Accounting Transactions: 30 Real-World Problems and Solutions [With PDF]
Accounting transactions form the backbone of financial reporting. Understanding whether an event qualifies as a transaction is crucial for keeping accurate financial records.
In this post, we provide 30 real-world problems and solutions related to accounting transactions. These examples cover a range of scenarios from simple to complex, helping you better grasp how transactions affect the accounting equation: Assets = Liabilities + Equity.
This post is ideal for accounting students, beginners, and professionals seeking to sharpen their knowledge of basic accounting principles.
What is an Accounting Transaction?
An accounting transaction is any business event that has a monetary impact on the company’s financial statements. It can involve the exchange of goods, services, or money.
Understanding which events qualify as transactions is key to keeping an accurate record of a company’s financial health.
Why is Understanding Accounting Transactions Important?
- Accurate Financial Reporting: Recording accounting transactions correctly ensures the financial statements reflect the true financial health of the business.
- Compliance: Proper transaction recording is essential for complying with accounting standards and regulations.
- Decision-Making: Understanding transactions helps business owners and managers make informed financial decisions based on accurate data.
30 Accounting Transaction Problems and Solutions
Below, you’ll find practical examples of accounting transaction problems, each with an in-depth explanation of the event’s impact on the accounting equation.
Problem 1: Owner Invests Cash into the Business
Problem:
The owner invests $5,000 into the business. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- It involves the exchange of economic value (cash).
- It affects both assets (cash increases) and equity (owner’s equity increases).
The accounting equation is impacted:
Assets = Liabilities + Equity - $5,000 (Cash) = + $5,000 (Owner’s Equity)
Problem 2: Signing a Contract for Future Services
Problem:
A company signs a contract with a supplier to purchase office supplies worth $2,000 next month. Is this an accounting transaction?
Solution:
No, this is not an accounting transaction yet.
- The contract is simply an agreement to perform a future transaction.
- No economic resources have been exchanged, and no impact has been made on the accounting equation.
Problem 3: Paying Salaries to Employees
Problem:
The company pays $3,000 in salaries to its employees. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- It involves the outflow of cash, which affects assets (cash decreases) and equity (salaries expense decreases equity).
- The accounting equation is impacted:
Assets = Liabilities + Equity - – $3,000 (Cash) = – $3,000 (Equity)
Problem 4: Hiring an Employee
Problem:
The company hires a new employee with a monthly salary of $4,000 but has not yet paid them. Is this an accounting transaction?
Solution:
No, this is not an accounting transaction.
- No financial exchange has taken place yet.
- Hiring an employee is simply a future commitment and does not affect assets, liabilities, or equity at the moment.
Problem 5: Purchasing Equipment on Credit
Problem:
A company purchases $10,000 worth of equipment on credit. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company has received equipment (an asset) and incurred a liability (accounts payable).
- The accounting equation is impacted:
Assets = Liabilities + Equity - $10,000 (Equipment) = + $10,000 (Liabilities)
Problem 6: Receiving an Order from a Customer
Problem:
A customer places an order for products worth $5,000. The company hasn’t delivered the goods yet. Is this an accounting transaction?
Solution:
No, this is not an accounting transaction.
- Receiving an order is a future event.
- No exchange of goods or payment has occurred, so there is no impact on the accounting equation.
Problem 7: Payment of Utility Bills
Problem:
The company pays $1,200 for its monthly electricity bill. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- It involves the outflow of cash, which decreases assets (cash) and increases expenses (which decreases equity).
- The accounting equation is impacted:
Assets = Liabilities + Equity - – $1,200 (Cash) = – $1,200 (Equity)
Problem 8: Owner Withdraws Money for Personal Use
Problem:
The owner withdraws $2,500 from the business for personal use. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- It decreases assets (cash) and decreases equity (owner’s withdrawals).
- The accounting equation is impacted:
Assets = Liabilities + Equity - – $2,500 (Cash) = – $2,500 (Owner’s Equity)
Problem 9: Selling Goods on Credit
Problem:
A company sells $8,000 worth of goods to a customer on credit. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The sale increases assets (accounts receivable) and increases equity (sales revenue).
