Transaction Analysis – Accounting Journal Entries For Accounting Transactions Examples – Part 4

So this is the last part of step 5, in here we continue over the impact of transactions on the accounting equation and the last transaction for company zeta is the following.  Office space rent income was received for February and it is $2,300 and part of that was paid by cash.  It is $1,300 and remaining part will be paid in the next month in March so let’s see how this transaction impacts accounting equation.

First of all we get cash in bank that is 1,300 since customers paid for rent partly in cash transferring 8 to the bank account and we have accounts receivable increase in accounts receivable and this shows that customers will pay the remaining amount during the next month so they owe Zeta part of the rent price for February so it is $1,000 and this is a difference between total rent income and rent income part which was paid by cash.

What happens on the other side of the accounting equation?  We have income which is a positive impact on equity 2,300 total income and there were no expenses incurred and there was no impact on liabilities so what we do next we calculate total change in assets and total change in equity plus liabilities and there is a balance which shows that transaction was recorded properly.

All the time we need to do this step in order to check whether the transaction was recorded correctly here we do not have a lot of information but solving more sophisticated exercises and problems you can have a lot of information and a lot of items impacted therefore we need to calculate total change in assets and total change in equity and liabilities in order to check whether all that information was correctly recorded.

And the last step is to check how all the 7 transactions were recorded and whether they were recorded correctly.  So what we do we calculate total value of each asset type and it is cash which remained unchanged after 7 transaction bank account it increased balance of the cash in bank increased since customer paid for the rent of office space by cash prepaid insurance on stationary these balances remained unchanged AR, this is accounts receivable.

Here we have higher amount since customers will be paying partly for rent next month in March here we have a debt from customers for the office space rent and cost of office space has not changed also after the 7th transaction.  On the right side equity, owner’s equity remains unchanged since there was no increase in share capital or the shareholders were not adding additional funds to the business and profit for the period to conceive that it was increased by rent income amount.

So total profit earned through all the 7 transaction is $3,400 and as I mentioned before it is recorded separately in order to show how much profit Zeta was able to earn.  It does not add it to the owners equity since there is an aim to show this amount separately and accounts payable, accounts payable remains unchanged after the transaction number 7 since we were not getting any additional liabilities or paying liabilities and the last step is to calculate total value in assets $28,500 and total value of equity plus liabilities again $20,500 and you can see that there is a balance.

So we have recorded all the 7 transactions properly and this step is done after each transaction is recorded in order to check whether everything was reflected correctly and whether there is an equation which must be.

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