Question

Kevin owns a food truck that sells only items that contain bacon. Kevin leased the grill that he uses on his truck to cook his products. He paid $1,200 on January 1, which allows him to use the grill for an entire year. Using the accrual accounting method, how would the transaction impact the accounting equation?

Answer 1

In accrual accounting, Kevin's grill lease transaction results in a decrease in Cash and an increase in Prepaid Expenses by $1,200, which keeps the accounting equation balanced.

Step-by-step explanation:

Using accrual accounting, Kevin's transaction for the grill lease would impact the accounting equation by showing a decrease in Cash by $1,200 and an increase in Prepaid Expenses by $1,200.

The accounting equation, which states that Assets = Liabilities + Owner's Equity, remains balanced after this transaction. Over the course of the year, as the lease period elapses, Kevin will recognize an expense each month, decreasing Prepaid Expenses and increasing Expenses, thus reducing Owner's Equity.

In accrual accounting, the transaction where Kevin paid $1,200 to lease the grill for a year would impact the accounting equation as follows:

Assets: The lease payment would decrease the cash balance by $1,200.

Liabilities: There is no impact on liabilities in this transaction.

Equity: The payment for the lease decreases the retained earnings by $1,200.

In summary, the transaction would result in a decrease in cash (asset) and retained earnings (equity) by $1,200 each.