- The accounting equation is impacted:
Assets = Liabilities + Equity - $8,000 (Accounts Receivable) = + $8,000 (Equity)
Problem 10: Receiving Cash Advance from a Customer
Problem:
A customer pays a $3,000 advance for services that will be delivered next month. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The business receives cash (an asset) and records a liability (unearned revenue) since the service hasn’t been delivered yet.
- The accounting equation is impacted:
Assets = Liabilities + Equity - $3,000 (Cash) = + $3,000 (Unearned Revenue)
Problem 11: Declaring Dividends
Problem:
A company declares dividends of $4,000 to its shareholders, but has not yet paid them. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- Declaring dividends creates a liability (dividends payable) as the company now owes money to its shareholders.
- The accounting equation is impacted:
Assets = Liabilities + Equity
No effect on assets = + $4,000 (Liabilities) + – $4,000 (Equity)
Problem 12: Receiving a Loan Approval from a Bank
Problem:
A company’s bank approves a loan for $50,000, but the funds have not yet been transferred. Is this an accounting transaction?
Solution:
No, this is not an accounting transaction.
- Approval is not enough to qualify as a transaction.
- No economic resources have been exchanged, and the loan has not yet affected the company’s assets or liabilities.
Problem 13: Purchasing Insurance for the Year
Problem:
A company purchases a 1-year insurance policy for $2,400 and pays the amount in full. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- Cash is exchanged for prepaid insurance (an asset). Over time, the asset will be expensed as the insurance coverage is used.
- The accounting equation is impacted:
Assets = Liabilities + Equity - $2,400 (Prepaid Insurance) – $2,400 (Cash) = No change in liabilities or equity
Problem 14: Receiving Interest on a Bank Account
Problem:
The company receives $200 in interest from its savings account. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company’s cash increases (an asset), and interest income (part of equity) also increases.
- The accounting equation is impacted:
Assets = Liabilities + Equity - $200 (Cash) = + $200 (Equity)
Problem 15: Disposing of Fully Depreciated Equipment
Problem:
The company disposes of equipment that has been fully depreciated and has no residual value. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company removes the asset from its books and records no gain or loss as the asset is fully depreciated.
- The accounting equation is impacted:
- $0 (Equipment) = No impact on liabilities or equity.
Problem 16: Paying Off a Loan
Problem:
The company repays a $10,000 loan to the bank, including $500 in interest. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The payment affects both assets (cash decreases) and liabilities (loan decreases), and the interest payment reduces equity (an expense).
- The accounting equation is impacted:
Assets = Liabilities + Equity - – $10,500 (Cash) = – $10,000 (Liabilities) – $500 (Equity)
Problem 17: Donating Office Supplies to Charity
Problem:
The company donates $500 worth of office supplies to a local charity. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The donation decreases the company’s assets (office supplies) and decreases equity (recorded as a charitable expense).
- The accounting equation is impacted:
Assets = Liabilities + Equity - – $500 (Office Supplies) = – $500 (Equity)
Problem 18: Receiving Cash for a Service Not Yet Provided
Problem:
The company receives $1,500 from a customer for a service that will be provided in the future. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company’s cash increases (an asset), but since the service is not yet delivered, it records a liability (unearned revenue).
- The accounting equation is impacted:
Assets = Liabilities + Equity - $1,500 (Cash) = + $1,500 (Unearned Revenue)
Problem 19: Purchasing Land with Cash
Problem:
The company purchases land for $25,000 and pays in cash. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company’s cash decreases (asset) and land increases (asset). The total amount of assets remains the same.
- The accounting equation is impacted:
Assets = Liabilities + Equity - $25,000 (Land) – $25,000 (Cash) = No effect on liabilities or equity.
Problem 20: Paying Rent in Advance
Problem:
The company pays $6,000 for six months of rent in advance. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company’s cash decreases, and a prepaid rent asset is recorded. Over time, as the rent is used up, this prepaid rent will become an expense.
- The accounting equation is impacted:
Assets = Liabilities + Equity - $6,000 (Prepaid Rent) – $6,000 (Cash) = No change in liabilities or equity.
Problem 21: Providing Services and Receiving Payment
Problem:
The company provides consulting services worth $7,000 to a client and receives the payment immediately. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company’s cash (asset) increases, and service revenue (equity) also increases, as the service was provided and payment was received.
