Reference no: EM133327374

Analyzing the effect of business transactions on the accounting equation. 

Example I

After planning for several months Mwana Hamisi decided to start her own hairdressing business called The Maridadi Salon. During its first month of operations, The Maridadi Salon completed the following transactions:

1. On September 1, 2018, Mwana Hamisi put sh.200,000 of her savings into a checking account in the name of the business.
2. On September 2, 2018, she bought supplies for sh.30,000 cash.
3. On September 3, 2018, she paid a rent deposit of sh.10,000 and sh.10,000 rent for the month of September for an operating space along the Likoni Street.
4. On September 5, 2018, she furnished the space, installing new furniture and fixtures sold to her on credit by a supplier at sh.60,000. This amount was to be paid in three equal installments at the end of September, October, and November.
5. On September 12, 2018, The Maridadi Salon opened, and in the first week of business ending September 16, cash receipts from hairdressing services provided to clients amounted to sh.32,500 while amounts owing from clients for hairdressing services provided on account amounted to sh.15,000.
6. On September 17, 2018, Mwana Hamisi paid sh.6,000 to an assistant for working during the business grand opening and the first week of business.
7. Receipts from clients during the two-week period ended September 30, 2018 was sh.92,500. Sh.7000 was receipts from clients who owed the Salon for services provided during the first week of business and the balance was for services provided during the two-week period ended September, 30 2018.
8. On September 30, 2018, Mwana Hamisi paid the first installment on the furniture and fixtures, withdrew sh.20, 000 for her personal expenses, paid her assistant sh.6000 as wages for the second half month, received a bill from the electricity firm of sh.1,500 for electricity consumed during the month of September and conducted a stock take of her supplies. Only sh.10,000 of the supplies were in stock as at September 30, 2018 

Required:

1. Arrange the following asset, liability and owner's equity accounts in an accounting equation: Cash, Accounts receivable, Supplies, Furniture and fixtures, Rent deposit, Accounts payable, Accrued expenses and Mwana Hamisi Capital and show by addition and subtraction the effects of each of the preceding transactions on the accounting equation. Provide an explanation column for the changes in equity.
2. Prepare the income statement for The Maridadi Salon for the month of September 2018.
3. Prepare the statement of changes in owner's equity for The Maridadi Salon for the period ended September 2018.
4. Prepare the balance sheet as at September 30, 2018, for The Maridadi Salon.

EXAMPLE 2

Mary and June, two former college mates, decided to open an International Travel Agency in Mombasa. The company was organized as a corporation. Each investor purchased 1,000 shares of sh. 1,000 par value common stock for sh. 1,000 per share. The following transactions took place in the month of January 2019.

1. After making the initial investment, the business purchased office equipment by paying a deposit of sh. 800,000 cash and the balance to be paid on account. The list price of the equipment was sh. 1,900,000, but after some hard negotiations, the supplier agreed to sell the equipment for sh 1,700,000.
2. The company purchased sh. 120,000 in office supplies from Fiesta Office Supply Limited, agreeing to pay for this bill in 45 days. The company expects to consume the office supplies over several months as it performs services for customers.
3. The company performed services to customers and received sh128, 000 in cash.
4. The company paid sh.70, 000 of the amount due on the office supplies purchased on credit in transaction 2.
5. The amount paid to employees for the work performed to date amounted to sh. 95,000.
6. A client was billed sh.72, 000 for services performed.
7. A utility bill for the month of January was received in the amount of sh.18, 000. It is the intention of the company to pay the bill in February 2019.
8. On the last day of the period, International Travel Agency borrowed sh.500, 000 cash, interest free, from Valley City Bank, giving it a note in exchange.
9. Received sh.25, 000 from clients in payment of their accounts receivable.
10. A stock take conducted on office supplies revealed that sh.40,000 worth of office supplies was used in the month of January. 

11.The firm received sh.55,000 in advance from clients for services to be performed in the month of February.

Required:

1. Journalise the above transactions in the general journal
2. Post the journal entries made above to the ledger
3. Cast the accounts opened in b above and extract a trial balance

Use the following accounts: Cash at bank, Fees Receivable, Office Supplies, Office Equipment, Accounts payables, Accruals, Notes payable, Fees earned, Salaries and wages, Office supplies expense, Utilities, Fee received in advance and Common Stock.