Stephanie Martinez Opened A Latin Fusion Restaurant Downtown
Stephanie Martinez Opened A Latin Fusion Restaurant Downtown In A Larg
Stephanie Martinez opened a Latin Fusion restaurant downtown in a large southern city. She has asked you, her accountant, to complete The Accounting Formulas for some of her first month’s transactions. Complete the following Accounting Formulas. a. The restaurant started with a $1,200,000 check from its owner, Stephanie. b. The restaurant generated revenues of $5,000 on accounts receivable. c. Stephanie purchased a $400,000 building with $40,000 cash and a $360,000 mortgage. d. Stephanie paid $550 cash for the utilities bill.
Paper For Above instruction
The foundational accounting equation, which ensures that the books always balance, is Assets = Liabilities + Owner’s Equity. Each of the transactions provided affects this equation, and understanding these effects is crucial for accurate financial accounting.
Transaction a: The restaurant started with a $1,200,000 check from Stephanie. This initial investment directly increases the owner’s equity. It also increases assets because cash (an asset) rises by $1,200,000.
Impact:
- Assets (Cash) increase by $1,200,000
- Owner’s Equity increases by $1,200,000
Transaction b: The restaurant generated revenues of $5,000 on accounts receivable. This increases assets because accounts receivable (an asset) increases by $5,000. Simultaneously, revenue accounts increase, which increases owner’s equity through retained earnings.
Impact:
- Assets (Accounts Receivable) increase by $5,000
- Owner’s Equity (Revenues) increases by $5,000
Transaction c: Stephanie purchased a $400,000 building with $40,000 cash and a $360,000 mortgage.
Effect on assets:
- Cash decreases by $40,000
- Building (a new asset) increases by $400,000
The total assets effectively increase by the net effect of these two: ($400,000 - $40,000) = $360,000.
Effect on liabilities:
- Mortgage (a liability) increases by $360,000
Effect on owner’s equity: No immediate change, as this is a financing activity.
Impact:
- Assets increase by $360,000 (building minus cash)
- Liabilities increase by $360,000 (mortgage)
Transaction d: Stephanie paid $550 cash for the utilities bill.
Effect:
- Cash decreases by $550
- Utilities expense increases, which reduces owner’s equity via retained earnings
Impact:
- Assets decrease by $550
- Owner’s Equity decreases by $550
Summary of effects on the accounting equation:
Starting with initial investments, revenue generation, asset acquisition through financing, and expense payment, the overall equation balances each time details of transactions are accounted for, illustrating how assets, liabilities, and owner’s equity change in tandem. For example, the initial investment and revenues increase assets and owner’s equity, while expenses and asset acquisitions affect the cash account and liabilities reflect borrowed funds.
This exercise demonstrates the importance of each transaction in maintaining the balance sheet’s integrity and provides insight into how daily operations impact financial statements in a real-world restaurant business.
References
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