Olive Enterprises experienced the following events during Year 1

1. Acquired cash from the issue of common stock.

2. Paid cash to reduce the principal on a bank note.

3. Sold land for cash at an amount equal to its cost.

4. Provided services to clients for cash.

5. Paid utilities expenses with cash.

6. Paid a cash dividend to the stockholders.

Explain how each of the events would affect the accounting equation by writing the letter I for increase, the letter D for decrease, and NA for does not affect under each of the components of the accounting equation.

1. Acquired cash from the issue of common stock - Assets (I) = Liabilities (NA) + Equity (I)

2. Paid cash to reduce the principal on a bank note - Assets (D) = Liabilities (D) + Equity (NA)

3. Sold land for cash at an amount equal to its cost - Assets (I and D) = Liabilities (NA) + Equity (NA)

4. Provided services to clients for cash - Assets (I) = Liabilities (NA) + Equity (I)

5. Paid utilities expenses with cash - Assets (D) = Liabilities (NA) + Equity (D)

6. Paid a cash dividend to the stockholders - Assets (D) = Liabilities (NA) + Equity (D)

Explanation:

Accounting equation is usually expressed as the total assets of the company being equal to liabilities and equity. These elements are present in the balance sheet of any organization. Mathematically, it is:

Assets = Liabilities + Equity

The acquisition of cash from the issue of common stock increases both the asset (cash) and equity (common stock). Payment of cash to reduce bank note's principal reduces cash (asset) and ultimately reduces liabilities (notes payable). Sale of land with zero profit or loss only increases cash (asset) and reduces the land (asset). So, this has zero effect. Services provided for cash increases cash (asset) and increases revenue (retained earnings). Utilities expenses payment reduces cash and reduces retained earnings (equity). Cash dividend to stockholders reduces cash (asset) and reduced retained earnings (equity).

1. Acquired cash from the issue of common stock. - Assets (I) Liabilities (NA) Equity (I)

2. Paid cash to reduce the principal on a bank note. - Assets (D) Liabilities (D) Equity (NA)

3. Sold land for cash at an amount equal to its cost. - Assets (NA) Liabilities (NA) Equity (NA)

4. Provided services to clients for cash. - Assets (I) Liabilities (NA) Equity (I)

5. Paid utilities expenses with cash. - Assets (D) Liabilities (NA) Equity (D)

6. Paid a cash dividend to the stockholders. - Assets (D) Liabilities (NA) Equity (D)

Explanation:

The accounting equation shows the relationship between the elements of a balance sheet which are assets liabilities and equity. This may be expressed mathematically as

Assets = Liabilities + Equity

While assets include fixed assets, cash, inventories, account receivables etc, liabilities include accounts payable, loans payable, accrued expenses etc.

Equity which represents the amount owed to the owners of the business includes retained earnings (which is the accumulation of the net income/loss over the years less dividends paid) and common shares.