Basic Accounting Equation Effects

Part 1: Basic Accounting Equation Effects

Count everything, or almost everything. Just about every event that happens in a business results in changes to the assets, liabilities, or equities. For this reason, it is critical for the accountant to analyze how every business event affects the basic accounting equation, and how every event must be managed. Part 1 of the assessment is a good test of your critical thinking skills as you apply them to the components of the accounting cycle, in particular the basic accounting equation for the balance sheet.

Given below is a list of 15 business transactions. Using Part 1 of the Assessment 1 Template, indicate whether each transaction increased (+), decreased (–), or had no effect (NE) on assets, liabilities, and owner’s equity.

1. Purchased supplies on account.
2. Received cash for providing a service.
3. Paid expenses in cash.
4. Received an investment of cash from the owner.
5. Experienced a cash withdrawal by the owner.
6. Received cash from a customer who had previously been billed for services provided.
7. Paid cash to purchase equipment.
8. Paid employee salaries.
9. Paid a creditor from whom the business had previously purchased supplies on account.
10. Sold new shares of stock.
11. Paid cash for monthly rent on the office space.
12. Paid cash for monthly utility bills.
13. Performed services on account.
14. Made a payment on a loan received from the bank.
15. Purchased for cash merchandise that will be later resold for profit.

Part 2: Missing Accounting Equation Data

The accounting equation requires that it always be kept in balance after a business transaction has been processed. This requires the accountant to have applied knowledge of all parts of the equation and to be able to critically analyze when the equation is not in balance. Part 2 of the assessment provides you an opportunity to apply your accounting equation intelligence quotient.

Using your knowledge about the accounting equation, answer the following questions in Part 2 of the Assessment 1 Template. Be sure to show your calculations.

1. The liabilities of the Smith Company are $120,000 and its owner’s equity is $232,000. What is the amount of the company’s total assets?
2. The total assets of the Jones Company are $190,000 and its owner’s equity is $91,000. What is the amount of the company’s total liabilities?
3. The total assets of the Greene Company are $800,000 and its liabilities are equal to one-half of its total assets. What is the amount of the company’s owner’s equity?
4. Beginning the new year, the Orange Company had total assets of $800,000 and total liabilities of $300,000. If total assets increased by $150,000 during the year and total liabilities decreased by $80,000, what is the owner’s equity total at the end of the year?
5. Beginning the new year, the Orange Company had total assets of $800,000 and total liabilities of $300,000. If, during the year, the Orange Company’s total liabilities increased by $100,000 and its owner’s equity decreased by $70,000, what is the company’s ending amount of total assets?
6. Beginning the new year, the Orange Company had total assets of $800,000 and total liabilities of $300,000. If total assets decreased by $80,000 and its owner’s equity increased by $120,000 during the year, what is the company’s year-end total liabilities amount.

Part 3: Accounting Conventions and Principles

Accounting conventions represent the principles, assumptions, and rules that guide an accountant as he or she analyzes the effects of business events on the accounting cycle and applies them to various cycle procedures. Part 3 of the assessment requires you to determine which of these conventions apply to a given business scenario to enhance your understanding of the foundation of accounting procedures and processes.

Using Part 3 of the Assessment 1 Template, identify the applicable accounting convention for each of the following business scenarios. More than one convention may apply to each scenario. Explain your choices for each scenario.

Before completing the scenarios consider and describe what role ethics has throughout the accounting process and reporting to internal and external customers. Throughout your assessments ensure that you apply ethics to your decision making and reporting.

• Scenario 1: The Acme Company is undergoing a reorganization to improve its financial structure. As part of this process, the company is considering lowering its expense calculations to improve the bottom line net income.
• Scenario 2: Regal Enterprises has purchased $45,000 worth new equipment for use in its manufacturing operations and would like to write off the cost of this equipment in just a couple of years, instead of the usual 10 years for this equipment type. The company’s president fears that the economic conditions in its industry will worsen and cause the company to sell the equipment sooner than expected.
• Scenario 3: Bozrah Industries, a small independent retailer, wants to change its accounting system from cash-based to accrual-based, and is concerned about how this change will affect the recording of sales and expenses.
• Scenario 4: Randolph, Inc., has experienced major turnover in its accounting department, and the new head of accounting has been going through the current records of transactions. A couple of those transactions appear problematic. The first contains an error of $10,000 that the previous accountant decided was not large enough to adjust before the financial statements were prepared. This error would understate income and make the company look more profitable than it actually is.
• Scenario 5: The Morrison Company receives much of its revenue from those customers who buy or rent furniture and appliances on the installment plan. Because the company uses an accrual-based accounting system, revenue is recognized at the point of sale, even though cash comes in on a monthly basis from customers. Lately, the company’s accountant is questioning the use of the accrual basis for recognizing revenue, because several customers have defaulted on their contracts, causing problems in the accounting system.
• Scenario 6: Charter Communications has recently found itself at the wrong end of multiple lawsuits for failure to provide necessary services according to their contractual obligations. Senior management does not want to disclose the potential liability of these lawsuits on its financial statements.