Rosie Dry Cleaning was started on January 1, Year 1. It experienced the following events during its first two years of operation: Events Affecting Year 1 Provided $45,000 of cleaning services on account. Collected $39,000 cash from accounts receivable. Adjusted the accounting records to reflect the estimate that uncollectible accounts expense would be 1 percent of the cleaning revenue on account. Events Affecting Year 2 Wrote off a $300 account receivable that was determined to be uncollectible. Provided $62,000 of cleaning services on account. Collected $61,000 cash from accounts receivable. Adjusted the accounting records to reflect the estimate that uncollectible accounts expense would be 1 percent of the cleaning revenue on account.

Question Completion:

Show the effects of the transactions on the accounting equation for each year.

Rosie Dry Cleaning

Effects on the accounting equation of Assets = Liabilities + Equity:

Year 1:

Assets (Accounts Receivable +$45,000) = Liabilities + Equity (Retained earnings: Service Revenue +$45,000)

Assets (Cash +$39,000; Accounts Receivable -$39,000) = Liabilities + Equity

Assets (Accounts Receivable ($450)) = Liabilities + Equity (Retained Earnings - Bad Debt Expense ($450))

Year 2:

Assets (Accounts Receivable ($300)) = Liabilities + Equity (Retained Earnings: Bad Debts Expense ($300))

Assets (Accounts Receivable +$62,000) = Liabilities + Equity (Retained Earnings: Service Revenue +$62,000)

Assets (Cash +$61,000; Accounts Receivable -$61,000) = Liabilities + Equity

Assets (Accounts Receivable ($620)) = Liabilities + Equity (Retained Earnings: Bad Debt Expense ($620))

Explanation:

a) Data and Analysis:

Year 1:

Accounts Receivable $45,000 Service Revenue $45,000

Cash $39,000 Accounts Receivable $39,000

Accounts Receivable ($450) Bad Debt Expense ($450)

Year 2:

Accounts Receivable ($300) Bad Debts Expense $300

Accounts Receivable $62,000 Service Revenue $62,000

Cash $61,000 Accounts Receivable $61,000

Accounts Receivable ($620) Bad Debt Expense ($620)

b) The accounting equation is an important concept of accounting which explains that at every given time, the assets of the business are equal to its liabilities and equity.  The implication is that the entity's assets are funded by a combination of debts to third parties and owners' equity (capital contributions + retained earnings).