1.

Describe how the following business transactions affect the three elements of the
accounting equation.
a. Received cash for services performed.
b. Invested cash in business.
c. Paid for utilities used in the business.
d. Purchased supplies on account.
e. Purchased supplies for cash.

a. Received cash for services performed:

- Assets: Cash increases as a result of receiving cash for services performed.

- Liabilities: The liabilities remain unaffected by this transaction.

- Equity: The equity increases as a result of the revenue generated from the services performed.

b. Invested cash in the business:

- Assets: Cash increases as a result of the cash investment made into the business.

- Liabilities: The liabilities remain unaffected by this transaction.

- Equity: The equity increases as a result of the cash investment made by the owner(s) or shareholders.

c. Paid for utilities used in the business:

- Assets: Cash decreases as a result of paying for the utilities.

- Liabilities: The liabilities remain unaffected by this transaction.

- Equity: The equity remains unaffected by this transaction.

d. Purchased supplies on account:

- Assets: Supplies increase as a result of the purchase.

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- Liabilities: Accounts payable (a liability) increases as the purchase is made on account, representing a
debt owed to the supplier.

- Equity: The equity remains unaffected by this transaction.

e. Purchased supplies for cash:

- Assets: Supplies increase as a result of the purchase.

- Liabilities: The liabilities remain unaffected by this transaction.

- Equity: The equity remains unaffected by this transaction.

2.Suppose Mr. Boris establishes a sole proprietorship to be known as Effective Garage, on

Transaction (1): Mr. Boris starts business by depositing Br. 100,000 in a bank account opened in the
name of Effective Garage.

Transaction (2): Effective Garage bought land for Birr 20,000 in cash, to be used as a future site for the
business.

Transaction (3): Mr. Boris bought office supplies for birr 2,500 on credit, to be used by the business.
Transaction (4): Effective Garage paid Birr. 1,500 to creditors on account.
Transaction (5): During the first month of operation, Effective Garage earned service Fees of Birr
30,000 receiving the amount in cash for the garage services it rendered.

Transaction (6): During the month of September, Effective Garage paid Birr 15,000 for different types
of expenses (birr 10,000 to salary of employees, birr 3000 Telephone, birr 1,500 for rent, and birr 500 for
advertisement).

Transaction (7): Mr. Boris, the owner, withdrew Birr 3000 for his personal from the business.

Required:

A. Show the effect of every transaction in terms of increases and /or decreases in one or more of
the elements of the accounting equation so that the equality of the two sides of the accounting
equation is maintained.

B. Prepare the Income statements of Effective Garage for the year ended September 30, 2020.

C. Prepare statements of owners’ equity of Effective Garage for the year ended September 30,
2020.

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D. Prepare the Balance sheet of Effective Garage on September 30, 2020.

E. Prepare the statements of cash flows of Effective Garage for the year ended September 30,
2020.

A. Effect of each transaction on the accounting equation:

Transaction (1):
Increases: Cash (Assets)

Equity (Owners' Equity)

Transaction (2):
Decreases: Cash (Assets)

Increases: Land (Assets)

Transaction (3):
Increases: Office Supplies (Assets)

Increases: Accounts Payable (Liabilities)

Transaction (4):
Decreases: Accounts Payable (Liabilities)

Decreases: Cash (Assets)

Transaction (5):
Increases: Cash (Assets)

Increases: Service Fees (Revenue)

Transaction (6):
Decreases: Cash (Assets)

Decreases: Salary Expense (Expenses)

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Decreases: Telephone Expense (Expenses)

Decreases: Rent Expense (Expenses)

Decreases: Advertisement Expense (Expenses)

Transaction (7):
Decreases: Cash (Assets)

Decreases: Owners' Equity

B. Income Statement of Effective Garage for the year ended September 30, 2020:

Revenue:
Service Fees: Birr 30,000

Expenses:
Salary Expense: Birr 10,000

Telephone Expense: Birr 3,000

Rent Expense: Birr 1,500

Advertisement Expense: Birr 500

Net Income (Revenue - Expenses):

Birr 15,000

C. Statement of Owners' Equity of Effective Garage for the year ended September 30, 2020:

Owners' Equity, September 1, 2020:

Initial Investment: Birr 100,000

Net Income: Birr 15,000

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Owners' Drawings: Birr 3,000

Owners' Equity, September 30, 2020:

