ACCT 2001 Chapter : Chapter 3 Notecards
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| Assets | = | Liabilities + Equity |
| The left side of the accounting equation shows the economic resources of the company (what the company has). | = | The right side of the accounting equation summarizes who provided those assets: Creditors or the owners. |
When a business is first formed, both sides of the equation are equal to zero. As transactions occur, they affect the accounting equation, but the accounting equation must always stay in balance. A transaction can increase both sides or decrease both sides. A transaction could also affect only one side by increasing and decreasing one side at the same time.
APPLYING THE CONCEPTS: Analyzing Changes to Assets, Liabilities and Equity
Thomas Company: The table below demonstrates the effect of the first three transactions for Thomas Company. Review the details of each transaction and determine the effect on the accounting equation. Then, enter the updated amounts for the assets, liabilities, and equity accounts (do not record the the transaction). Enter all amounts as positive numbers. If an updated balance is zero, enter "0".
| Transaction | Assets | = | Liabilities | + | Equity |
| Beginning | $0 | = | $0 | + | $0 |
| Investment in the Business The owner of the company has invested $26,000 cash into the business. This increases the assets of the business from its zero balance. The owner has a claim on the assets, so equity also increases from its zero balance. Make sure the equation stays in balance. | $ | = | $ | + | $ |
| Borrow Cash The company borrows $13,000 cash from the local bank. This increases the assets from its balance after the first transaction. The company now owes the bank; therefore, the bank also has a claim on the assets. Thus, liabilities increase from their zero balance. Notice this transaction did not affect equity. The equation still needs to balance. | $ | = | $ | + | $ |
| Purchase equipment The company pays cash for a piece of equipment costing $10,000. Make sure that the equation stays in balance. Remember, the left side of the equation summarizes the total assets. The company has merely exchanged one asset (cash) for another asset (equipment); the value of each asset is the same. | $ | = | $ | + | $ |
Jones Company: Analyze the accounting equation for another business, Jones Company. Assume that the assets are $66,000 and the liabilities are $26,400. By rearranging the accounting equation, you determine that equity is $.
During the year, the owner invested an additional $4,000 in the business. The company also paid off $2,500 of its debt. What would the accounting equation look like at the end of the year for Jones Company? Enter the updated amounts for Jones' accounting equation below.
| Assets | = | Liabilities | + | Equity |
| $ | = | $ | + | $ |
APPLYING THE CONCEPTS: Analyzing the Effect of Revenues and Expenses
The equity component of the accounting equation can be affected by more than owner contributions. In any form of business, the owners take all revenues and expenses. Therefore, equity increases for revenue earned and decreases for expenses incurred. Also in any form of business, money can be distributed from the business to the owners. Distributions (in the form of cash or other assets) to the owner decrease the equity account. Smith Company had transactions affecting equity during the past year. The table below demonstrates the effect of these transactions for Smith Company. Review the details of each transaction and determine the effect on the accounting equation. Then, enter the updated amounts for the assets, liabilities, and equity accounts (do not record the the transaction). Enter all amounts as positive numbers.
| Transaction | Assets | = | Liabilities | + | Equity |
| Beginning of the year | $320,000 | = | $96,000 | + | $224,000 |
| Revenues earned: During the year, Smith Company earned revenues totalling $192,000. The cash has been collected from the customers for all revenue earned this year. | $ | = | $ | + | $ |
| Expenses incurred: Smith Company incurred expenses totalling $134,400 during that same year. All of the expenses incurred this year were paid in cash. | $ | = | $ | + | $ |
| Distributions: At the end of each quarter, the owner withdraws cash from Smith Company. The sum of those quarterly distributions was $5,760. | $ | = | $ | + | $ |
APPLYING THE CONCEPTS: Putting it all together
Letâs put all the pieces together now. Suppose that you are analyzing Martin Company. You know that at the beginning of the year, the assets equaled $320,000 and the liabilities equaled $176,000. During the year, assets increased by $48,000 and equity increased by $74,400. The change in equity includes all increases and decreases. Further analysis reveals that the changes in equity were caused by revenues of $172,800 and expenses totaling $112,320 during the year, and additional ownersâ investments of $50,400 in the first half of the year. Because of your understanding of the accounting equation, you realize that distributions (withdrawals) to the owner must have also occurred during the year. However, you must determine the amountfor those distributions.
