Teri West operates her own catering service. Summary financial data for July are presented in equation form as follows

Teri West operates her own catering service. Summary financial data for July are presented in equation form as follows. Each line designated by a number indicates the effect of a transaction on the equation. Each increase and decrease in owner’s equity, except transaction (5), affects net income.


Assets 5 Liabilities 1 Owner’s Equity
Cash 1 Supplies 1 Land 5
Accounts 
 Payable 1
Teri West , 
Capital −
Teri West , 
Drawing 1
Fees  
Earned − Expenses
Bal. 40,000 3,000 82,000 7,500 117,500
1. +71,800+71,800
2. –15,000 +15,000
3. –47,500−47,500
4. +1,100 +1,100
5. –5,000–5,000
6. –4,000 –4,000
7. –1,500–1,500
Bal.   40,300   2,600    97,000    4,600 117,500 –5,000     71,800 –49,000


a.  Describe each transaction.

b. What is the amount of the net increase in cash during the month?

c. What is the amount of the net increase in owner’s equity during the month?

d. What is the amount of the net income for the month?

e. How much of the net income for the month was retained in the business?

Answers:
a.
(1)  Provided catering services for cash, $71,800.
(2)  Purchase of land for cash, $15,000.
(3)  Payment of cash for expenses, $47,500.
(4)  Purchase of supplies on account, $1,100.
(5)  Withdrawal of cash by owner, $5,000.
(6)  Payment of cash to creditors, $4,000.
(7)  Recognition of cost of supplies used, $1,500.

b. $300  ($40,300 – $40,000)
c. $17,800  (–$5,000 + $71,800 – $49,000)
d. $22,800  ($71,800 – $49,000)
e. $17,800  ($22,800 – $5,000)

A vacant lot acquired for $115,000 is sold for $298,000 in cash. What is the effect of the sale on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity?

a. A vacant lot acquired for $115,000 is sold for $298,000 in cash. What is the effect of the sale on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity?

b. Assume that the seller owes $80,000 on a loan for the land. After receiving the $298,000 cash in (a), the seller pays the $80,000 owed. What is the effect of the payment on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity?

c.  Is it true that a transaction always affects at least two elements (Assets, Liabilities, or Owner’s Equity) of the accounting equation? Explain.

Answers:
a.
(1) Total assets increased $183,000 ($298,000 – $115,000).
(2) No change in liabilities.
(3) Owner’s equity increased $183,000.

b.
(1) Total assets decreased $80,000.
(2) Total liabilities decreased $80,000.
(3) No change in owner’s equity.

c. No. It is false that a transaction always affects at least two elements (Assets, Liabilities, or Owner’s Equity) of the accounting equation. Some transactions affect only one element of the accounting equation. For example, purchasing supplies for cash only affects assets.