Zoe Parker opened Fresh Step Carpet Cleaners, Ltd. on March 1. During March, the following transactions were completed.
Mar. 1 Shareholders invested £14,000 cash in the business in exchange for ordinary shares.
1 Purchased used truck for £10,000, paying £3,000 cash and the balance on account.
3 Purchased cleaning supplies for £1,200 on account.
5 Paid £1,800 cash on one-year insurance policy effective March 1.
14 Billed customers £4,500 for cleaning services performed.
18 Paid £1,500 cash on amount owed on truck and £500 on amount owed on cleaning supplies.
Mar. 20 Paid £1,800 cash for employee salaries.
21 Collected £1,600 cash from customers billed on March 14.
28 Billed customers £2,500 for cleaning services performed.
31 Paid £320 for the monthly gasoline bill for the truck.
31 Declared and paid £800 cash dividends.
The Correct Answer and Explanation is:
To analyze the financial impact of these transactions, we will record each event and understand its effect on the accounting equation:
Accounting Equation:
Assets = Liabilities + Shareholders’ Equity
Let’s go through the transactions:
1. March 1: Shareholder investment of £14,000 in cash
- Assets (Cash) increase by £14,000
- Equity (Common Stock) increases by £14,000
2. March 1: Purchase of a truck for £10,000
- Paid £3,000 cash, remaining £7,000 on account
- Assets (Truck) increase by £10,000
- Assets (Cash) decrease by £3,000
- Liabilities (Accounts Payable) increase by £7,000
3. March 3: Purchased cleaning supplies on account for £1,200
- Assets (Supplies) increase by £1,200
- Liabilities (Accounts Payable) increase by £1,200
4. March 5: Paid £1,800 for a one-year insurance policy
- Assets (Prepaid Insurance) increase by £1,800
- Assets (Cash) decrease by £1,800
5. March 14: Billed customers £4,500 for cleaning services
- Assets (Accounts Receivable) increase by £4,500
- Revenue (Service Revenue) increases, contributing to Equity
6. March 18: Paid £1,500 toward truck and £500 toward supplies
- Assets (Cash) decrease by £2,000
- Liabilities (Accounts Payable) decrease by £2,000
7. March 20: Paid salaries of £1,800
- Assets (Cash) decrease by £1,800
- Expenses (Salaries Expense) increase, reducing Equity
8. March 21: Collected £1,600 from customers
- Assets (Cash) increase by £1,600
- Assets (Accounts Receivable) decrease by £1,600
9. March 28: Billed customers £2,500 for cleaning services
- Assets (Accounts Receivable) increase by £2,500
- Revenue (Service Revenue) increases, contributing to Equity
10. March 31: Paid £320 for truck gasoline
- Assets (Cash) decrease by £320
- Expenses (Gasoline Expense) increase, reducing Equity
11. March 31: Paid £800 cash dividends
- Assets (Cash) decrease by £800
- Equity (Dividends) increases, which reduces Retained Earnings
Summary
These entries follow double-entry accounting, affecting at least two accounts per transaction. Over March, Fresh Step Carpet Cleaners:
- Invested and used cash for assets (truck, supplies, insurance)
- Earned revenue through cleaning services
- Incurred expenses and paid salaries
- Made partial repayments of liabilities
- Collected some accounts receivable
- Paid dividends to shareholders
