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Chapter 1: Problem 9

Indicate whether each of the following is identified with (1) an asset, (2) a liability, or (3) owner's equity: a. wages expense d. land b. accounts payable e. fees eamed c. cash f. supplies

Short Answer

Expert verified
a. Neither (indirectly owner's equity), b. Liability, c. Asset, d. Asset, e. Owner's Equity, f. Asset.

Step by step solution

01

Defining Assets, Liabilities, and Owner's Equity

An asset is something of value owned by the business. A liability is an obligation or debt owed by the business to creditors. Owner's equity refers to the residual interest in the assets of the entity after deducting liabilities.
02

Categorizing 'Wages Expense'

'Wages Expense' is not an asset, liability, or owner's equity. It represents costs incurred, thus affecting only the income statement. However, it indirectly reduces owner鈥檚 equity through a reduction in net income.
03

Categorizing 'Accounts Payable'

'Accounts Payable' represents money owed to suppliers or creditors, and is identified as a liability.
04

Categorizing 'Cash'

'Cash' is a resource owned by the business and can be classified as an asset.
05

Categorizing 'Land'

'Land' is a long-term tangible asset owned by the business, classifying it as an asset.
06

Categorizing 'Fees Earned'

'Fees Earned' is revenue generated from services provided, and is technically under owner's equity as it contributes to net income, thus increasing owner's equity.
07

Categorizing 'Supplies'

'Supplies' are items used in the business operations, inventoried, and thus considered an asset.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Assets
Assets are valuable items owned by a business. They are the foundation of a company's financial health. When you think of assets, picture things like cash, land, and supplies. All these help a business operate smoothly.

  • Cash: This represents the liquid funds a company has. It's crucial for daily operations and meeting immediate needs.
  • Land: Unlike cash, land is a long-term asset. It doesn鈥檛 depreciate and holds its value over time.
  • Supplies: These are consumable items used in day-to-day operations. They might not seem like big assets but are essential for functionality.

Understanding assets helps managers make informed decisions. They need to know what resources are available to seize opportunities or weather tough times.
Liabilities
Liabilities represent what a business owes. They can range from short-term obligations to long-term debts. Think of liabilities as a company鈥檚 financial responsibilities. Knowing them helps businesses plan effectively.

  • Accounts Payable: This is a common liability. It includes unpaid bills to suppliers or creditors. Staying on top of accounts payable is crucial as it impacts credit ratings and supplier relationships.

Businesses need a solid strategy for managing liabilities. This ensures sustainability and demonstrates financial responsibility. Managing liabilities well can increase profitability by reducing unnecessary interest payments.
Owner's Equity
Owner's equity is essentially the owner鈥檚 share in the company after all liabilities are subtracted from assets. It's what's left over once a business pays all its debts.

  • Fees Earned: This is the income from services provided. It鈥檚 a key contributor to owner鈥檚 equity as it increases the net income.

Owner鈥檚 equity provides a snapshot of a company's wealth. It indicates the stability and value invested by the owner. Tracking changes in owner's equity can guide future investments and operational adjustments.

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Most popular questions from this chapter

From the following list of selected items taken from the records of Ishmael Appliance Service as of a specific date, identify those that would appear on the balance sheet: 1\. Supplies 6\. Fees Earned 2\. Wages Expense 7\. Supplies Expense 3\. Cash 8\. Accounts Payable 4\. Land 9\. Melinda Elder, Capital 5\. Utilities Expense 10\. Wages Payable

Chris Lund is the owner and operator of Saluki, a motivational consulting business. At the end of its accounting period, December 31,2005 , Saluki has assets of \(\$ 475,000\) and liabilities of \(\$ 200,000\). Using the accounting equation and considering each case independently, determine the following amounts: a. Chris Lund, capital, as of December 31, \(2005 .\) b. Chris Lund, capital, as of December 31,2006 , assuming that assets increased by \(\$ 75,000\) and liabilities increased by \(\$ 40,000\) during 2006 . c. Chris Lund, capital, as of December 31,2006 , assuming that assets decreased by \(\$ 15,000\) and liabilities increased by \(\$ 27,000\) during \(2006 .\) d. Chris Lund, capital, as of December 31,2006 , assuming that assets increased by \(\$ 125,000\) and liabilities decreased by \(\$ 65,000\) during \(2006 .\) e. Net income (or net loss) during 2006, assuming that as of December 31,2006 , assets were \(\$ 425,000\), liabilities were \(\$ 105,000\), and there were no additional investments or withdrawals.

Indicate whether each of the following companies is primarily a service, merchandise, or manufacturing business. If you are unfamiliar with the company, you may use the Internet to locate the company's home page or use the finance Web site of Yahoo.com. 1\. Ford Motor 2\. Citigroup 3\. Sears Roebuck 4\. AT\&'T 5\. H\&R Block Inc. 6\. Boeing 7\. First Union Corporation 8\. Alcoa 9\. CVS 10\. Caterpillar 11\. FedEx 12\. Dow Chemical 13\. Gap 14\. Hilton Hotels 15\. Procter \& Gamble

a. A vacant lot acquired for \(\$ 50,000\) is sold for \(\$ 130,000\) in cash. What is the effect of the sale on the total amount of the seller's (1) assets, (2) liabilities, and (3) owner's equity? b. Assume that the seller owes \(\$ 30,000\) on a loan for the land. After receiving the \(\$ 130,000\) cash in (a), the seller pays the \(\$ 30,000\) owed. What is the effect of the payment on the total amount of the seller's (1) assets, (2) liabilities, and (3) owner's equity?

The income statement of a proprietorship for the month of October indicates a net income of \(\$ 158,250\). During the same period, the owner withdrew \(\$ 180,000\) in cash from the business for personal use. Would it be correct to say that the business incurred a net loss of \(\$ 21,750\) during the month? Discuss.
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