Effects of a transaction on assets, liabilities, and equity
Mrs. Sanchez, the owner, withdraws $2,100 cash from the business to take her spouse on a weekend vacation in Paris.
Mrs. Moore, the owner, purchases $4,000 of
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Effects of a transaction on assets, liabilities, and equity
Mrs. Sanchez, the owner, withdraws $2,100 cash from the business to take her spouse on a weekend vacation in Paris.
Mrs. Moore, the owner, purchases $4,000 of merchandise on credit.
Mr. Lee, the owner, purchases office supplies for $2,350 from The Depot on account.
On June 15, Mrs. Baker, the owner, pays $600 for May's utility bill. Earlier, on May 31, Mrs. Baker had accrued the utility
cost.
On June 15, Mr. Anderson, the owner, pays $610 for May's utility bill. Earlier, on May 31, Mr. Anderson had accrued the
utility cost.
Miss Carter, the owner, performs services for some clients and is paid in cash immediately, $850.
In this transaction, the current month's rent expense is paid with cash. So Cash, an asset, decreases.
An expense is incurred (the Rent Expense account increases). This expense reduces the income for the fiscal year, which
in turn reduces equity. So Owner's Equity decreases.
Here is the effect of the transaction on the accounting equation.
Assets Liabilities Owner's Equity
-1,475 (Cash) -1,475
Here is a summary.
•Cash, an individual asset account, decreases.
•No individual liability accounts are affected.
•Owner's Equity decreases.
Mrs. Roberts, the owner, receives money in advance of performing the service, $6,200.
Mr. Cooper, the owner, pays its supplier $4,000 for supplies purchased three weeks earlier.
Mrs. Collins, the owner, takes $30,000 from a personal bank account and puts the money in the business checking
account.
Miss Patterson, the owner, receives money from customers who have been previously billed, on account, $7,250.
Under the accrual basis system of accounting, revenues are recognized and recorded when earned, not necessarily when
cash is received.
In this transaction, Miss Patterson receives cash for services previously performed. So Cash, an asset account,
increases.
The amount that was owed to Miss Patterson was recorded Accounts Receivable, an asset account. Since Miss Patterson
is now being paid part or all of what is owed, Accounts Receivable decreases.
Here is the effect of the transaction on the accounting equation.
Assets Liabilities Owner's Equity
7,250 (Cash)
7,250 (Accounts Receivable)
Here is a summary.
•Cash, an individual asset account, increases.
•Accounts Receivable, an individual asset account, decreases.
•No individual liability accounts are affected.
•Owner's Equity is not affected.
Mrs. Harris, the owner, purchases printing equipment for $8,000, paying 40% of the amount due in cash and agreeing to
pay the balance at a later date.
Mrs. Lewis, the owner, purchases store supplies for $2,800, paying 20% of the amount due in cash and agreeing to pay
the balance at a later date.
Mr. Jones, the owner, purchases printing equipment for $3,000, paying 40% of the amount due in cash and agreeing to
pay the balance at a later date.
In this transaction, Mrs. Harris purchased printing equipment, an asset. So Equipments, an asset account, increases.
As stated in the problem, part of the puchase (40% of $8,000 = $3,200) is paid with cash. So cash, an asset account,
decreases.
Mrs. Harris incurs a libility for the remaining amount (60% of $8,000 = $4,800). This liability is recorded in Accounts
Payable.
Here is the effect of the transaction on the accounting equation.
Assets Liabilities Owner's Equity
8,000 (Equipment) 3,200 (Cash) 4,800 (Accounts Payable)
Here is a summary.
•Equipment, an individual asset account, increases.
•Cash, an individual asset account, decreases.
•Accounts Payable, an individual liability account, increases.
•Owner's Equity is not affected.
Mrs. Ross, the owner, receives money from customers who have been previously billed, on account, $4,600.
Mrs. Evans, the owner, pays money for insurance in advance of using the insurance, $8,400.
Mrs. Patterson, the owner, receives her utility bill for $390 on July 31. She intends to pay the bill on August 20.
Under the accrual basis system of accounting, expenses are recognized and recorded when incurred, not necessarily
when cash is paid.
In this transaction, Mrs. Patterson is recording the utility expense even though it will not be paid until next month. Since no
cash was paid, the business incurs a liability. Account Payable, a liability account, increases.
An expense is incurred (the Utility Expense account increases). This expense decreases the income for the fiscal year,
which in turn reduces equity. So Owner's Equity decreases.
Here is the effect of the transaction on the accounting equation.
