The Accounting Equation: More Examples.



Lesson 4


To help you better understand how the accounting equation works and stays in balance, here are more sample transactions and their effects to the accounting equation.

In addition to transactions 1, 2 and 3 in the previous lesson, assume the following data:
Rendered services and received the full amount in cash, $500Rendered services on account, $750Purchased office supplies on account, $200Had some equipment repaired for $400, to be paid after 15 daysMr. Alex, the owner, withdrew $5,000 cash for personal usePaid one-third of the loan obtained in transaction #2Received customer payment from services in transaction #5

The transactions will result to the following effects:


Examples Explained


The company received cash for services rendered. Cash increased thereby increasing assets. At the same time, capital is increased as a result of the income (Service Revenue). As we've mentioned in the Accounting Elementslesson, income increases capital.The company rendered services on account. The services have been rendered, hence, already earned. Thus, the $750 worth of services rendered is considered income even if the amount has not yet been collected. Since the amount is still to be collected, it is recorded as Accounts Receivable, an asset account.Office supplies worth $200 were acquired. This increases the company's Office Supplies, part of the company's assets. The purchase results in an obligation to pay the supplier; thus a $200 increase in liability (Accounts Payable).The company incurred in $400 Repairs Expense. Expenses decrease capital. The amount has not yet been paid. Thus, it results in an increase in total liabilities.The owner withdrew $5,000 cash. Cash is decreased thereby decreasing total assets.Withdrawals or drawings decrease capital.One-third of the $30,000 loan was paid. Therefore, Cash is decreased by $10,000 due to the payment. Liabilities are also decreased by the amount paid.The $750 account in a previous transaction has been collected. Therefore, the Accounts Receivable account is decreased and Cash is increased.

Notice that every transaction results in an equal effect to assets and liabilities plus capital. The beginning balances are equal. The changes arising from the transactions are equal. Therefore, the ending balances would still be equal.

The balance of the total assets after considering all the above transactions amounts to $36,450. It is equal to the combined balances of total liabilities at $20,600 and capital at $15,850 (total of $36,450).

Assets = Liabilities + Capital is a mathematical equation. Using your skills in algebra, the formula can be rewritten to get other versions of the equation.

Liabilities = Assets - CapitalCapital = Assets - Liabilities



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