The general manager of a business encounters many different types of business transactions. Provide an example for each of the following transactions that would describe its effect on the accounting equation. Each situation is independent of the other situations. Please respond in 250-300 words.
- The transaction would increase an asset account and increase a liability account.
- The transaction would decrease an asset account and decrease the owner’s equity account.
- The transaction would increase an asset account and increase the owner’s equity account.
- The transaction would decrease an asset account and decrease a liability account.
Expert Solution Preview
Introduction:
In accounting, every business transaction has an impact on the accounting equation, which represents the relationship between the assets, liabilities, and owner’s equity of a company. As a medical professor, it is essential to understand the basics of accounting to manage the financial aspects of our educational institution. In this assignment, we will provide examples of different business transactions that affect the accounting equation.
Answer:
1. The transaction would increase an asset account and increase a liability account.
An example of this type of transaction is when a company borrows money from the bank. The borrower receives cash (an asset), which increases the company’s cash account, and at the same time incurs a liability in the form of a loan payable (an increase in liability). Both accounts increase, and the accounting equation remains balanced, as assets and liabilities both increase by an equal amount.
2. The transaction would decrease an asset account and decrease the owner’s equity account.
An example of this type of transaction is when the company pays dividends to its shareholders. This transaction reduces the company’s cash account (an asset) and decreases the retained earnings account (a component of owner’s equity). The accounting equation remains balanced, as both accounts decrease by an equal amount.
3. The transaction would increase an asset account and increase the owner’s equity account.
An example of this transaction is when the company sells products or services to customers for cash. The company receives cash (an asset) and at the same time earns revenue (an increase in owner’s equity). The accounting equation remains balanced, as assets increase by an equal amount to the increase in owner’s equity.
4. The transaction would decrease an asset account and decrease a liability account.
An example of this type of transaction is when a company makes a payment on a loan. The company reduces its cash account (an asset) and decreases its loan payable account (a liability) as it repays the borrowed amount. The accounting equation remains balanced, as both accounts decrease by an equal amount.
Conclusion:
Understanding the impact of different business transactions on the accounting equation is essential for the financial management of a company. As a medical professor, it is important to impart this knowledge to our students to equip them with the necessary skills to manage their future practices.