Assets Liabilities Owner's Equity
390 (Accounts Payable) -390
Here is a summary.
•No individual assets accounts are affected.
•Account Payable, an individual liability account, increases.
•Owner's Equity decreases.
Under the accrual basis system of accounting, expenses are recognized and recorded when incurred, not necessarily
when cash is paid.
In this transaction, Mrs. Gonzales is recording the salary expense even though the salary will not be paid until next month.
Since no cash was paid, the business incurs a liability. Salaries Payable, a liability account, increases.
An expense is incurred (the Salary Expense account increases). This expense decreases the income for the fiscal year,
which in turn reduces equity. So Owner's Equity decreases.
Here is the effect of the transaction on the accounting equation.
Assets Liabilities Owner's Equity
+1,200 (Salaries Payable) -1,200
Here is a summary.
•No individual assets accounts are affected.
•Salaries Payable, an individual liability account, increases.
•Owner's Equity decreases.
•
Miss Thomas, the owner, purchases equipment for $3,500, cash.
Changes to owner's equity: Problem type 1
Presented below is information related to Martin Company.
Compute Drawing.
(Ending capital - Beginning capital) = 9700
(Net income + Additional investments by owner) = 13100
13100-9700 = 3400
Drawing = 3400
(Beginning capital + Net income + Additional investments by owner - Drawing) = 53300
Ending capital = 53300
(Ending capital - Beginning capital) = 9900
9900 - Net income (6000) = 3900
3900 + Drawing (1100) = 5000
Additional investments by owner = 5000
The basic equation for determining the increase in owner's equity is:
Net change in owner's equity = Additional investments + Net income - Drawing
Solve for drawing:
Drawing = Additional investments + Net income -Net change in owner's equity
= $24,100 + $30,300 - $26,200
= $28,200
Solving for beginning capital
The basic equation for total capital is:
Beginning capital + Net change in owner's equity = Ending capital
Solve for beginning capital:
Beginning capital = Ending capital - Net change in owner's equity
= $72,100 - $26,200
=45,900
Net Income=Less drawing + Increase in
equity - additional investments
15300+12300-10800=16800
Beginning capital + Increase in equity =
Ending capital
69500 + 12300 = 81800
Ending capital – Increase in equity =
Beginning capital
112300 – 38300 = 74000
Less drawing + Increase in equity – Net
income
11400 + 38300 – 15400 = 34300
Beginning capital + Increase in equity =
Ending capital
60100 + 23500 = 83600
Additional investments + Net income –
Increase in equity = Less drawing
16500 + 27700 – 23500 = 20700
The income statement communicates the results of operations for a specific period. This period can be
defined as a month, quarter, or fiscal year. Net income or net loss is determined by evaluating the difference
between total revenue earned and total expenses incurred. The income statement contains only revenue
and expense accounts. In a service company, the revenue accounts are typically called Service Revenue or
Consulting Revenue. Supplies Expense, Rent Expense, Travel Expense, and Maintenance Expense are
examples of typical expense accounts in a service company.
Step 1: Calculate the following: beginning owner's equity, ending owner's equity, and the amount of change (increase
or decrease) in owner's equity.
(a) Calculate the beginning owner's equity:
Beginning owner's equity = Beginning assets - Beginning liabilities
= $45,000 - $30,000
= $15,000
(b) Calculate the ending owner's equity:
Ending owner's equity = Ending assets - Ending liabilities
= $83,000 - $56,000
= $27,000
(c) Calculate the change (increase or decrease) in owner's equity:
Change in owner's equity = Ending owner's equity - Beginning owner's equity
= $27,000 - $15,000
= $12,000
Since the result is positive, the change in owner's equity is an increase. Next, determine why owner's equity increased
by $12,000. Since owner's equity is affected by additional investments by owner, revenues, expenses, and drawing, we
must determine which item caused the change in owner's equity.
Step 2: Calculate what caused owner's equity to increase by $12,000. The following equation may be used to
determine why owner's equity increased.
Increase in owner's equity = Additional investments by owner + Revenues - Expenses - Drawing
To solve for revenues, modify the equation as follows.
Revenues = Increase in owner's equity - Additional investments by owner + Expenses + Drawing
= $12,000 - $9,000 + $8,300 + $6,000
= $17,300
45000 – 30000 = 15000
83000 – 56000 = 27000
27000 – 15000 = 12000
12000 – 9000 + 8300 + 6000 = 17300
Revenues = 17300
Step 1: Calculate the following: beginning owner's equity, ending owner's equity, and the amount of change (increase or
decrease) in owner's equity.
