Define the terms assets, liabilities, and Owners equity.

Assets are resources owned by a business. Liabilities are amounts owed to creditors. Put more
simply, liabilities are existing debts and obligations. Owners equity is the ownership claim on net
assets.

Which of these items are liabilities of ABC Cleaning Service?

(a) Cash.
(b) Dividends.
(c) Accounts payable.
(d) Accounts receivable.
(e) Supplies.
(f) Service revenue.
(g ) Equipment.
(h) Rent expense.
(i) Salaries and wages payable.
The liabilities are (c) Accounts payable and (i) Salaries and wages payable.

Example
of
transactions:

Common

business

Owners Investment to Form the Business

July 1: Joan Miller invests $40,000 in cash to form Miller Design Studio.

Economic Event That Is Not a Business Transaction

July 2: Orders office supplies, $5,200.

Prepayment of Expenses in Cash

July 3: Rents an office; pays two months rent in advance, $3,200.

Purchase of an Asset on Credit

July 5: Receives office supplies ordered on July 2 and an invoice for $5,200.

Purchase of an Asset Partly in Cash and Partly on Credit

July 6: Purchases office equipment, $16,320; pays $13,320 in cash and agrees to pay
the rest next month.

Payment of a Liability
July 9: Makes a partial payment of the amount owed for the office supplies received on
July 5, $2,600.

Revenue in Cash
July 10: Performs a service for an investment advisor by designing a series of brochures
and collects a fee in cash, $2,800.

Revenue on Credit
July 15: Performs a service for a department store by designing a TV commercial; bills
for the fee now but will collect the fee later, $9,600.

Revenue Collected in Advance

July 19: Accepts an advance fee as a deposit on a series of brochures to be designed,
$1,400.

Collection on Account
July 22: Receives cash from customer previously billed on July 15, $5,000.

Expense Paid in Cash

July 26: Pays employees four weeks wages, $4,800.

Expense to Be Paid Later

July 30: Receives, but does not pay, the utility bill that is due next month, $680.

Withdrawals
July 31: Withdraws $2,800 in cash.

Transaction Analysis Problem and Solution:

Joan Robinson opens her own law office on July 1, 2012. During the first month of operations,
the following transactions occurred.
1. Joan invested $11,000 in cash in the law practice.
2. Paid $800 for July rent on office space.
3. Purchased office equipment on account $3,000.
4. Provided legal services to clients for cash $1,500.
5. Borrowed $700 cash from a bank on a note payable.
6. Performed legal services for client on account $2,000.
7. Paid monthly expenses: salaries and wages $500, utilities $300, and supplies $100.
8. Joan withdraws $1,000 cash for personal use.
Instructions
(a) Prepare a tabular summary of the transactions.

Analyze the transactions of a business organized as a proprietorship described below and indicate
their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a
minus sign () to indicate a decrease.
Assets
= Liabilities + Owner's Equity
1. Received cash for services rendered.

________

________

________

2. Purchased office equipment on credit.

________

________

________

3. Paid employees' salaries.

________

________

________

4. Received cash from customer in payment

on account.

________

________

________

5. Paid telephone bill for the month.

________

________

________

6. Paid for office equipment purchased in

transaction 2.

________

________

________

7. Purchased office supplies on credit.

________

________

________

8. Owner withdrew cash for personal

expenses.

________

________

________

9. Obtained a loan from the bank.

________

________

________

________

________

________

10. Billed customers for services rendered.

Solution

Assets
1. Received cash for services rendered.

2. Purchased office equipment on credit.

3. Paid employees' salaries.

4. Received cash from customer in payment

on account.

Liabilities + Owner's Equity

+
+

+,

5. Paid telephone bill for the month.

6. Paid for office equipment purchased in

transaction 2.

7. Purchased office supplies on credit.

8. Owner withdrew cash for personal

expenses.