Birr 112,000 (100,000 + 15,000 - 3,000)

D. Balance Sheet of Effective Garage on September 30, 2020:

Assets:
Cash: Birr 73,000 (100,000 - 1,500 - 3,000 - 15,000 - 7,500)

Land: Birr 20,000

Office Supplies: Birr 2,500

Total Assets: Birr 95,500

Liabilities:
Accounts Payable: Birr 0

Owners' Equity:

Owners' Equity: Birr 112,000

Total Liabilities and Owners' Equity: Birr 112,000

E. Statement of Cash Flows of Effective Garage for the year ended September 30, 2020:

Cash flows from Operating Activities:

Cash Receipts from Customers (Service Fees): Birr 30,000

Cash Payments to Creditors (Expenses): Birr 15,000

Net Cash from Operating Activities: Birr 15,000

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Cash flows from Investing Activities:

Purchase of Land: Birr (20,000)

Cash flows from Financing Activities:

Withdrawals by Owner: Birr (3,000)

Net Increase in Cash: Birr (8,000)

Cash, September 1, 2020: Birr 100,000

Cash, September 30, 2020: Birr 92,000 (100,000 – 8,000)

3. On January 1, 2010, Daniel Getachew, an ex-manager of Commercial Bank of Ethiopia, Arat Kilo
Branch, established his own consultancy business. He named his business "DG Consultancy Services".
The objective of the business is to render financial consultancy services to clients on a fee basis. The
following transactions are occurred during the first month of operation of the firm (from January 1 to 31
of January, 2010).

Transaction 1:

January 1: Daniel deposited birr 20,000 cash in a bank account in the name of his business- DG
Consultancy Services.

Transaction 2:

January 3: Daniel transferred furniture worth birr 30,000 from his home for office uses by DG
Consultancy Services. He also has extra home furniture and other personal assets worth birr 860,000.

Transaction 3:

January 6: the company purchased office supplies worth birr 5,000 from various suppliers agreeing to
pay the sum within two weeks.

Transaction 4:

January 7: DG paid Birr 3,000 cash for advertising its services through EBC.

Transaction 5:

January 10: DG received Birr 20,000 cash for consultancy services it rendered to cash clients.

Transaction 6:

January 11: DG purchased a used car for business purposes. The business paid birr 28,000 cash for the
car. Brokers estimated that the car currently worth birr 30,000 and the Inland Revenue assessed the car
at birr 25,000 for property tax purposes.

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Transaction 7:

January 14: DG received birr 10,000 additional cash investment from its owner.

Transaction 8:

January 16: DG rendered consultancy services worth Birr 15,000 to clients who promised to pay the sum
within two weeks.

Transaction 9:

January 18: DG paid birr 4,000 cash to suppliers for its credit purchase of supplies on January 4.

Transaction 10:

January 20: DG employed an accountant and a secretary for monthly salary of birr 1,200 and birr 700,
respectively.

Transaction 11:

January 21: DG borrowed birr 14,000 cash from Dashen Bank. The loan is repayable over six months.

Transaction 12:

January 29: DG incurred and paid for the following expenses. Wages birr 6,000, Rent birr 4,500, Utilities
birr 1,200, and others birr 800.

Transaction 13:

January 27:DG collected birr 12,000 from its credit customers

Transaction 14:

January 30: DG paid birr 450 cash to Dashen Bank consisting of birr 400 principal and birr 50 one month
interest on part of the loan due in January.

Transaction 15:

January 31: DG paid its owner birr 5,000 cash to pay house utility expenses

Transaction 16:

January 31: DG determined that cost of supplies remained on hand at the end of the current month total
birr 1,300.

Required:

A. Show the effect of every transaction in terms of increases and /or decreases in one or more of
the elements of the accounting equation so that the equality of the two sides of the accounting
equation is maintained.

B. Prepare the Income statements of "DG Consultancy Services" for the Month ended January 31,
2010.

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C. Prepare statements of owners’ equity of "DG Consultancy Services" for the Month ended
January 31, 2010

D. Prepare the Balance sheet of "DG Consultancy Services” on Month ended January 31, 2010

E. Prepare the statements of cash flows of "DG Consultancy Services “for the Month ended
January 31, 2010

A. Effect of each transaction on the accounting equation:

Transaction 1:

January 1: Daniel deposited Birr 20,000 cash in a bank account in the name of his business- DG
Consultancy Services.

