Question

Using the information provided, analyze the affects of Lawry Lawn Service's transactions on the accounting equation.

May 1 Received $3,400 and issued common stock

May 3 Purchased a mower on account, $1,600

May 5 Performed lawn services for client on account $1,000

May 17 Paid $100 cash for gas used in mower.

May 28 Paid cash dividends of $700

Analyze the events chronologically, one transaction at a time. Beginning with the transaction on May 3rd, calculate the balance in each account after analyzing the effect of the transaction on the accounting equation.

Answer 1

Lawry Lawn Service

Analysis of the effects of transactions on the accounting equation:

May 1:

Asset (Cash + $3,400) = Liabilities + Equity (Common Stock + $3,400)

May 3:

Asset (Cash $3,400 + Equipment $1,600) = Liabilities (Accounts Payable + $1,600) + Equity $3,400

May 5:

Asset (Cash $3,400 + Equipment $1,600 + Accounts Receivable + $1,000) = Liabilities (Accounts Payable + $1,600) + Equity $3,400 + Retained Earnings + $1,000

May 17:

Asset (Cash $3,400 - 100 + Equipment $1,600 + Accounts Receivable + $1,000) = Liabilities (Accounts Payable + $1,600) + Equity $3,400 + Retained Earnings + $1,000 -100

May 28:

Asset (Cash $3,300 - 700 + Equipment $1,600 + Accounts Receivable + $1,000) = Liabilities (Accounts Payable + $1,600) + Equity $3,400 + Retained Earnings + $900 - 700

Asset (Cash $2,600 + Equipment $1,600 + Accounts Receivable + $1,000) = Liabilities (Accounts Payable + $1,600) + Equity $3,400 + Retained Earnings + $200

Step-by-step explanation:

The accounting equation reveals that each transaction that Lawry Lawn Service embarks on ensures that the two sides of the equation remain in balance. This happens immediately the two entry principle is correctly applied and the transactions posted properly. This is because every transaction affects two or more accounts, with one or two on one side and the others on the opposite side. Every transaction giving rise to an asset must be funded either from debt or equity.