Q25E - Horngren'S Financial And Managerial Accounting

Question

As the manager of a Papa Sean’s restaurant, you must deal with a variety of business transactions. Give an example of a transaction that has each of the following effects on the accounting equation: a. Increase one asset and decrease another asset. b. Decrease an asset and decrease equity. c. Decrease an asset and decrease a liability. d. Increase an asset and increase equity. e. Increase an asset and increase a liability

Step-by-Step Solution

Answer

(a) Inventory purchased by cash.

(b) Dividends paid in cash

(c) Payment to accounts payable

(d) Issuance of common stock

(e) Inventory purchased on account

Step-by-Step-Solution Step 1: Inventory purchased by cash.

Inventory purchased by cash will increase inventory (asset) and cash (asset). 

Step 2: Dividends paid in cash

Payment of dividends, results in decrease in cash (asset) and decrease in retained earnings (equity). 

Step 3: Payment to accounts payable

Payment of accounts payable, results in decrease in cash (asset) and decrease in  accounts payable (Liability). 

Step 4: Issuance of common stock

Issuance of common stock, results in decrease in cash (asset), and increase in common stock (Equity). 

Step 5: Inventory purchased on account

Inventory purchased on account, results in increase in inventory (asset) and increase in accounts payable (Liability).