Accounting transaction question?

During the first month of operations, the following transactions occured for Virmani architects Inc:

Invested cash of $10,000 and equipment of $6,000 in the company in exchange for common shares

I looked at the answer in the textbook and it says that cash and equipment is debited and common shares is credited. This doesn't make sense though.

Since cash and equipment is being used in exchange for common shares, there should be a decrease in cash and equipment since you are giving up these to get the common shares. For common shares, he is receiving them so that would increase which would be credited but now that doesn't make sense since it must balance.

1 Answer

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  • 2 months ago
    Best Answer

    You're not thinking about it correctly. What is occuring is that the owners are giving the business cash and equipment. The business is not using anything. In exchange for receiving the cash & equipment, the business gives the investors an ownership stake in the form of shares. So the business is receiving assets in exchange for owners equity.

    • Serena2 months agoReport

      This is correct, you are doing the business' books and therefore you should view the entire transaction from the business' perspective.

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