9. Obtained a loan from the bank.

10. Billed customers for services rendered.

+
+

Assignment 1:
EXERCISE 1
The following situations involve accounting principles and assumptions.
1. Rex Company owns buildings that are worth substantially more than they
originally cost. In an effort to provide more relevant information, Rex reports
the buildings at fair value in its accounting reports.
2. Levi Company includes in its accounting records only transaction data that
can be expressed in terms of money.
3. Josh Borke, owner of Joshs Photography, records his personal living costs
as expenses of the business.
Instructions
For each of the three situations, say if the accounting method used is correct
or incorrect. If correct, identify which principle or assumption supports the
method used. If incorrect, identify which principle or assumption has been
violated.

EXERCISE 2
Thornton Computer Timeshare Company entered into the following
transactions during May 2012.
1. Purchased computer terminals for $20,000 from Digital Equipment on
account.
2. Paid $4,000 cash for May rent on storage space.
3. Received $17,000 cash from customers for contracts billed in April.
4. Provided computer services to Fisher Construction Company for $3,000
cash.
5. Paid Northern States Power Co. $11,000 cash for energy usage in May.
6. Thornton invested an additional $29,000 in the business.
7. Paid Digital Equipment for the terminals purchased in (1) above.
8. Incurred advertising expense for May of $1,200 on account.
Instructions
Indicate with the appropriate letter whether each of the transactions above
results in:
(a) An increase in assets and a decrease in assets.
(b) An increase in assets and an increase in owners equity.
(c) An increase in assets and an increase in liabilities.

(d) A decrease in assets and a decrease in owners equity.

(e) A decrease in assets and a decrease in liabilities.
(f) An increase in liabilities and a decrease in owners equity.
(g) An increase in owners equity and a decrease in liabilities.

EXERCISE 3
Natalie Koebel spent much of her childhood learning the art of cookie-making
from her grandmother. They passed many happy hours mastering every type
of cookie imaginable and later creating new recipes that were both healthy
and delicious. Now at the start of her second year in college, Natalie is
investigating various possibilities for starting her own business as part of the
requirements of the entrepreneurship program in which she is enrolled. A
long-time friend insists that Natalie has to somehow include cookies in her
business plan. After a series of brainstorming sessions, Natalie settles on the
idea of operating a cookie-making school. She will start on a part-time basis
and offer her services in peoples homes. Now that she has started thinking
about it, the possibilities seem endless. During the fall, she will concentrate
on holiday cookies. She will offer individual lessons and group sessions
(which will probably be more entertainment than education for the
participants). Natalie also decides to include children in her target market.
The first difficult decision is coming up with the perfect name for her
business. In the end, she settles on Cookie Creations and then moves on to
more important issues.

EXERCISE 4
Carla Quentin started her own consulting firm, Quentin Consulting, on May 1, 2012. The
following transactions occurred during the month of May.
May 1 Carla invested $7,000 cash in the business.
2
Paid $900 for office rent for the month.
3
Purchased $600 of supplies on account.
5
Paid $125 to advertise in the County News.
9
Received $4,000 cash for services provided.
12
Withdrew $1,000 cash for personal use.
15
Performed $5,400 of services on account.
17
Paid $2,500 for employee salaries.
20
Paid for the supplies purchased on account on May 3.
23
Received a cash payment of $4,000 for services provided on account on May 15.
26
Borrowed $5,000 from the bank on a note payable.
29
Purchased office equipment for $4,200 on account.
30
Paid $275 for utilities.
Instructions
(a) Show the effects of the previous transactions on the accounting equation using the following
format.

(b) Prepare the income statement, owners equity statement, and balance sheet at
May 31 and a cash flow statement for Quentin Consulting.

Exercise 5

Exercise 6
One item is omitted in each of the following summaries of balance sheet and income statement
data for three different sole proprietorships, X, Y, and Z. Determine the amounts of the missing
items, identifying each proprietorship by letter.

Beginning of the Year:

Assets
Liabilities
End of the Year:
Assets
Liabilities
During the Year:
Additional Investment by the owner
Withdrawals by the owner
Revenue
Expenses

Proprietorship
Y

$460,000
250,000

$180,000
105,000

$189,000
168,000

480,000
280,000

225,000
95,000

195,000
169,000

79,000

80,000

90,000
195,000
160,000

83,000
?
113,000

?
187,000
185,000