Classify five cash transactions

Problem

Juniper Consulting is a new sole proprietorship. During its first reporting period, the owner contributes $20,000 cash, and a bank lends Juniper $5,000. Juniper earns and receives $3,000 for a completed customer service. It pays $800 for utility service used in the period, and the owner withdraws $1,000 cash. Determine the ending assets, liabilities, and equity. Explain why each transaction does or does not change equity.

Classify before adding

The owner contribution raises Cash and contributed capital by $20,000. It is not revenue because the owner transferred value in exchange for an ownership interest.

The bank loan raises Cash and Note Payable by $5,000. It does not change equity because the company receives cash and must repay the same amount.

The completed customer service raises Cash and equity through $3,000 revenue. The utility service uses $800 Cash and reduces equity through expense. Those two performance effects produce a net $2,200 increase in equity.

The authorized owner distribution reduces Cash and equity by $1,000. It is not expense because the transfer is to the owner acting as owner.

Calculation

Ending cash = $20,000 + $5,000 + $3,000 − $800 − $1,000
            = $26,200

Ending liabilities = $5,000 note payable

Ending equity = $20,000 owner investment
              + $3,000 revenue
              −   $800 expense
              − $1,000 owner distribution
              = $21,200

The amounts satisfy the accounting equation:

$26,200 assets = $5,000 liabilities + $21,200 equity

Why the sources of cash matter

The $21,200 equity balance includes $20,000 invested by the owner, a $2,200 net increase from revenue and expense, and a $1,000 owner's draw. The total alone does not show where the changes came from.

Likewise, the $26,200 cash balance does not say that Juniper earned $26,200. Cash includes financing from both the owner and bank. A lender or investor who mistook all receipts for revenue would overstate the scale of operations and ignore the repayment claim.

Common wrong paths

• Call all $28,000 of receipts revenue: This treats owner and creditor financing as customer performance.
• Treat the $800 utility payment and $1,000 distribution as $1,800 expense: This mixes an owner transaction into operating performance.
• Ignore the loan because Cash covers it: The asset does not erase the creditor's present claim.
• Use equity only as the amount needed to balance the equation: The equation may balance even when revenue, expense, or an owner transaction is misclassified.

Try equal receipts from an owner, bank, and customer. Classify each receipt before adding the amounts, and explain which receipt creates revenue.