- Selected Transaction of Boyoyong, an interior designer, in his first month of business, are as follows:
October
1 Invested P50,000 cash in the business.
2 Purchased used car for P40,000 cash for use in the business.
3 Purchased supplies on Account for P5,000.
4 Billed customers P18,000 for services performed.
5 Paid P2,000 cash for advertising start of the business.
6 Received 7,000 cash from customers billed in October 4.
7 Paid creditor P3,000 cash on account.
8 Withdrew P5,000 cash for personal use of owner.
The Correct Answer and Explanation is :
Correct Answer:
Here’s a breakdown of Boyoyong’s transactions and their effects on the accounting equation (Assets = Liabilities + Owner’s Equity):
October 1:
- Transaction: Invested P50,000 cash in the business.
- Effect: Cash (Asset) increases by P50,000.
- Owner’s Equity: Increases by P50,000 (investment by the owner).
- Accounting Equation:
- Assets: +P50,000 (Cash)
- Liabilities: 0
- Owner’s Equity: +P50,000 (Owner’s capital)
October 2:
- Transaction: Purchased used car for P40,000 cash for use in the business.
- Effect: Cash (Asset) decreases by P40,000.
- Car (Asset): Increases by P40,000.
- Accounting Equation:
- Assets: Cash -P40,000, Car +P40,000
- Liabilities: 0
- Owner’s Equity: 0 (No change)
October 3:
- Transaction: Purchased supplies on account for P5,000.
- Effect: Supplies (Asset) increase by P5,000.
- Accounts Payable (Liabilities): Increase by P5,000.
- Accounting Equation:
- Assets: +P5,000 (Supplies)
- Liabilities: +P5,000 (Accounts Payable)
- Owner’s Equity: 0 (No change)
October 4:
- Transaction: Billed customers P18,000 for services performed.
- Effect: Accounts Receivable (Asset) increase by P18,000.
- Revenue (Owner’s Equity): Increases by P18,000.
- Accounting Equation:
- Assets: +P18,000 (Accounts Receivable)
- Liabilities: 0
- Owner’s Equity: +P18,000 (Revenue)
October 5:
- Transaction: Paid P2,000 cash for advertising.
- Effect: Cash (Asset) decreases by P2,000.
- Expenses (Owner’s Equity): Decreases by P2,000.
- Accounting Equation:
- Assets: Cash -P2,000
- Liabilities: 0
- Owner’s Equity: -P2,000 (Expenses)
October 6:
- Transaction: Received P7,000 cash from customers billed on October 4.
- Effect: Cash (Asset) increases by P7,000.
- Accounts Receivable (Asset): Decreases by P7,000.
- Accounting Equation:
- Assets: Cash +P7,000, Accounts Receivable -P7,000
- Liabilities: 0
- Owner’s Equity: 0 (No change)
October 7:
- Transaction: Paid creditor P3,000 cash on account.
- Effect: Cash (Asset) decreases by P3,000.
- Accounts Payable (Liabilities): Decreases by P3,000.
- Accounting Equation:
- Assets: Cash -P3,000
- Liabilities: Accounts Payable -P3,000
- Owner’s Equity: 0 (No change)
October 8:
- Transaction: Withdrew P5,000 cash for personal use.
- Effect: Cash (Asset) decreases by P5,000.
- Owner’s Equity: Decreases by P5,000 (Owner’s withdrawal).
- Accounting Equation:
- Assets: Cash -P5,000
- Liabilities: 0
- Owner’s Equity: -P5,000 (Owner’s withdrawal)
Explanation:
In each transaction, the accounting equation (Assets = Liabilities + Owner’s Equity) must remain in balance. When an asset is increased or decreased, the accounting equation is adjusted accordingly. For example:
- Investing cash increases both assets (cash) and the owner’s equity (capital).
- Purchasing a car reduces cash but increases an asset (the car).
- Purchasing supplies on account increases assets (supplies) and liabilities (accounts payable).
- Billing customers creates revenue, increasing assets (accounts receivable) and owner’s equity.
- Paying for advertising decreases cash and decreases owner’s equity due to the expense.
- Receiving cash from customers shifts amounts between assets (accounts receivable and cash).
- Paying creditors reduces both cash and liabilities.
- Owner’s withdrawal decreases cash and reduces owner’s equity.
This shows how the business activities affect the accounting equation, ensuring that the financial records are in balance and that the business’s financial position is accurately reflected.