Assets: Cash increases by Birr 20,000.

Liabilities: No effect.

Equity: Capital increases by Birr 20,000.

Transaction 2:

January 3: Daniel transferred furniture worth Birr 30,000 from his home for office use by DG Consultancy
Services. He also has extra home furniture and other personal assets worth Birr 860,000.

Assets: Furniture increases by Birr 30,000.

Liabilities: No effect.

Equity: No effect. (The value of personal assets is not recorded as an increase in equity.)

Transaction 3:

January 6: The company purchased office supplies worth Birr 5,000 from various suppliers, agreeing to
pay the sum within two weeks.

Assets: Office supplies increase by Birr 5,000.

Liabilities: Accounts payable increase by Birr 5,000.

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Equity: No effect.

Transaction 4:

January 7: DG paid Birr 3,000 cash for advertising its services through EBC.

Assets: Cash decreases by Birr 3,000.

Liabilities: No effect.

Equity: No effect.

Transaction 5:

January 10: DG received Birr 20,000 cash for consultancy services it rendered to cash clients.

Assets: Cash increases by Birr 20,000.

Liabilities: No effect.

Equity: Revenue increases by Birr 20,000.

Transaction 6:

January 11: DG purchased a used car for business purposes. The business paid Birr 28,000 cash for the
car. Brokers estimated that the car is currently worth Birr 30,000, and the Inland Revenue assessed the
car at Birr 25,000 for property tax purposes.

Assets: Car (vehicle) increases by Birr 28,000.

Liabilities: No effect.

Equity: No effect.

Transaction 7:

January 14: DG received Birr 10,000 additional cash investment from its owner.

Assets: Cash increases by Birr 10,000.

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Liabilities: No effect.

Equity: Capital increases by Birr 10,000.

Transaction 8:

January 16: DG rendered consultancy services worth Birr 15,000 to clients who promised to pay the sum
within two weeks.

Assets: Accounts receivable increase by Birr 15,000.

Liabilities: No effect.

Equity: Revenue increases by Birr 15,000.

Transaction 9:

January 18: DG paid Birr 4,000 cash to suppliers for its credit purchase of supplies on January 4.

Assets: Cash decreases by Birr 4,000.

Liabilities: Accounts payable decrease by Birr 4,000.

Equity: No effect.

Transaction 10:

January 20: DG employed an accountant and a secretary for a monthly salary of Birr 1,200 and Birr 700,
respectively.

Assets: No effect.

Liabilities: No effect.

Equity: Expenses increase: Salaries expense increases by Birr 1,900.

Transaction 11:

January 21: DG borrowed Birr 14,000 cash from Dashen Bank. The loan is repayable over six months.

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Assets: Cash increases by Birr 14,000.

Liabilities: Loans payable increase by Birr 14,000.

Equity: No effect.

Transaction 12:

January 29: DG incurred and paid for the following expenses: Wages Birr 6,000, Rent Birr 4,500, Utilities
Birr 1,200, and others Birr 800.

Assets: Cash decreases by Birr 12,500 (6,000 + 4,500 + 1,200 + 800).

Liabilities: No effect.

Equity: Expenses increase: Wages expense increases by Birr 6,000, Rent expense increases by Birr 4,500,
Utilities expense increases by Birr 1,200, and other expenses increase by Birr 800.

Transaction 13:

January 27: DG collected Birr 12,000 from its credit customers.

Assets: Cash increases by Birr 12,000.

Liabilities: No effect.

Equity: No effect.

Transaction 14:

January 30: DG paid Birr 450 cash to Dashen Bank consisting of Birr 400 principal and Birr 50 one-month
interest on part of the loan due in January.

Assets: Cash decreases by Birr 450.

Liabilities: Interest Expense increases by Birr 50.

Equity: No effect.

Transaction 15:

January 31: DG paid its owner Birr 5,000 cash to pay house utility expenses.

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Assets: Cash decreases by Birr 5,000.

Liabilities: No effect.

Equity: Drawing (withdrawal) increases by Birr 5,000.

Transaction 16:

January 31: DG determined that the cost of supplies remained on hand at the end of the current month
totals Birr 1,300.

Assets: Supplies on hand decrease by Birr 1,300.

Liabilities: No effect.

Equity: No effect.

B. Income Statement of "DG Consultancy Services" for the Month Ended January 31

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