Question

Indicate how the following business transactions affect the basic accounting equation. (a) Paid cash for janitorial services. (b) Purchased equipment for cash. (c) Invested cash in the business. (d) Paid accounts payable in full.

a) (a) - Decrease in Assets, Increase in Expenses (b) - No change (c) - Increase in Assets, Increase in Owner's Equity (d) - Decrease in Liabilities, Decrease in Assets
b) (a) - Increase in Liabilities, Decrease in Assets (b) - Increase in Assets (c) - Increase in Assets, Increase in Owner's Equity (d) - Decrease in Liabilities, Decrease in Assets
c) (a) - Decrease in Assets, Increase in Expenses (b) - Decrease in Assets (c) - Increase in Assets, Increase in Owner's Equity (d) - Decrease in Liabilities, Decrease in Assets
d) (a) - Increase in Liabilities, Decrease in Assets (b) - Increase in Assets (c) - Increase in Assets, Increase in Liabilities (d) - Decrease in Liabilities, Decrease in Assets

Answer 1

(a) Paid cash for janitorial services: Reduces cash and owner's equity.

(b) Purchased equipment for cash: Reduces cash but increases equipment value, maintaining balance.

Step-by-step explanation:

In accounting, the fundamental equation is Assets = Liabilities + Owner's Equity. For the first transaction (a), paying cash for janitorial services reduces cash (an asset) and increases expenses (a decrease in owner's equity). For the second transaction (b), purchasing equipment for cash reduces cash (an asset) but increases the value of equipment (another asset), maintaining the balance.

In the third transaction (c), investing cash increases cash (an asset) and owner's equity (capital), ensuring the equation remains balanced. Lastly, paying accounts payable in full (d) decreases liabilities (accounts payable) and cash, maintaining the equilibrium in the basic accounting equation.

These transactions illustrate the impact on the key elements of the accounting equation, showcasing how financial activities are recorded while preserving the balance between assets, liabilities, and owner's equity.