

Answer

Effect of the transaction on the accounting equation is shown as follows: 

	Assets	=	Liabilities	+	Equity
Contributed Capital	+	Retained Earnings
Cash	+	Accounts Receivable	+	Office Supplies	Accounts Payable	Common Stock	-	Dividends	+	Service Revenue	-	Rent Expense	-	Advertising Expense	-	Salaries Expense	-	Utilities Expense
Dec.1	+19,000								+19,000
Bal.	$19,000					=		+	$19,000
Dec.2	+3,800												+3,800
Bal.	$22,800					=		+	$19,000			+	$3,800
Dec.5	-300				+300
Bal.	$22,500			+	$300	=		+	$19,000			+	$3,800
Dec.9			+4,500										+4,500
Bal.	$22,500	+	$4,500	+	$300	=		+	$19,000			+	$8,300
Dec.10							+150														-150
Bal.	$22,500	+	$4,500	+	$300	=	$150	+	$19,000			+	$8,300							-	$150
Dec.15	-350																-350
Bal.	$22,150	+	$4,500	+	$300	=	$150	+	$19,000			+	$8,300			-	$350			-	$150
Dec. 20	-150						-150
Bal.	$22,000	+	$4,500	+	$300	=	$0	+	$19,000			+	$8,300			-	$350			-	$150
Dec.25	+4,500		-4,500
Bal.	$26,500	+	$0	+	$300	=	$0	+	$19,000			+	$8,300			-	$350			-	$150
Dec.28	-3,800														-2600				-1200
Bal.	$22,700	+	$0	+	$300		=	$0	+	$19,000			+	$8,300	-	$2,600	-	$350	-	$1,200	-	$150
Dec.30	+1,600												+1,600
Bal.	$24,300	+	$0	+	$300	=	$0	+	$19,000			+	$9,900	-	$2,600	-	$350	-	$1,200	-	$150
Dec.31	-3,000										-3,000
Bal.	$21,300	+	$0	+	$300	=	$0	+	$19,000	-	$3,000	+	$9,900	-	$2,600	-	$350	-	$1,200	-	$150
	$21,600	=	$21,600

Explanation on Transaction Analysis

Transaction analysis helps in analyzing the effect of the transactions on the accounting equation. These transactions are pertained to various operating and non-operating activities of a business organization.

Explanation on Accounting Equation

As per the accounting equation, both sides of the accounting equation should be equal. In the given case, both sides, assets’ side and liabilities’ side are equal at $21,600.