ACC 100 Chapter Notes - Chapter 3: Office Supplies, The Monthly, Accounting Equation
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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 |
| $ | = | $ | + | $ |
Morrison Accounting Services was organized on June 2 by a group of accountants to provide accounting and tax services to small businesses. The following transactions occurred during the first month of business:
| June 2 | Received contributions of $10,000 from each of the three owners of the business in exchange for shares of stock. (Capital Stock) |
| June 5 | Purchased a computer system for $12,000. The agreement with the vendor requires a down payment of $2,500 with the balance due in 60 days. (Computer; Cash; Accounts Payable) |
| June 8 | Signed a two-year promissory note (Note Payable) at the bank and received cash of $20,000. |
| June 15 | Billed $12,350 to clients for the first half of June. Clients are billed twice a month for services performed during the month, and the bills are payable within ten days. (Accounts Receivable; Service Revenue) |
| June 17 | Paid a $900 bill from the local newspaper for advertising for the month of June. (Advertising Expense) |
| June 23 | Received the amounts billed to clients for services performed during the first half of the month. |
| June 28 | Received and paid gas, electric, and water bills (Utilities Expense). The total amount is $2,700. |
| June 29 | Received the landlord’s bill for $2,200 for rent on the office space the Morrison leases. The bill is payable by the 10th of the following month. (Rent Expense; Rent Payable) |
| June 30 | Paid salaries and wages for June. (Salaries Expense) The total amount is $5,670. |
| June 30 | Billed $18,400 to clients for the second half of June. |
| June 30 | Declared and paid dividends in the amount of $6,000. (Dividends) |
Prepare journal entries on the books of Morrison Accounting Services to record the transactions entered into during the month. Ignore depreciation expense and interest expense (we’ll get to that later in the semester.)
Prepare a trial balance in good form at June 30. List the accounts in the following order: assets, liabilities, owners’ equity, revenue, expenses, dividends. (You will find it helpful to set-up and post to T-accounts; the T-accounts are not required to be turned in for grading.)
Prepare the following financial statements in good form:
Income statement for the month of June
Statement of retained earnings for the month of June
Classified balance sheet at June 30.
