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Accounting

Equation
Objective 1 - State the accounting equation and define each
element of the equation.

Objective 2 - Describe and illustrate how business transactions


can be recorded in terms of the resulting change in the basic
elements of the accounting equation.
The Accounting Equation

Assets = Liabilities + Owners Equity

The resources owned The rights of the


by a business owners
The rights of the
creditors, which
represent debts of the
business
A business transaction is an economic event or condition that
directly changes an entitys financial condition or directly affects
its results of operations.

On November 1, 2007, Chris Clark begins a business


that will be known as NetSolutions. This business
provides web design services, and computer repair services etc.
Assets = Owners Equity
Cash Chris Clark, Capital
=
a. 25,000 25,000 Investment
by Chris
Clark

a. Chris Clark deposits $25,000 in a bank account in the


name of NetSolutions.
Assets = Owners Equity
Cash + Land Chris Clark, Capital
Bal. 25,000 = 25,000
b. 20,000 +20,000
Bal. 5,000 20,000 25,000

b. NetSolutions purchased land for $20,000.


Owners
Assets Liabilities + Equity
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
=
Bal. 5,000 20,000 25,000
c. +1,350 +1,350
Bal. 5,000 1,350 20,000 1,350 25,000

c. During the month, NetSolutions purchased supplies for $1,350


and agreed to pay the supplier in the near future (on account).
Note these supplies e.g. wires, cables etc, will be used up later in the business
Revenue and expenses

A company earns revenues by


selling products - Sales
providing services - Fees Earned
renting out premises - Rent Revenue
lending money - Interest Revenue

The amounts used in earning revenue are called expenses.

Note: Expenses that have paid for (or incurred) but not yet been used up are referred to as prepaid
expenses e.g. supplies.

When these prepaid expenses have been used up, they will then become regular
expenses e.g. supplies expenses
Assets Liabilities + Owners Equity

Accounts Chris Clark, Fees


Cash + Supplies + Land Payable + Capital + Earned

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


d. +7,500 +7,500
=
Bal. 12,500 1,350 20,000 1,350 25,000 7,500

d. NetSolutions provided services to customers, earning


fees of $7,500 and received the amount in cash.
Note If the customers did not pay immediately, but opted to pay on account ( i.e. at a later
date), then the asset that would have been increased would have been accounts receivable
Note

1. Adding expenses to the owners equity section results in a space


problem. To adjust for these added headings, the word Bal. has
been omitted from some slides. The bottom row still provides the
balances after each transaction.

2. Beginning with entry (e) the asset section will be shown first, then the
liabilities and owners equity will be shown in the following slide.
Assets
Cash + Supplies + Land
Bal. 12,500 1,350 20,000
e. 3,650
Bal. 8,850 1,350 20,000

e. NetSolutions paid the following expenses: wages, $2,125;


rent, $800; utilities, $450; and miscellaneous, $275.
Liabilities + Owners Equity
Accounts Chris Clark, Fees Wages Rent Utilities Misc.
Payable + Capital + Earned Expense Expense Expense Expense
1,350 25,000 7,500
2,125 800 450 275 e.
1,350 25,000 7,500 2,125 800 450 275

e. NetSolutions paid the following expenses: wages, $2,125; rent,


$800; utilities, $450; and miscellaneous, $275.
Assets
Cash + Supplies + Land
Bal. 8,850 1,350 20,000
f. 950
Bal. 7,900 1,350 20,000

f. NetSolutions paid $950 to creditors during the month.


Liabilities + Owners Equity
Accounts Chris Clark, Fees Wages Rent Utilities Misc.
Payable + Capital + Earned Expense Expense Expense Expense
1,350 25,000 7,500 2,125 800 450 275
950 f.
400 25,000 7,500 2,125 800 450 275

f. NetSolutions paid $950 to creditors during the month.


Assets
Cash + Supplies + Land
Bal. 7,900 1,350 20,000
g. 800
Bal. 7,900 550 20,000

g. At the end of the month, the cost of supplies on hand is


$550, so $800 of supplies must have been used up
Liabilities + Owners Equity
Accounts Chris Clark, Fees Wages Rent Supplies Util. Misc.
Payable + Capital + Earned Exp. Exp. Exp. Exp. Exp.
400 25,000 7,500 2,125 800 450 275
800 g.
400 25,000 7,500 2,125 800 800 450 275

g. At the end of the month, the cost of supplies on hand is


$550, so $800 of supplies must have been used up
Assets
Cash + Supplies + Land
Bal. 7,900 550 20,000
h. 2,000
Bal. 5,900 550 20,000

h. At the end of the month, Chris withdrew $2,000 in cash from


the business for personal use.
Liabilities + Owners Equity
Accounts Chris Clark, Chris Clark Fees Wages Rent Supplies Util. Misc.
Payable + Capital + Drawing Earned Exp. Exp. Exp. Exp. Exp.
400 25,000 7,500 2,125 800 800 450 275
2,000 h.
400 25,000 2,000 7,500 2,125 800 800 450 275

h. At the end of the month, Chris withdrew $2,000 in cash from


the business for personal use.
Summary
Owners Equity

Increased by Decreased by

Owners Owners
investments withdrawals
Revenues Expenses

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