Accounting Equation -1

8/8/2019 Accounting Equation -1

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Use the accounting equation to

analyze business transactions.


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Assets

Liabilities &

Equity

Accounting Equation

Liabilities

Liabilities Equity

EquityAssets

Assets = +

A1


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Land

Equipment

Buildings

Cash

Vehicles

Store

Supplies

Notes

Receivable

Accounts

Receivable

Resources

owned or

controlled by

a company

AssetsA1


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Taxes

Payable

Wages

Payable

Notes

Payable

Accounts

Payable

Creditors

claims on

assets

LiabilitiesA1


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Owners

claim on

assets

Dividends

Contributed

Capital

Retained

Earnings

EquityA1


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Liabilities EquityAssets = +

Expanded Accounting Equation

Revenues ExpensesCommon

StockDividends

__++

__

Retained Earnings

Liabilities

Liabilities Equity

EquityAssets

Assets = +

A1


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Transaction Analysis Equation

The accounting equation MUST remain in

balance after each transaction.

LiabilitiesLiabilities EquityEquityAssetsAssets = +

A2


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The Accounting EquationThe Accounting Equation

Assets = Liabilities + Owners Equity

The resourcesThe resources

owned by aowned by a

businessbusiness


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The rights of theThe rights of the

creditors, whichcreditors, which

represent debtsrepresent debtsof the businessof the business


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The rights of theThe rights of the

ownersowners


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ASSETS

FIXED FLOATING(CURRENT) FICTITIOUS LIQUID WASTING TANGIBLE INTANGIBLE


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FIXED ASSET

LAND BUILDINGPLANT

MACHINERY FIXTURESVEHICLE

MACHINERY


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FLOATING(CURRENT ASSETS)

STOCK CASH BANK

DEBTOR PREPAID EXPB/R

MARKEATABLE SECURITIES


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FICTITIOUS ASSET

LOSS ON ISSUE OF

SHARESPRELIMINARY

EXPENSES

UNDERWRITING COMMISSION


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LIQUID ASSET=CA-STOCK-PREPAID EXP

CASH BANKDEBTORS

B/R


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WASTING ASSET=PATENTS, ASSETS TAKEN ON

LEASE,MINES ETC


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LIABILITY

FIXED LIABILITY

(CAPITAL, LONG TERM LOANS)

FLOTING LIABILITY(CREDITORS)

CONTINGENT


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What is a business

transaction?

Abusiness transaction is an economic event orcondition that directly changes an entitys financial

condition or directly affects its results of operations.


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On November1,

2005, Chris

Clark begins abusiness that will

be known as

NetSolutions.


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a. Chris Clark deposits $25,000 in a banka. Chris Clark deposits $25,000 in a bank

account in the name of NetSolutions.account in the name of NetSolutions.

Chris Clark, Capital

25,000 Investment

by Chris

Clark

Cash

25,000a.

Assets Owners Equity=

=


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b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.

Chris Clark, Capital

25,000

Cash + Land

25,000Bal.

Assets Owners Equity=

=b. 20,000 +20,000

Bal. 5,000 20,000 25,000


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Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

c. During the month, NetSolutions purchasedc. During the month, NetSolutions purchased

supplies for $1,350 and agreed to pay thesupplies for $1,350 and agreed to pay the

supplier in the near future (supplier in the near future (on accounton account).).

Owners

Liabilities + Equity=

Bal. 5,000 20,000 25,000c. + 1,350 + 1,350

Bal. 5,000 1,350 20,000 1,350 25,000

=


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d. NetSolutions provided services tod. NetSolutions provided services to

customers, earning fees of $7,500 andcustomers, earning fees of $7,500 andreceived the amount in cash.received the amount in cash.

Bal. 12,500 1,350 20,000 1,350 32,500

d. + 7,500 + 7,500


AssetsOwners

Liabilities + Equity

Bal. 5,000 1,350 20,000 1,350 25,000Fees

earned

=

=


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e. 3,650 2,125

800

450

275

Wages

Rent

Util.

Misc.


Assets

e. NetSolutions paid the followinge. NetSolutions paid the following

expenses: wages, $2,125; rent, $800;expenses: wages, $2,125; rent, $800;

utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.

Owners


Bal. 12,500 1,350 20,000 1,350 32,500

=

Bal.8,850 1,350 20,000 1,350 28,850


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Assets

f. NetSolutions paid $950 tof. NetSolutions paid $950 to

creditors during the month.creditors during the month.

Owners


Bal. 8,850 1,350 20,000 1,350 28,850

f. 950 950

=

Bal. 7,900 1,350 20,000 400 28,850


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Assets

g. At the end of the month, the costg. At the end of the month, the cost

of supplies on hand is $550, soof supplies on hand is $550, so$800 of supplies were used.$800 of supplies were used.

Owners


Bal. 7,900 1,350 20,000 400 28,850

g. 800 800

=

Bal. 7,900 550 20,000 400 28,050

Supplies

expense


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Assets

h. At the end of the month, Chrish. At the end of the month, Chris

withdrew $2,000 in cash from thewithdrew $2,000 in cash from the

business for personal use.business for personal use.

Owners

Liabilities + Equity

Bal. 7,900 550 20,000 400 28,050

h. 2,000 2,000

Bal. 5,900 550 20,000 400 26,050

With-

drawal

=

=


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Owners

withdrawals

Expenses

Decreased byDecreased by

Owners Equity

Effects ofTransactions on Owners EquityEffects ofTransactions on Owners Equity

Increased byIncreased by

Owners

investments

Revenues

Net

income


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ACCOUNTING EQUATION

Economic resources=Claims

Asset=Liability+Capital


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Accounting for Business Transactions

What is a transaction?

It is any event that both affects the financial

position of the business and can be reliablyrecorded.


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1 Gay Gillen invests $30,000 to begin Gay Gillen

eTravel.

2 Gillen purchases an office location, paying$20,000 in cash.

3 She buys office supplies, agreeing to pay $500

in 30 days.

4 She earns and collects $5,500 revenues.


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5 Gillen performs services, and the client agrees

to pay $3,000 within one month.

6 During the month, she pays $3,100 forexpenses incurred.

7 Gillen pays $300 to the store from which she

purchased $500 worth of supplies.

What is the effect of these transactions on the

accounting equation?


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OwnersAssets = Liabilities + Equity

1) Cash + $30,000 + $30,000

2) Cash 20,000Land + 20,000

3) Supplies + 500 + 500

4) Cash + 5,500 + 5,500

5) Receivable + 3,000 + 3,0006) Cash 3,100 3,100

7) Cash 300 300

Totals + $35,600 + 200 + $35,400



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Notice that the equation always stays in

balance.

Each transaction affects at least two accounts,sometimes more.

Some transactions affect only one side of the

equation; some affect both sides.


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Other transactions that took place were as

follows:

The business collected $1,000 from the client. She sold some land at cost for $9,000.

She withdrew $2,100 from the business.

Accounting Equation -1

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