Analyzing the Effect of Transactions

Common stock and cash received

Common stocks are some of the capital contributed by the shareholders of the business. In this sense, investors contribute funds to the firm for ownership in return. The firm, on the other hand, provides the investor with a certificate of ownership and interest to the stockholder. Currently, most of the corporations are offering electronic shares or stocks ( Aizenman and Chinn, 2017) . However, common stocks should not be confused with a loan. It is an evidence of ownership interest. In such an exchange between the investors and company, accounting records are involved. The balance sheet of the corporation records its liabilities, assets, and stockholders’ equity. Thus, stockholders' equity is calculated as the difference between the total assets minus liabilities. According to the accounting principles, assets are recorded on the balance sheet at cost. In this case, investors provide cash which increases assets and also increase the stockholders’ equity.

Paid Monthly Rent

The incurrence of expenses in business, the effect is that the profit reported in the income statement is affected. Also, the expenses have some impact on the balance sheet when reporting the closing balances of liabilities, equity, and assets. However, the impact varies depending on the nature of the original transaction of expenses. In most cases, expenses are recorded in the account payable, accrued expenses and cash payment. If account payable increases, the retained earning account reduces with the same amount of expense. Thus, liability in the balance sheet increases as the equity portion decrease. The cash expense is recorded when paid. It reduces cash account (assets) and also the retained earnings. Therefore, the asset and equity decline offsets each other on the balance sheet. In other words, expenses in the business reduce the credit balances in the retained earnings account. The payment of rent expenses will decrease assets (cash) and decrease stockholders’ equity (expenses).

Cash balance from customer

Cash from customers is part of account receivables and categorized as current assets. It represents the value of corporation from the transaction which has been received or yet to be paid by the customer. Similarly, the account receivable in the firm represents the primary method of generating cash inflow. It is anticipated that the current assets will be converted into cash within less than twelve months. Therefore, in understanding the impact of cash received on the balance sheet, it is essential to understand the initial transaction. If the original transaction were a cash sale, the cash account in the general ledger would have been credited. Thus, there would be no effect on the account receivable balance. The payment from the customer after a service would be recorded on the cash account on the asset side of the balance sheet. It will be an increase in cash (assets) and increase in revenue (shareholders’ equity).

Billed customers

According to the accounting principle, if payment for services is paid at a later date, the revenue is recorded as per the date the service was delivered. In this sense, even if the cash is not yet received, revenue increases as services are being completed ( Barajas et al. 2016) . Billing the customer means that the expense is accruing and not yet paid. In other words, it is unpaid debt. The invoice to the customer is recorded as debt in the receivable account. When the customer pays at a later date, it reduces the account receivable with the credit amount. In this sense, the debt balance in the account receivable is the amount billed to customer’s invoice. The amount of the invoice is recorded but not yet paid. In this case, the liabilities increases as the assets increase.

Dividend paid to stockholders

Dividends payment may take different forms. However, dividends payment should not be treated as expenses in the corporation. Rather, it is the distribution of the business’ retained earnings. It is commonly paid in cash or added shares of stock or both. It is important to note that, after stock dividend’s payment of a company, its retained earnings reduce as common stock increases. However, asset changes in the balance sheet are not affected by dividend payment but reallocate part of the retained earnings to the common stock thereby affecting the equity side. It’s important to note that after dividend payment, company's credit is recorded to its cash account and debited to the dividend payable account. Also, a company’s balance sheet remains constant when the stock dividend is distributed to its stakeholders. Therefore, both assets and stockholders' equity will decrease.

Incurred advertising expense

An expense occurrence in business leads to a reduction in the amount of profit reported in the income statement. However, advertising expenses lead to decrease in the business equity, thus decreasing the stock holder’s equity. In this case, there is a specific account in the income account called advertising expenses, which is meant to grip any outflow of cash for advertising costs. Since it is cash leaving the business, there will be a deduction of the cost from the assets side of the equation. A liability is neither created nor paid, but it will also deduct the same amount from stockholder’s equity to show the total business value loss. On the other hand, this leads to rising in the accounts payable of the company. As a result, current or total liabilities increase. As the liabilities increases, the stockholder’s equity decreases with the same amount. In this sense, there is an increase in liabilities.

Received cash from customers.

Cash is the main liquid asset in a company since it can be freely used to fund the operating events of the company. It can be used to reach a variety of goals. It may be used to acquire more assets for the company. In this case, it has a neutral effect on the balance sheet. Also, received cash can be used to shield company’s liabilities ( Farhi and Tirole, 2016) . A liability is a responsibility on the assets of the company, meaning that the company must pay its debts. In this sense, the number of assets on the company's balance sheet is reduced. However, the number of liabilities that appear on the company's balance sheet reduce too. This means that stakeholders' equity remains the same although the company decreases the amount in its cash account. In this case, received cash from customers leads to increase in assets.

Purchased additional equipment for cash

When a company uses cash to purchase additional equipment, the equipment assets increase as well as the equipment’s total amount. According to the accounting principle, assets are equal to liabilities plus owner's equity. Owner's equity is the total involvement of business, plus the remaining assets of the company minus liabilities Therefore the owner’s equity will be reduced as a result ( Hashimoto and Kinoshita, 2016) . Liabilities are claims that creditors and other parties have on company’s assets. Similarly, due to additional equipment, the fixed assets account or the equipment account increases, as the liabilities remains constant. This is because liabilities are not company’s assets, but they are company's obligations that come up during its business operations. However, the total assets of the company remain the same since there is a decrease in cash, which is a current asset, is offset by the increase in fixed assets. In this case, as the assets (cash) increases, the assets (equipment) increases.

Purchased equipment on account.

According to the accounting equation, assets are equal to liabilities plus owner's equity. Assets are resources of the company which holds the economic value of accounts receivable and cash. There are current assets and fixed assets. Current assets are the ones used in the bookkeeping period whereas fixed assets are tangible properties that a company expects to use for more than the accounting period ( Melander et al. 2016) . In our case, equipment is a fixed asset. Liabilities are claims that other parties and creditors have on company’s assets. In this case, purchasing equipment on the account will lead to an increase in both the assets and the liabilities. This is because the additional equipment increases the assets account whereas the liabilities increase too due to a debt the company now is obliged to. In this sense, an increase in the asset leads to increase the liabilities.

Solution Summary

References

Aizenman, J., Chinn, M. D., & Ito, H. (2017). Balance sheet effects on monetary and financial spillovers: The East Asian crisis plus 20.  Journal of International Money and Finance ,  74 , 258-282. 

Barajas, A., Restrepo Ochoa, S. I., Steiner, R., Medellín, J. C., & Pabón, C. (2016). Balance Sheet Effects in Colombian Non-Financial Firms. 

Farhi, E., & Tirole, J. (2016).  Deadly embrace: Sovereign and financial balance sheets doom loops  (No. w21843). National Bureau of Economic Research. 

Hashimoto, Y., & Kinoshita, N. (2016). The Financial Wealth of Corporations: A First Look at Sectoral Balance Sheet Data. 

Melander, O., Sandström, M., & von Schedvin, E. (2016). The effect of cash flow on investment: an empirical test of the balance sheet theory.  Empirical Economics , 1-22.