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Accounting
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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

Let’s 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 owners’ 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
$ = $ + $

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Hubert Koch
Hubert KochLv2
28 Sep 2019

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Related questions

1.
The realizationprinciple indicates that revenue usually should be recorded inthe accounting records:
Question 1 options:
A) when cash is collected from customers
B) when goods are sold or services are rendered to customers
C) at the end of the accounting period
D) only when the revenue can be matched by an equal dollar amountof expenses
E) both (b) and (d) are correct

2.
Which of the following account(s) would be part ofworking capital?
Question 2 options:
A) accounts payable
B) land
C) supplies
D) retained earnings
E) cost of goods sold
F) two of the above accounts are part of working capital
G) three of the above accounts are part of working capital
H) four of the above accounts are part of working capital
I) all of the above accounts are part of working capital

3.
On May 17, Buckeye Corporation performed $800 ofservices for ABC Company, a customer. ABC paid for one-half ofthe
bill on May 17 and agreed to pay the remainder within 30 days. OnJune 9, ABC paid the remaining amount owed. Which
of the following journal entries would ABC Company make onJune 9?
Question 3 options:
A) debit accounts receivable $400 and credit cash $400
B) debit cash $400 and credit service revenue $400
C) debit accounts payable $400 and credit service revenue$400
D) debit cash $400 and credit accounts payable $400
E) debit cash $400 and credit accounts receivable $400
F) debit accounts payable $400 and credit cash $400

4.
The following information is available for XYZ Company: January 1, 2003 December 31, 2003Assets $500,000 $700,000Liabilities $300,000 $400,000 Equity $200,000 $300,000
XYZ Company reported a net income of $50,000 during 2003.
XYZ Company's return on equity (ROE) for 2003 was equal to:
Question 4 options:
A) 8.3%
B) 50.0%
C) 25.0%
D) 20.0%
E) 16.7%

5.
Fletcher, Inc. reported an ending notes payablebalance of $57,000. An examination of the notes payablet-account
revealed debits of $25,000 and credits of $39,000 during the year.The beginning notes payable balance for Fletcher,
Inc. was equal to:
Question 5 options:
A) $71,000 credit
B) $71,000 debit
C) $43,000 debit
D) $43,000 credit
E) none of the above are correct

6.

Indicate the effect each of the following transactions has onthe accounting equation (i.e., assets, liabilities, and equity).Enter the number corresponding to your answer in the box provided.Answer choices may be used once, more than once, or not atall.

Question 6 options:
ABC Company performed $2,000 of delivery servicesfor a customer who agreed to pay next month

ABC Company paid $2,000 cash to the bank; $1,800of this amount was the repayment of a bank loan and the other $200paid was interest

ABC Company made the adjusting entry to accrueincome taxes owed but not yet paid

ABC Company purchased equipment for $3,000cash

1.
assets increase; liabilities increase; equitydecrease
2.
assets decrease; liabilities decrease; equity noeffect
3.
assets increase; liabilities no effect; equityincrease
4.
assets no effect; liabilities no effect; equity noeffect
5.
assets no effect; liabilities increase; equitydecrease
6.
assets increase; liabilities increase; equityincrease
7.
assets increase; liabilities increase; equity noeffect
8.
assets no effect; liabilities decrease; equityincrease
9.
assets decrease; liabilities no effect; equitydecrease
10.
assets decrease; liabilities decrease; equitydecrease
1.
The realizationprinciple indicates that revenue usually should be recorded inthe accounting records:
Question 1 options:
A) when cash is collected from customers
B) when goods are sold or services are rendered to customers
C) at the end of the accounting period
D) only when the revenue can be matched by an equal dollar amountof expenses
E) both (b) and (d) are correct

2.
Which of the following account(s) would be part ofworking capital?
Question 2 options:
A) accounts payable
B) land
C) supplies
D) retained earnings
E) cost of goods sold
F) two of the above accounts are part of working capital
G) three of the above accounts are part of working capital
H) four of the above accounts are part of working capital
I) all of the above accounts are part of working capital

3.
On May 17, Buckeye Corporation performed $800 ofservices for ABC Company, a customer. ABC paid for one-half ofthe
bill on May 17 and agreed to pay the remainder within 30 days. OnJune 9, ABC paid the remaining amount owed. Which
of the following journal entries would ABC Company make onJune 9?
Question 3 options:
A) debit accounts receivable $400 and credit cash $400
B) debit cash $400 and credit service revenue $400
C) debit accounts payable $400 and credit service revenue$400
D) debit cash $400 and credit accounts payable $400
E) debit cash $400 and credit accounts receivable $400
F) debit accounts payable $400 and credit cash $400

4.
The following information is available for XYZ Company: January 1, 2003 December 31, 2003Assets $500,000 $700,000Liabilities $300,000 $400,000 Equity $200,000 $300,000
XYZ Company reported a net income of $50,000 during 2003.
XYZ Company's return on equity (ROE) for 2003 was equal to:
Question 4 options:
A) 8.3%
B) 50.0%
C) 25.0%
D) 20.0%
E) 16.7%

5.
Fletcher, Inc. reported an ending notes payablebalance of $57,000. An examination of the notes payablet-account
revealed debits of $25,000 and credits of $39,000 during the year.The beginning notes payable balance for Fletcher,
Inc. was equal to:
Question 5 options:
A) $71,000 credit
B) $71,000 debit
C) $43,000 debit
D) $43,000 credit
E) none of the above are correct

6.

Indicate the effect each of the following transactions has onthe accounting equation (i.e., assets, liabilities, and equity).Enter the number corresponding to your answer in the box provided.Answer choices may be used once, more than once, or not atall.

Question 6 options:
ABC Company performed $2,000 of delivery servicesfor a customer who agreed to pay next month

ABC Company paid $2,000 cash to the bank; $1,800of this amount was the repayment of a bank loan and the other $200paid was interest

ABC Company made the adjusting entry to accrueincome taxes owed but not yet paid

ABC Company purchased equipment for $3,000cash

1.
assets increase; liabilities increase; equitydecrease
2.
assets decrease; liabilities decrease; equity noeffect
3.
assets increase; liabilities no effect; equityincrease
4.
assets no effect; liabilities no effect; equity noeffect
5.
assets no effect; liabilities increase; equitydecrease
6.
assets increase; liabilities increase; equityincrease
7.
assets increase; liabilities increase; equity noeffect
8.
assets no effect; liabilities decrease; equityincrease
9.
assets decrease; liabilities no effect; equitydecrease
10.
assets decrease; liabilities decrease; equitydecrease

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 titled

AvaAva

PetrilloPetrillo?,

Attorney. The business issued common stock to

PetrilloPetrillo.

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 on

MarchMarch

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.

+

+

+

=

+

-

+

-

-

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