Amy Austin established an insurance agency on March 1 of the current year and completed the following transactions during March:
a. Opened a business bank account with a deposit of $50,000 from personal funds.
b. Purchased supplies on account, $4,000.
c. Paid creditors on account, $2,300.
d. Received cash from fees earned on insurance commissions, $13,800.
e. Paid rent on office and equipment for the month, $5,000.
f. Paid automobile expenses for the month, $1,150, and miscellaneous expenses, $300.
g. Paid office salaries, $2,500.
h. Determined that the cost of supplies on hand was $2,700; therefore, the cost of supplies used was $1,300.
i. Billed insurance companies for sales commissions earned, $12,500.
j. Withdrew cash for personal use, $3,900.
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 + Amy Austin, Capital – Amy Austin, 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 March.
4. How much did March’s transactions increase or decrease Amy Austin’s capital?
Answer:
1. Assets = +
+ + = + – + – – – – –
(a) + 50,000+ 50,000
(b) + 4,000 + 4,000
Bal. 50,000 4,000 4,000 50,000
(c) – 2,300– 2,300
Bal. 47,700 4,000 1,700 50,000
(d) + 13,800+ 13,800
Bal. 61,500 4,000 1,700 50,000 13,800
(e) – 5,000– 5,000
Bal. 56,500 4,000 1,700 50,000 13,800 – 5,000
(f) – 1,450– 1,150 – 300
Bal. 55,050 4,000 1,700 50,000 13,800 – 5,000– 1,150 – 300
(g) – 2,500– 2,500
Bal. 52,550 4,000 1,700 50,000 13,800 – 5,000 – 2,500 – 1,150 – 300
(h) – 1,300– 1,300
Bal. 52,550 2,700 1,700 50,000 13,800 – 5,000 – 2,500 – 1,300 – 1,150 – 300
(i) + 12,500+ 12,500
Bal. 52,550 12,500 2,700 1,700 50,000 26,300 – 5,000 – 2,500 – 1,300 – 1,150 – 300
(j) – 3,900– 3,900
Bal. 48,650 12,500 2,700 1,700 50,000 – 3,900 26,300 – 5,000 – 2,500 – 1,300 – 1,150 – 300
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. $16,050 ($26,300 – $5,000 – $2,500 – $1,300 – $1,150 – $300)
4. March’s transactions increased Amy Austin’s capital to $62,150 ($50,000 + $16,050 – $3,900), which is the initial investment of $50,000 plus the
excess of March’s net income of $16,050 over Amy Austin’s withdrawals of $3,900.