The Following Cash Transactions Took Place During March
The Following Cash Transactions Took Place During March The First Mon
The following cash transactions took place during March, the first month of business for Cats and Dogs Company: D.C. Dawg started a business, Cats and Dogs Company, by contributing $6,000. The Cats and Dogs Company borrowed $2,000 from the bank on March 1. The note is a 1-year, 12% note, with both principal and interest to be repaid on February 28 of next year. The company earned $900 in revenue. Expenses amounted to $650. Distributions to owners amounted to $25. You are to complete the following tasks: Show how each cash transaction affects the accounting equation. ex: A = L + OE Give one additional piece of information related to the transaction that could be recorded in an information system for a purpose other than the financial statements. Prepare the four basic financial statements for the month of March.
Paper For Above instruction
The financial transactions of a new business, Cats and Dogs Company, in its initial month provide a foundational understanding of how cash activities influence the accounting equation and the construction of formal financial statements. Analyzing each transaction illuminates the core accounting principles and underscores the importance of accurate record-keeping for managerial and external purposes.
Impact of Cash Transactions on the Accounting Equation
The fundamental accounting equation—Assets = Liabilities + Owner's Equity (OE)—serves as the framework for recording the financial position of the business after each transaction.
1. Owner's Capital Contribution: $6,000
When D.C. Dawg contributes cash into the business, assets increase through cash, and owner's equity increases correspondingly, representing the owner's investment.
- Assets (Cash) increase by $6,000
- Owner’s Equity increases by $6,000
- Equation: Assets ($6,000) = Liabilities ($0) + Owner's Equity ($6,000)
Additional Information: Recording the owner’s contribution as 'Owner’s Capital' in the equity section facilitates tracking owner's investment increases over time.
2. Borrowed Funds from the Bank: $2,000
Borrowing cash increases assets (cash), and liabilities (notes payable) increase because the business now owes this amount.
- Assets (Cash) increase by $2,000
- Liabilities (Notes Payable) increase by $2,000
- Equation: Assets ($2,000) = Liabilities ($2,000) + Owner’s Equity ($0)
Additional Information: This borrowing should be linked to a note payable record, which can track repayment schedules and interest calculations.
3. Revenue Earned: $900
Revenue, earned through business operations, increases assets (cash) and increases owner's equity through retained earnings.
- Assets (Cash) increase by $900
- Owner’s Equity (Revenue) increases by $900
- Equation: Assets ($900) = Liabilities ($0) + Owner’s Equity ($900)
Additional Information: Recognizing revenue in the system allows for performance analysis and tax reporting.
4. Expenses: $650
Expenses reduce owner's equity as they represent costs incurred; assuming paid in cash.
- Assets (Cash) decrease by $650
- Owner’s Equity (Expenses) decrease by $650
- Equation: Assets (-$650) = Liabilities ($0) + Owner’s Equity (-$650)
Additional Information: Expense recording helps in determining net income and tax liability.
5. Distributions to Owners: $25
Distributions are withdrawals by the owner, reducing cash assets and owner’s equity.
- Assets (Cash) decrease by $25
- Owner’s Equity (Drawings/Distributions) decrease by $25
- Equation: Assets (-$25) = Liabilities ($0) + Owner’s Equity (-$25)
Additional Information: Distributions impact owner’s equity directly, important for owner’s capital tracking.
Preparation of Financial Statements for March
Income Statement
The income statement summarizes revenues and expenses to determine net income:
- Revenue: $900
- Expenses: $650
- Net Income: $900 - $650 = $250
Statement of Owner’s Equity
Starting owner’s equity: $6,000
Add: Net income for March: $250
Less: Distributions: $25
Ending owner’s equity: $6,000 + $250 - $25 = $6,225
Balance Sheet (Assets, Liabilities, Owner’s Equity)
- Assets:
- Cash:
- Beginning: $6,000
- Plus: Borrowed $2,000
- Plus: Revenue $900
- Less: Expenses $650
- Less: Distributions $25
- Total Cash: $6,000 + $2,000 + $900 - $650 - $25 = $8,225
- Liabilities:
- Notes Payable: $2,000
- Owner’s Equity:
- Owner’s Capital: $6,000
- Add: Net Income $250
- Less: Distributions $25
- Total Owner’s Equity: $6,225
Total Assets ($8,225) = Liabilities ($2,000) + Owner’s Equity ($6,225)
Conclusion
This analysis demonstrates how each cash transaction influences the fundamental accounting equation, emphasizing the interconnected nature of assets, liabilities, and owner’s equity. Accurate recording of these transactions provides the basis for reliable financial statements, which are essential for stakeholders to assess the company’s financial health, compliance, and strategic planning.
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