What is the amount of distributions made to the owner of Martin Company during the year? $
Complete the equation below with amounts for the end of the year.
| Assets | = | Liabilities | + | Equity |
| $ | = | $ | + | $ |
AvaAva
PetrilloPetrillo
recently opened her own law office on
MarchMarch
?1, which she operates as a corporation. The name of the newentity is
AvaAva
PetrilloPetrillo?,
Attorney.
PetrilloPetrillo
experienced the following events during the organizing phase ofthe new business and its first month of? operation,
MarchMarch
20182018.
Some of the events were personal and did not affect the lawpractice. Others were business transactions and should be accountedfor by the business.
Mar.Mar.???1 | Sold personal investment in Amazon?stock, which she had owned for several? years, receiving $ 33 comma 000$33,000 cash. | |
2 | Deposited the $ 33 comma 000$33,000 cash from the sale of the Amazon stock in her personal bankaccount. | |
3 | Deposited $ 60 comma 000$60,000 cash in a new business bank account titledAvaAva PetrilloPetrillo?, Attorney. The business issued common stock toPetrilloPetrillo. | |
5 | Paid $ 450$450 cash for ink cartridges for the printer. | |
7 | Purchased computer for the law?office, agreeing to pay the? account, $ 7 comma 000$7,000?, within three months. | |
9 | Received $ 3 comma 100$3,100 cash from customers for services rendered. | |
15 | Received bill from TheLawyer for magazine? subscription, $ 200$200. ?(Use Miscellaneous Expense? account.) | |
23 | Finished court hearings on behalfof a client and submitted a bill for legal? services, $ 12 comma 000$12,000?, on account. | |
28 | Paid bill from The Lawyer. | |
30 | Paid? utilities, $ 1 comma 300$1,300. | |
3131 | Received $ 1 comma 000$1,000 cash from clients billed onMarchMarch 23. | |
3131 | Cash dividends of $ 3 comma 000$3,000 were paid to stockholders. |
. | Analyze the effects of thepreceding events on the accounting equation of AvaAva PetrilloPetrillo?, Attorney. |
2. | Prepare the following financial? statements: a. Income statement. b. Statement of retained earnings. c. Balance sheet. d. Statement of cash flows. |
.
Requirement 1. Analyze the effects of thepreceding events on the accounting equation of
AvaAva
PetrilloPetrillo?,
Attorney.Analyze the events? chronologically, one transaction ata time. Beginning with the transaction on the? 2nd, calculate thebalance in each account after analyzing the effect of thetransaction on the accounting equation. After calculating theending balance of each account on the
3131?st,
calculate total assets and total liabilities and equity.?(Complete only the necessary answer boxes for your transactionlines. If a transaction is personal and does not affect the?business, leave the transaction line blank. Carry down all balancesto the? "Bal." line, including zero balance? accounts, entering a?"0" for any zero balances. Enter a decrease in an account with aminus sign or parentheses. Abbreviations? used: A/P? = Accounts?Payable; A/R? = Accounts? Receivable; Com.? = Common; Contr. Cap.?= Contributed? Capital; Div.? = Dividends; Comp.? = Computer; Exp.?= Expense; Liab.? = Liabilities; Misc.? = Miscellaneous; Rev.? =Revenue; Sup.? = Supplies; Util.? = Utilities.)
ASSETS | = | LIAB. | + | EQUITY | |||||||||||||||
Contr. | |||||||||||||||||||
Cap. | + | Retained Earnings | |||||||||||||||||
Cash | + | A/R | + | Office | + | Comp. | = | A/P | + | Com. | - | Div. | + | Service | - | Util. | - | Misc. | |
Sup. | Stock | Rev. | Exp. | Exp. | |||||||||||||||
3/1 | 72,000 | + | + | + | = | + | - | + | - | - | |||||||||
3/2 | + | + | + | = | + | - | + | - | - | ||||||||||
Bal. | + | + | + | = | + | - | + | - | - | ||||||||||
