accounting_principles_12th_ed_by_weygandt

14 1 Accounting in Action
DO IT! 3 Owner’s Equity Effects
Action Plan
✔ Understand the
sources of revenue.
✔ Understand what
causes expenses.
✔ Review the rules for
changes in owner’s
equity.
✔ Recognize that drawings
are withdrawals
of cash or other assets
from the business for
personal use.
Classify the following items as investment by owner (I), owner’s drawings (D), revenues
(R), or expenses (E). Then indicate whether each item increases or decreases owner’s
equity.
1. Rent Expense. 3. Drawings.
2. Service Revenue. 4. Salaries and Wages Expense.
Solution
1. Rent Expense is an expense (E); it decreases owner’s equity. 2. Service Revenue
is revenue (R); it increases owner’s equity. 3. Drawings is owner’s drawings (D); it
decreases owner’s equity. 4. Salaries and Wages Expense is an expense (E); it
decreases owner’s equity.
Related exercise material: BE1-1, BE1-2, BE1-3, BE1-4, BE1-5, BE1-8, E1-5, and DO IT! 1-3.
LEARNING
OBJECTIVE
4
Analyze the effects of business transactions on the accounting
equation.
Illustration 1-7
Transaction identification
process
Transactions (business transactions) are a business’s economic events recorded by
accountants. Transactions may be external or internal. External transactions involve
economic events between the company and some outside enterprise. For example,
Campus Pizza’s purchase of cooking equipment from a supplier, payment of monthly
rent to the landlord, and sale of pizzas to customers are external transactions. Internal
transactions are economic events that occur entirely within one company. The
use of cooking and cleaning supplies are internal transactions for Campus Pizza.
Companies carry on many activities that do not represent business transactions.
Examples are hiring employees, responding to e-mails, talking with customers,
and placing merchandise orders. Some of these activities may lead to business
transactions. Employees will earn wages, and suppliers will deliver ordered merchandise.
The company must analyze each event to find out if it affects the components
of the accounting equation. If it does, the company will record the
transaction. Illustration 1-7 demonstrates the transaction identification process.
CHIP CITY
Events
RENT
DELL
Purchase computer
Discuss product design with
potential customer
Pay rent
Criterion
Is the financial position (assets, liabilities, or owner’s equity) of the company changed?
Yes
No
Yes
Record/
Don’t Record