Transaction effects on Accounting Equation
What is the effect of purchasing inventory on credit on the accounting equation?
Assets increase; Liabilities increase.
What is the effect of recording depreciation on the accounting equation?
Decrease assets; decrease owners' equity.
Which type of account is closed to retained earnings during the closing process?
Revenues and expenses.
What does the adjusting entry to record accrued revenue do?
Increase an asset; increase revenue.
A firm received $100 cash for future services. What is the effect of the adjusting entry when the service is performed?
Decrease a liability; increase owners' equity.
A business pays a $500 dividend to its stockholders. How does this affect the accounting equation?
Decrease an asset; decrease stockholders' equity.
If a firm receives cash in advance of providing a service, how is this recorded?
Increase an asset; increase a liability (Unearned Revenue).
Which of the following accounts will be closed at year-end: Dividends, Unearned Revenue, or Consulting Revenue?
Dividends and Consulting Revenue.
What type of adjustment is made when recording depreciation?
Recognizing the expense and reducing the asset's value.
What is the net effect on the accounting equation when a firm adjusts for a prepaid insurance expense?
Decrease an asset; decrease owners' equity.
When a firm makes a credit sale, what is the effect on the accounting equation?
Increase an asset; increase owners' equity.
A firm accrues interest expense at the end of the period. What is the effect on the accounting equation?
Increase a liability; decrease owners' equity.
If a company fails to record an adjusting entry for prepaid rent, what happens?
Expenses are understated, and net income is overstated.
If total assets increased by $46,000 and stockholder's equity increased by $60,000, what is the change in liabilities?
$14,000 decrease.
What is the effect of recording an accrued expense that has not yet been paid?
Increase a liability; decrease stockholders' equity.
What is the effect on the accounting equation when a prepaid expense is adjusted at the end of the period?
Decrease assets; decrease owners' equity.
How are unearned revenues adjusted at the end of the period?
Decrease a liability; increase revenue.
If a company pays its accounts payable in cash, how does this affect the accounting equation?
Decrease assets; decrease liabilities.
A business pays $7,000 to a creditor for an amount owed. What is the effect on the accounting equation?
Decrease an asset; decrease a liability.
How does accruing wages that have not yet been paid affect the accounting equation?
Increase a liability; decrease stockholders' equity.
What is the impact on the financial statements if accrued salaries expense is not recorded?
Net income is overstated, and liabilities are understated.
During the year, a company paid $38,000 of accounts payable in cash. What is the effect on the accounting equation?
Assets decrease by $38,000; liabilities decrease by $38,000; equity remains unchanged.