- The accounting equation is impacted:
Assets = Liabilities + Equity - $7,000 (Cash) = + $7,000 (Equity)
Problem 22: Prepaying for Office Supplies
Problem:
The company pays $2,000 for office supplies that it will receive next month. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- Cash decreases as payment is made, but the company records an asset (prepaid office supplies) that will later be converted into an expense when supplies are received and used.
- The accounting equation is impacted:
Assets = Liabilities + Equity - $2,000 (Prepaid Supplies) – $2,000 (Cash) = No change in liabilities or equity
Problem 23: Issuing Stock to Shareholders
Problem:
The company issues 1,000 shares of common stock to shareholders, receiving $10,000 in cash. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company’s cash increases (asset), and shareholders’ equity increases due to the issuance of stock.
- The accounting equation is impacted:
Assets = Liabilities + Equity - $10,000 (Cash) = + $10,000 (Equity)
Problem 24: Recording Depreciation for Equipment
Problem:
The company records $1,200 of depreciation for office equipment for the current year. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- Depreciation decreases the value of equipment (an asset) and also reduces equity as depreciation expense is recorded.
- The accounting equation is impacted:
Assets = Liabilities + Equity - $1,200 (Equipment value) = – $1,200 (Equity)
Problem 25: Borrowing Money from a Bank
Problem:
The company borrows $20,000 from a bank. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company’s cash increases (asset) while its liabilities also increase (loan payable).
- The accounting equation is impacted:
Assets = Liabilities + Equity - $20,000 (Cash) = + $20,000 (Loan Payable)
Problem 26: Writing Off Bad Debts
Problem:
The company decides to write off $500 in receivables from a customer who has gone bankrupt. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- Writing off bad debts decreases assets (accounts receivable) and decreases equity (bad debt expense).
- The accounting equation is impacted:
Assets = Liabilities + Equity - – $500 (Accounts Receivable) = – $500 (Equity)
Problem 27: Selling Goods and Accepting a Promissory Note
Problem:
The company sells $3,000 worth of goods and accepts a promissory note from the customer, agreeing to receive payment in 60 days. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company records a note receivable (an asset) and increases revenue (equity), even though the cash has not yet been received.
- The accounting equation is impacted:
Assets = Liabilities + Equity - $3,000 (Note Receivable) = + $3,000 (Equity)
Problem 28: Settling a Lawsuit Out of Court
Problem:
The company settles a lawsuit and agrees to pay $8,000 to the other party. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company’s liabilities increase as a legal obligation is recorded (lawsuit payable), and equity decreases as the legal expense is incurred.
- The accounting equation is impacted:
Assets = Liabilities + Equity
No change in assets = + $8,000 (Liabilities) – $8,000 (Equity)
Problem 29: Refund to a Customer
Problem:
The company issues a refund of $500 to a customer who returned defective goods. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- The company’s cash decreases (asset), and revenue (equity) also decreases as a refund is issued.
- The accounting equation is impacted:
Assets = Liabilities + Equity - – $500 (Cash) = – $500 (Equity)
Problem 30: Paying for Advertising in Advance
Problem:
The company pays $1,200 in advance for 3 months of online advertising. Is this an accounting transaction?
Solution:
Yes, this is an accounting transaction.
- Cash decreases (asset), but the company records an asset (prepaid advertising) that will later be converted into an expense as advertising services are provided.
- The accounting equation is impacted:
Assets = Liabilities + Equity - $1,200 (Prepaid Advertising) – $1,200 (Cash) = No effect on liabilities or equity
Conclusion
By understanding how to identify and record accounting transactions, you ensure your financial statements accurately reflect your business activities.
The 30 problems and solutions outlined in this post offer a comprehensive guide to learning how transactions impact the accounting equation.
Whether you’re an accounting student, a beginner, or a professional, these examples will deepen your understanding of basic accounting principles and help you make more informed financial decisions.
Did these examples help you understand accounting transactions better? Share your thoughts in the comments, or take a quiz on accounting transactions to test your knowledge!
Explore more practical examples and resources on our Accounting Challenges page.
