Question

Zen began a new consulting firm on January 5. Following is a financial summary, including balances, for each of the company’s first five transactions (using the accounting equation form).

Assets = Liabilities + Equity

Transaction Cash + Accounts + Office + Office = Accounts + Common + Revenues Receivable Supplies Furniture Payable Stock

2. 38,000 + 0 + 3,000 + 0 = 1,000 + 40,000 + 0

Identify the explanation from a through j below that best describes each transaction 1 through 5 above and enter it in the blank space in front of each numbered transaction.

a. The company purchased office furniture for \(8,000 cash.

b. The company received \)40,000 cash from a bank loan.

c. The owner invested \(1,000 cash in the business in exchange for its common stock.

d. The owner invested \)40,000 cash in the business in exchange for its common stock.

e. The company purchased office supplies for \(3,000 by paying \)2,000 cash and putting \(1,000 on credit.

f. The company billed a customer \)6,000 for services provided.

g. The company purchased office furniture worth \(8,000 on credit.

h. The company provided services for \)1,000 cash.

i. The company sold office supplies for \(3,000 and received \)2,000 cash and \(1,000 on credit.

j. The company provided services for \)6,000 cash

Short answer

Accounts payable is the amount owed to other parties which are payable within one accounting period. The correct explanation for the transaction is option E

Step-by-step solution

Definition of accounts payable

Accounts payable is defined as the amount owed by the business to another party in exchange for some goods or services which is payable within one accounting period.

Explanation for the correct option

In the accounting equation, the cash item of the asset column is decreased with the amount of $2,000, the office supplies item is increased by $3,000, and the accounts payable item is also increased by $1,000. This effect on the accounting equation shows that office supplies of $3,000 are purchased by paying $2,000 upfront by cash and the remaining $1,000 is not paid. Hence, explanation E is correct for this transaction.