accounting

Question

repare the journal entries for all transactions.
Calculate the annual depreciation expense using the straight-line method.
Prepare a partial Income Statement for January 2025.
Explain the effect of each transaction on the accounting equation.

Answer

1. journal entries for the transactions

owner invests cash into the business debit: cash credit: owner’s capital (cash increases, owner’s equity increases)

purchase of equipment for cash debit: equipment credit: cash (asset increases while another asset decreases)

revenue earned during the period (cash or credit) debit: cash / accounts receivable credit: service revenue (company earns income, increasing equity and assets) 2. straight-line depreciation calculation depreciation spreads the cost of an asset over its useful life evenly.

\frac{ ext{cost} - ext{residual value}}{ ext{useful life}}

using the example: cost = $12,000 residual value = $2,000 useful life = 5 years annual depreciation = $2,000 3. partial income statement (january 2025) revenue: sales / service revenue = $15,000 expenses: salaries expense rent expense depreciation expense (total expenses = $4,667) net profit calculation: $15,000 − $4,667 = $10,333 4. effect on accounting equation

assets = liabilities + owner’s equity

when owner invests money → assets and equity increase when equipment is purchased on credit → assets and liabilities increase when revenue is earned → assets and equity increase when expenses are incurred → assets and equity decrease final note all business transactions affect at least two parts of the accounting equation, but the system always stays balanced. this ensures accurate financial reporting and clear measurement of performance over time.

Answer

preparing journal entries involves recording every financial transaction according to the debit and credit rules of accounting while ensuring that the accounting system remains balanced at all times. under the double-entry accounting system, each transaction affects at least two accounts. for example, when the owner invests $20,000 cash into the business, the journal entry records cash as a debit because assets increase, while owner’s capital is credited because owner’s equity increases. when equipment is purchased for $12,000 cash, equipment is debited because assets increase, while cash is credited because another asset decreases. when the company earns $15,000 of service revenue in cash, cash is debited because money is received, while service revenue is credited because revenue increases owner’s equity through net income. when salaries expense of $3,500 is paid, salaries expense is debited because expenses increase with debits, while cash is credited because assets decrease. likewise, when rent expense of $1,167 is paid, rent expense is debited and cash is credited. these journal entries create a complete and systematic record of all financial activities and ensure that transactions are accurately transferred into the accounting system for later financial reporting. in addition to transaction recording, businesses must allocate the cost of long-term assets fairly over their useful lives using depreciation. under the straight-line depreciation method, the annual depreciation expense is calculated using the formula:

expense}=\frac{ ext{cost}- ext{residual value}}{ ext{useful life}}

if equipment costs $12,000, has a residual value of $2,000, and a useful life of 5 years, the calculation becomes:

12,000−2,0005\frac{12{,}000-2{,}000}{5}

first, the residual value is subtracted from the asset cost:

12{,}000-2{,}000=10{,}000

then the remaining depreciable cost is divided by the useful life:

10,0005=2,000\frac{10{,}000}{5}=2{,}000

resulting in an annual depreciation expense of $2,000 per year. the monthly depreciation expense for january is approximately:

2,00012≈166.67\frac{2{,}000}{12}\approx166.67

or about $167. to evaluate business performance, a partial income statement for january 2025 reports revenues earned and expenses incurred during the month. service revenue totals $15,000, while expenses include salaries expense of $3,500, rent expense of $1,167, and depreciation expense of approximately $167, producing total expenses of $4,834. net income is determined using the formula:

net income = revenue - expenses

substituting the values gives:

15{,}000-4{,}834=10{,}166

meaning the company reports a net income of approximately $10,166 for january 2025. every transaction also affects the accounting equation, which must always remain balanced:

assets = liabilities + owner’s equity

when the owner invests cash, assets increase because cash increases and owner’s equity increases because capital rises. when equipment is purchased with cash, one asset increases while another asset decreases, causing no overall change in total assets. revenue transactions increase assets and increase owner’s equity because revenues raise net income. expense transactions such as salaries, rent, and depreciation decrease assets or asset value and reduce owner’s equity because expenses lower profits. throughout the entire accounting process, the accounting equation remains balanced because every transaction affects at least two accounts equally, ensuring financial accuracy, consistency, and reliable financial reporting.

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