Question

1. Pay $1,200 for an employee's salary in the current period. 2. Purchase office equipment for $2,700 Write a brief memo (30+words) to your instructor describing each step of the six-step measurement external transactions

Answer 1

Six Steps can be following:

1. Identification of Accounts Affected: The first step is identification of Accounts being affected. So, if in first case Salary is already booked in Salary Account and thus liability towards its payment is already accounted for then its payment will affect that liability account (Salary Payable) and the Bank Account. As for second case, there will be an increase in Assets (Fixed Assets) and equivalent decrease in Assets (Cash or Bank).
2. Analyzing impact on Accounting Equation: In first case Accounting Equation can get impacted in two ways. As we know Assets = Liabilities + Owner's Equity (or Capital). So,
   1. If salary is already booked then on payment Liability (Salary Payable Account) and Asset Account (Cash or Bank) will get reduced by same amount. Other wise if salary is only being paid then the Assets and Capital will get reduced.
   2. In second case, both impacts would be on Asset leading to equal increase and decrease.
3. Assessing Impact of Transaction to Account Balance: The first transaction would decrease Bank Balance i.e. credited to Bank Account and reduce either Liability (Salary Payable) Account or Capital Account (if direct payment is made). Whereas, in second case Fixed Assets would get increased that is debit in Fixed Assets Account and credit in Bank Balance.
4. Recording Transaction in Journal: So the transaction would be recorded as: Salary Account Dr. and Bank Account Cr. or Salary Payable Account Dr. and Bank Account Credit. And for second case, it will be Office Equipment Dr. and bank Account Credit.
5. Posting Transaction to Ledger: To post in T- Accounts for first transaction Debit will be made to either Salary Account (booking expense) or Salary Payable Account (reducing Liability) and on Credit side of Bank Account Salary Amount will be recorded as paid. Whereas in second case, Office Equipment ledger will be debited and Bank Account will be credited.
6. Preparation of Trial Balance: In Trial Balance, Salary Amount will increase and Bank will decrease. So, it will impact only Debit Column. And similarly, for second case Office Equipment will add to Debit Column and Bank will be reduced by same amount in Debit Column.