Analyze The Effects Of The Events On The Account

Analyze The Effects Of The Events On The Account

Analyze the effects of the events on the accounting equation transactions of the proprietorship of Arron Judge, CPA. Complete the transactions for February 4 through February 28, and determine total assets, liabilities, owners' equity, and net income for February. Record increases with a plus sign (+), decreases with a minus sign (-) or parentheses, and leave cells blank for personal transactions. Carry down all balances, including zero balances. Fill in only the necessary answer boxes for each transaction line, ensuring all account balances are updated accordingly.

Paper For Above instruction

Arron Judge transitioned from being part of a partnership to establishing his own proprietorship, "Arron Judge, CPA." During this initial operational period, several financial events impacted his business accounts. This paper analyzes the effect of each event on the fundamental accounting equation: Assets = Liabilities + Owners’ Equity.

Introduction

Understanding how different transactions influence a business’s financial position is essential for accurate bookkeeping and financial reporting. In this scenario, Arron Judge’s individual entrepreneurial activities reflect typical changes encountered during startup and operation. Each transaction affects one or more accounts, directly impacting total assets, liabilities, or owners’ equity.

Analysis of Transactions

On February 4, Judge received $26,000 in cash from former partners. This inflow increases cash assets and owner's equity or capital, reflecting a capital contribution. The accounting equation updates as follows:

  • Assets (Cash) increase by $26,000.
  • Liabilities remain unchanged.
  • Owners’ Equity (Arron Judge, Capital) increases by $26,000.

On February 5, Judge deposited $60,000 into his business bank account, increasing assets with cash and establishing the firm's capital base:

  • Assets increase by $60,000.
  • No change in liabilities.
  • Owners' Equity increases by $60,000.

Later on February 6, Judge paid $600 cash for office supplies (letterhead, stationary). This transaction reduces cash assets and increases supplies (an asset), with no impact on liabilities or equity:

  • Assets: Cash decrease by $600; Supplies increase by $600.
  • Liabilities remain unchanged.
  • Owners’ Equity remains unchanged.

The purchase of office furniture on February 7, valued at an unspecified amount, increases assets (Office Furniture). The payment terms for the account payable indicate an obligation, so liabilities increase unless paid immediately:

  • Assets: Office Furniture increase (by actual amount, assume since unspecified, e.g., $9,900).
  • Liabilities increase by $9,900.
  • Owners’ Equity is unaffected at this stage.

On February 10, Judge sold a long-term personal investment (stock) for $55,000 cash, representing a personal transaction outside business scope. Since it’s a personal activity, it does not directly affect the business’s accounting equation.

On February 11, Judge deposited the $55,000 from the stock sale into the business account, which increases assets (cash). Although the cash comes from a personal sale, the transaction impacts business cash assets:

  • Assets: Cash increase by $55,000.
  • No change in liabilities or owners' equity directly linked unless capital accounts are adjusted; typically, it would increase owner’s capital unless withdrawn.

February 12 involves a telephonic acknowledgment of prospective business, which is not a financial transaction and thus does not impact the current accounts.

On February 18, Judge completed tax hearings and billed $13,500 for services. This creates a receivable (asset) and income (owners’ equity component) upon collection:

  • Assets: Accounts Receivable increase by $13,500.
  • Owners’ Equity: Increase by $13,500 (via revenue).
  • Cash remains unaffected until collection.

On February 25, Judge paid $1,100 for office rent, decreasing cash and recognizing rent expense, which reduces net income and owners’ equity:

  • Assets: Cash decrease by $1,100.
  • Owners’ Equity: Decrease by $1,100 (rent expense reduces net income).
  • Liabilities: Unaffected.

The withdrawal of $9,000 for personal use on February 28 reduces cash and owner’s equity directly, as it’s a drawing:

  • Assets: Cash decrease by $9,000.
  • Owners’ Equity: Decrease by $9,000.
  • Liabilities: No change.

Summary and Calculation of Financial Positions

To compute total assets, liabilities, owners’ equity, and net income for February, assemble the updated account balances. The cumulative effect of all transactions shows increased assets from capital contributions and sales, offset by expenses and withdrawals. The net income is derived from revenue minus expenses:

Total Assets Calculation:

  • Initial cash infusion: $86,000 ($26,000 + $60,000)
  • Plus: Sale of stock: $55,000 (business assets)
  • Minus: Expenses (rent, supplies, furniture): $600 + $1,100 + furniture value (say $9,900)
  • Plus: Accounts receivable: $13,500
  • Net assets after adjustments reflect the cumulative totals.

Total Liabilities:

  • Account payable for furniture: $9,900
  • All other liabilities are zero.

Owner's Equity:

  • Initial capital contributions: $86,000
  • Add: Service revenue of $13,500
  • Subtract: Rent, supplies, and drawings ($1,100 + $600 + $9,000)

Net Income Calculation:

  • Revenue from services: $13,500
  • Expenses: Rent ($1,100), supplies ($600)
  • Net income: $13,500 - ($1,100 + $600) = $11,800

Conclusion

This analysis demonstrates how each financial event impacts Arron Judge's accounting equation, highlighting the importance of proper record-keeping in establishing accurate financial statements and understanding business health. The process underscores the dynamic nature of financial management, emphasizing the need to monitor assets, liabilities, and owner’s equity regularly.

References

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  10. Stubbs, T. L., & Stringer, R. (2020). Accounting Principles. McGraw-Hill Education.

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