Question

A company pays $1,900 for supplies previously purchased on account. Indicate the amount of increases and decreases in the accounting equation.

Answer 1

When a company pays $1,900 for supplies on account, both its assets and liabilities decrease by that amount. The company's accounting profit is calculated by subtracting the explicit costs from total revenue; in the provided scenario, this results in a profit of $50,000.

Step-by-step explanation:

A company paying $1,900 for supplies previously purchased on account means that the company's assets (specifically, cash or cash equivalents) will decrease by $1,900, while its liabilities (specifically, accounts payable) will also decrease by $1,900. In the accounting equation, Assets = Liabilities + Owner's Equity, both sides will decrease equally by the payment amount, thus keeping the equation balanced.

Accounting Profit

To calculate the accounting profit, we deduct the explicit costs of labor, capital, and materials from the total revenue. In this case:

1. Total revenue: $1,000,000
2. Explicit costs: Labor ($600,000) + Capital ($150,000) + Materials ($200,000) = $950,000
3. Accounting profit: Total revenue - Explicit costs = $1,000,000 - $950,000 = $50,000

Answer 2

Assets decreases by $1,900 while liabilities also decreases by $1,900.

Step-by-step explanation:

Accounting equation shows that the assets of a company is equal to the addition of its liabilities and shareholders' equity. This is stated mathematically as follows:

Assets = Liabilities + Shareholders' equity ................................. (1)

The aim of the accounting equation is to ensure that the balance sheet is always balanced, that is, a change in one of the components of the accounting equation must result in a corresponding change in another component of the accounting equation. This ensures the accounting equation always balance.

in the question, purchasing an item on account means that the item was purchased on credit i.e. without paying for it immediately. This makes the supplier a creditor to the company and creditor is one of the components of liabilities in the accounting equation. The payment of $1,900 to the creditor implies a decrease in the liabilities by $1,900.

In addition, cash is one of the components of assets in the accounting equation stated above. Therefore, the payment of $1,900 by the company to the creditor/supplier reduces assets by $1,900.

Based on this information, the accounting equation (1) above can be restated as follows:

Assets - $1,900 = Liabilities - $1,900 + Shareholders' equity ............ (2)

This shows that assets decreases by $1,900 while liabilities also decreases by $1,900.

To test that the accounting equation always balance, equation (2) can be solved and we will obtain equation (1) back again as follows:

Assets - $1,900 + $1,900 = Liabilities + Shareholders' equity

Since - $1,900 + $1,900 = 0, we have equation (1) back again as follows:

Assets = Liabilities + Shareholders' equity

I wish you the best.