The general manager of a business encounters many different types of business transactions.

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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.

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.

 

Sample Solution

Increase an asset account and increase a liability account

  • A business borrows money from a bank. This transaction would increase the asset account, Cash, and increase the liability account, Accounts Payable.
  • A business purchases inventory on credit. This transaction would increase the asset account, Inventory, and increase the liability account, Accounts Payable.

Decrease an asset account and decrease the owner’s equity account

  • A business pays for rent. This transaction would decrease the asset account, Cash, and decrease the owner’s equity account, Retained Earnings.
  • A business pays for utilities. This transaction would decrease the asset account, Cash, and decrease the owner’s equity account, Retained Earnings.

Increase an asset account and increase the owner’s equity account

  • A business receives cash from a customer for services rendered. This transaction would increase the asset account, Cash, and increase the owner’s equity account, Revenue.
  • A business sells inventory for cash. This transaction would increase the asset account, Cash, and increase the owner’s equity account, Revenue.

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