The Accounting Equation - Solution to Monday Transactions

THE ACCOUNTING EQUATION

SOLUTION TO MONDAY TRANSACTIONS

Note that the solution below “increases” expenses, as opposed to showing the impact on equity which would necessarily be a decrease. The table on the next page shows the overall impact on the accounting equation as a result of these expense increases as a decrease to equity.

1. First thing in the morning you borrow £500 from a “very good” friend. This “very good” friend wants all of his money back, in regular instalments, by Saturday morning at the latest, and wants £50 per day interest for each day of the week regardless of the amount of loan still outstanding. You agree to pay him £100 of the loan back the morning after each trading day together with the interest charge. i.e. you will pay Monday’s loan interest (£50) and loan capital repayment (£100) on Tuesday morning.

Increase Cash £500 Increase Loan Capital £500

2. Second thing in the morning, you acquire a inventory of 500 bottles of mineral water for £0.50 each. You pay cash for 400 of the bottles and agree to pay for the remaining 100 bottles on Tuesday morning.

Increase Inventory £200 Decrease Cash £200

Increase Inventory £50 Increase Payables (Supplies) £50

3. Third thing in the morning, you buy a mobile, ice-powered, cool cabinet for £150 in which to keep your mineral water cold whilst standing at South Kensington tube station, selling water to thirsty tube passengers. You will use the cabinet all week and expect to be able to re-sell the cabinet for £50 at the end of Friday afternoon.

Increase Property, plant and equipment (PP&E) £150 Decrease Cash £150

4. During Monday you sell 350 bottles of mineral water to thirsty tube passengers for £1.20 each. Of these, 50 are sold to a different friend who promises to pay you for them on Tuesday morning.

Increase Revenues £360 Increase Cash £360

Increase Revenues £60 Increase Receivables £60

Decrease Inventory £175 Increase Cost of goods sold £175 (decreases equity)

5. During Monday you spend £15 on ice for your cool cabinet and spend £10 on sandwiches and coffee during the day. You resist the temptation to drink your inventory of mineral water!

Increase Operating Expenses (Ice) £15 Decrease Cash £15

Increase Operating Expenses (Food) £10 Decrease Cash £10

6. At the end of Monday you pay yourself £75 in wages, which you take from your cash balance.