Top of the World, Inc. provides rock climbing sessions to customers. The following is a list of transactions that occurred in 2017. For each transaction, describe the dual effect of the transaction on the accounting equation. For example, in transaction a): 1) assets increase $4,000 and 2) SHE increases $4,000. a. 1/20/17: Issued 400 shares of common stock for $10 per share. Assets increase $4,000;SHE increases $4,000.
b. 1/30/17: Signed a note payable for $14,900 in cash.9
c. 2/11/17: Purchased a building for $2,040 in cash.
d. 2/19/17: Purchased supplies on account from creditors for $1,030.
e. 3/10/17: Paid creditors $600 in cash. f. 4/30/17: Paid $9,100 in cash for employee wages for the current period.

a. Assets increase $4,000; SHE increases $4,000.

b. Assets increase $14,900; Liabilities increase $14,900.

c. Assets increase $2,040; Assets decrease $2,040.

d. Assets increase $1,030; Liabilities increase $1,030.

e.  Assets decrease $600; Liabilities decrease $600.

f. Assets decrease $9,100; Liabilities decrease $9,100.

Explanation:

Accounting equation is given as follows:

Assets = Liabilities + Shareholders' equity (SHE)

Therefore, we have the following:

a. 1/20/17: Issued 400 shares of common stock for $10 per share.

Assets increase $4,000; Shareholders' equity (SHE) increases $4,000.

When common stock is issued, cash is received by the company. Since cash is type of assets, current asset to be specific, the first effect on the accounting equation is therefore an increase in assets.

Common stock can be described as a security that represents ownership in a company. Since common stock is one of the component of SHE, any issue of common stock will therefore lead to an increase in SHE in the accounting equation.

b. 1/30/17: Signed a note payable for $14,900 in cash.

Assets increase $14,900; Liabilities increase $14,900.

Note payable is a type of liability which is a written promise by a borrower to repay a lender the amount of cash received/borrowed in return. Since the cash received is a type of asset, the first effect on the accounting equation is an increase. Since note signed is a type of liability, the second effect on the accounting is an increase in liabilities.

c. 2/11/17: Purchased a building for $2,040 in cash.

Assets increase $2,040; Assets decrease $2,040.

The building purchased is a type of asset, a fixed asset to be specific; while cash that is used to pay for it is also an asset, current asset to be specific. The dual effect of this transaction are therefore an increase in asset (fixed asset) by $2,040 and a decrease in assets (Current Asset, i.e cash) by $2,040.

d. 2/19/17: Purchased supplies on account from creditors for $1,030.

d. Assets increase $1,030; Liabilities increase $1,030.

Supplies is a type of asset, current asset to specific; while purchase on account creates a liablity to pay creditors, a current liability to be specific. Therefoe, the dual effect of this transaction on the accounting equation are Assets increase by $1,030 and Liabilities increase by $1,030.

e. 3/10/17: Paid creditors $600 in cash.

Assets decrease $600; Liabilities decrease $600.

A payment to creditors reduces cash which is an asset and also reduces creditors which are part of the liabilities. Therefoe, the dual effect of this transaction on the accounting equation are Assets decrease by $600 and Liabilities decrease by $600.

f. 4/30/17: Paid $9,100 in cash for employee wages for the current period.

Assets decrease $9,100; Liabilities decrease $9,100.

A payment of employess reduces cash which is an asset and also reduces wages payable which is a part of the liabilities. Therefoe, the dual effect of this transaction on the accounting equation are Assets decrease by $9,100 and Liabilities decrease by $9,100.

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