Question

During 2022, Sheridan Company entered into the following transactions.

1. Purchased equipment for $318,770 cash.
2. Issued common stock to investors for $139,050 cash.
3. Purchased inventory of $70,940 on account.
Using the following tabular analysis, show the effect of each transaction on the accounting equation. (If a transaction causes a decrease in Assets, Liabilities or Stockholders' Equity, place a negative sign (or parentheses) in front of the amount entered for the particular Asset, Liability or Equity item that was reduced. See Illustration 3-4 for example.)

Answer 1

Answer with its Explanation:

Transaction 1: The purchase of equipment is increase in the fixed assets and as the amount paid is in cash, the decrease in cash asset will also be with the same amount. This means the net effect on assets will be zero.

Accounting Equation is given as under:

Fixed Assets + Current Asset = Equity + Liability

Equipment 318,770 - Cash $318,770 = Zero Net Effect

Transaction 2: The increase in the equity will increase the current asset as well here, which means:

Fixed Assets + Current Asset = Equity + Liability

Current Assets + $139,050 = Issued common stock + $139,050

Transaction 3: The purchase of inventory on account means that the current asset would be increased and the payables will increase with the same amount. The effect on the accounting equation is given as under:

Fixed Assets + Current Asset = Equity + Liability

Current Asset + $70,94 = Current liabilities + $70,940