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Using the accounting equation to analyze transactionsElaine’s Inflatables earns service revenue by providing party planning services and inflatable playscapes. Elaine’s Inflatables is organized as a corporation. During the past month, Elaine’s Inflatables had the following transactions:Received contributions of $10,000 in exchange for common stock.Purchased equipment for $5,000 on account.Paid $400 for office supplies.Earned and received $2,500 cash for service revenue.Paid $400 for wages to employees.Cash dividends of $1,000 were paid to stockholders.Earned $1,000 for services provided. The customer has not yet paid.Paid $1,000 for rent.Received a bill for $250 for the monthly utilities. The bill has not yet been paid.Indicate the effects of the business transactions on the accounting equation for Elaine’s Inflatable. Transaction (a) is answered as a guide.Increase asset,(Cash); Increase Equity (Common Stock)

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Answer:

Elaine's Inflatables

The effects of the business transactions on the accounting equation for Elaine’s Inflatable.

a. Increase asset,(Cash); Increase Equity (Common Stock) by $10,000

b. Increase asset, (Equipment); Increase Liabilities (Accounts Payable) $5,000

c. Increase asset, (Supplies); Decrease asset, (Cash) $400

d. Increase asset, (Cash); Increase Equity (Retained Earnings) $2,500

e. Decrease asset, (Cash); Decrease Equity (Retained Earnings) $400

f. Decrease asset, (Cash); Decrease Equity (Retained Earnings) $1,000

g. Increase asset, (Accounts Receivable); Increase Equity (Retained Earnings) $1,000

h. Decrease asset, (Cash); Decrease Equity (Retained Earnings) $1,000

i. Increase Liabilities (Utilities Payable); Decrease Equity (Retained Earnings) $250

Explanation:

To explain the accounting equation in action, Elaine's Inflatable business transactions will always show the effects on the accounting equation.  This equation states that Assets are always equal to Liabilities Plus Equity with every given transaction.  This equation implies that two or more accounts are impacted by each transaction and the effect is always to keep the accounting equation in balance.  For example, the payment of rent of $1,000 decreases the asset (Cash) and decreases the equity (Retained Earnings) side of the accounting equation by the same amount.