On June 1 of the current year, Chad Wilson established a business to manage rental property. He completed the following transactions during June:
a. Opened a business bank account with a deposit of $30,000 from personal funds.
b. Purchased office supplies on account, $1,800.
c. Received cash from fees earned for managing rental property, $10,000.
d. Paid rent on office and equipment for the month, $4,500.
e. Paid creditors on account, $1,250.
f. Billed customers for fees earned for managing rental property, $16,800.
g. Paid automobile expenses (including rental charges) for the month, $750, and miscellaneous expenses, $980.
h. Paid office salaries, $4,000.
i. Determined that the cost of supplies on hand was $680; therefore, the cost of supplies used was $1,120.
j. Withdrew cash for personal use, $7,500.
Instructions
1. Indicate the effect of each transaction and the balances after each transaction, using the following tabular headings:
Assets 5Liabilities1 Owner’s Equity Cash + Receivable + Supplies= Accounts Payable + Chad Wilson, Capital – Chad Wilson, Drawing + Fees Earned – Rent Expense – Salaries Expense – Supplies Expense – Auto Expense – Misc. Expense
2. Briefly explain why the owner’s investment and revenues increased owner’s equity, while withdrawals and expenses decreased owner’s equity.
3. Determine the net income for June.
4. How much did June’s transactions increase or decrease Chad Wilson’s capital?
Answer:
1. Assets = +
+ + = + – + – – – – –
(a) + 30,000+ 30,000
(b) + 1,800 + 1,800
Bal. 30,000 1,800 1,800 30,000
(c) + 10,000+ 10,000
Bal. 40,000 1,800 1,800 30,000 10,000
(d) – 4,500– 4,500
Bal. 35,500 1,800 1,800 30,000 10,000 – 4,500
(e) – 1,250– 1,250
Bal. 34,250 1,800 550 30,000 10,000 – 4,500
(f) + 16,800+ 16,800
Bal. 34,250 16,800 1,800 550 30,000 26,800 – 4,500
(g) – 1,730– 750 – 980
Bal. 32,520 16,800 1,800 550 30,000 26,800 – 4,500– 750 – 980
(h) – 4,000– 4,000
Bal. 28,520 16,800 1,800 550 30,000 26,800 – 4,500 – 4,000 – 750 – 980
(i) – 1,120– 1,120
Bal. 28,520 16,800 680 550 30,000 26,800 – 4,500 – 4,000 – 1,120 – 750 – 980
(j) – 7,500– 7,500
Bal. 21,020 16,800 680 550 30,000 – 7,500 26,800 – 4,500 – 4,000 – 1,120 – 750 – 980
2. Owner’s equity is the right of owners to the assets of the business. These rights are increased by owner’s investments and revenues
and decreased by owner’s withdrawals and expenses.
3. $15,450 ($26,800 – $4,500 – $4,000 – $1,120 – $750 – $980)
4. June’s transactions increased Chad Wilson’s capital to $37,950 ($30,000 + $15,450 – $7,500), which is the initial capital investment of $30,000 plus
June's net income of $15,450 less Chad Wilson’s withdrawals of $7,500.