The transactions in this practice activity do not relate to a single business entity. Show how each transaction affects the financial position elements (assets, capital, and liabilities). Also, prepare a financial position statement to illustrate each financial transaction's effect on assets, capital, and liability.
The transactions are:
An individual (sole proprietor) commences business with ₦350,000 paid into the bank.
Two partners (Allen and Warren) commence business with a capital contribution of ₦378,900 and ₦389,000, respectively. They contribute the capital by cash.
Inventory was purchased by cash from Lift Ltd. The inventory was worth ₦57,800.
The business purchased goods worth ₦89,900 on credit from Teller Ltd.
Inventory worth ₦48,000 was sold to a customer, Alan, who paid by cheque.
A supplier, Give Enterprises, was paid ₦57,500 in cash for goods previously bought on credit.
An individual (sole proprietor) withdrew ₦78,890 cash out of business for personal use.
Suggested answers to practice activity 5.5
1. An individual (sole proprietor) commences business with ₦350,000 paid into the bank.
Assets + ₦350,000
Capital + ₦350,000
Liabilities (No effect)
Narration: The transaction results in equal addition to assets and capital aspects in the statement of financial position.
Statement of financial position extract
₦
2. Two partners (Allen and Warren) commence business with a capital contribution of ₦378,900 and ₦389,000, respectively. They contribute the capital by cash.
Assets + ₦767,900
Capital + ₦767,900
Liabilities (No effect)
Narration: The transaction results in equal addition to assets and capital aspects, respectively. In the financial position, the capital section will reflect the contributions of Allen and Warren, respectively.
Statement of financial position extract
₦
3. Inventory was purchased by cash from Lift Ltd. The inventory was worth ₦57,800.
Assets (Inventory) + ₦57,800
Assets (Cash) - ₦57,800
Capital (No effect)
Liabilities (No effect)
Narration: In the financial position, the transaction results in addition to assets (that is, inventory) and deduction from assets (that is, cash). Cash is being spent on purchasing inventory (goods) from Lift Ltd. The business has cash of ₦57,800 to buy goods worth ₦57,800.
Statement of financial position extract
₦
4. Goods worth ₦89,900 were purchased on credit from Teller Ltd.
Assets + ₦89,900
Capital (No effect)
Liabilities + ₦89,900
Narration: The transaction results in equal addition to assets and capital aspects in the financial position.
Statement of financial position extract
₦
5. Inventory worth ₦48,000 were sold to a customer, Alan, who paid by cheque.
Assets (Inventory) - ₦48,000
Assets (Bank) + ₦48,000
Capital (No effect)
Liabilities (No effect)
Narration: The transaction results in a deduction from assets (that is, inventory) and an increase in assets (that is, bank) in the financial position. A cheque is received through the bank for goods sold to a customer, Alan.
Statement of financial position extract
₦
6. A supplier, Give Enterprises, was paid ₦57,500 by cash for goods previously bought on credit.
Assets - ₦57,500
Capital (No effect)
Liabilities - ₦57,500
Narration: The transaction results in an equal decrease in assets and liabilities in the financial position.
Statement of financial position extract
₦
7. An individual (sole proprietor) withdrew ₦78,890 cash out of the business for personal use.
Assets - ₦78,890
Capital - ₦78,890
Liabilities (No effect)
Narration: The transaction results in an equal decrease in assets and capital.
Statement of financial position extract
₦
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