(a) Calculate the beginning owner's equity:
Beginning owner's equity = Beginning assets - Beginning liabilities
= $51,000 - $35,000
= $16,000
(b) Calculate the ending owner's equity:
Ending owner's equity = Ending assets - Ending liabilities
= $93,000 - $48,000
= $45,000
(c) Calculate the change (increase or decrease) in owner's equity:
Change in owner's equity = Ending owner's equity - Beginning owner's equity
= $45,000 - $16,000
= $29,000
Since the result is positive, the change in owner's equity is an increase. Next, determine why owner's equity increased by
$29,000. Since owner's equity is affected by additional investments by owner, revenues, expenses, and drawing, we must
determine which item caused the change in owner's equity.
Step 2: Calculate what caused owner's equity to increase by $29,000. The following equation may be used to determine
why owner's equity increased.
Increase in owner's equity = Additional investments by owner + Revenues - Expenses - Drawing
To solve for expenses, modify the equation as follows.
Expenses = Additional investments by owner + Revenues - Drawing - Increase in owner's equity
= $21,500 + $41,200 - $11,900 - $29,000
= $21,800
51000-35000=16000
93000-48000=45000
Now take 45000 – 16000 = 29000
Add 21500+41200-11900-29000 = 21800
Expense = 21800
Step 1: Calculate the following: beginning owner's equity, ending owner's equity, and the amount of change (increase or
decrease) in owner's equity.
(a) Calculate the beginning owner's equity:
Beginning owner's equity = Beginning assets - Beginning liabilities
= $65,000 - $42,000
= $23,000
(b) Calculate the ending owner's equity:
Ending owner's equity = Ending assets - Ending liabilities
= $96,000 - $63,000
= $33,000
(c) Calculate the change (increase or decrease) in owner's equity:
Change in owner's equity = Ending owner's equity - Beginning owner's equity
= $33,000 - $23,000
= $10,000
Since the result is positive, the change in owner's equity is an increase. Next, determine why owner's equity increased by
$10,000. Since owner's equity is affected by additional investments by owner, revenues, expenses, and drawing, we must
determine which item caused the change in owner's equity.
Step 2: Calculate what caused owner's equity to increase by $10,000. The following equation may be used to determine
why owner's equity increased.
Increase in owner's equity = Additional investments by owner + Revenues - Expenses - Drawing
To solve for drawing, modify the equation as follows.
Drawing = Additional investments by owner + Revenues - Expenses - Increase in owner's equity
= $7,200 + $13,200 - $6,700 - $10,000
= $3,700
65000 – 42000 = 23000
96000 – 63000 = 33000
33000 - 23000 = 10000
7200 + 13200 – 6700 -10000 = 3700
Drawing = 3700
Step 1: Calculate the following: beginning owner's equity, ending owner's equity, and the amount of change (increase or
decrease) in owner's equity.
(a) Calculate the beginning owner's equity:
Beginning owner's equity = Beginning assets - Beginning liabilities
= $60,000 - $30,000
= $30,000
(b) Calculate the ending owner's equity:
Ending owner's equity = Ending assets - Ending liabilities
= $75,000 - $42,000
= $33,000
(c) Calculate the change (increase or decrease) in owner's equity:
Change in owner's equity = Ending owner's equity - Beginning owner's equity
= $33,000 - $30,000
= $3,000
Since the result is positive, the change in owner's equity is an increase. Next, determine why owner's equity increased by
$3,000. Since owner's equity is affected by additional investments by owner, revenues, expenses, and drawing, we must
determine which item caused the change in owner's equity.
Step 2: Calculate what caused owner's equity to increase by $3,000. The following equation may be used to determine
why owner's equity increased.
Increase in owner's equity = Additional investments by owner + Revenues - Expenses - Drawing
To solve for Additional investments by owner, modify the equation as follows.
Additional investments by owner = Increase in owner's equity - Revenues + Expenses + Drawing
= $3,000 - $4,300 + $1,900 + $1,500.
= $2,100
60000 – 30000 = 30000
75000 – 42000 = 33000
33000 – 30000 = 3000
3000 – 4300 + 1900 + 1500 = 2100
Additional investments by owner = 2100
Creating a basic equity statement
On December 31, Hill Co. had the following list of accounts and their respective annual balances.
The owner's equity statement is usually prepared following the completion of the income statement, which concludes with
net income. To prepare a statement of owner's equity, we start with the balance of capital at the beginning of the
accounting period. Then we add net income for the period and subtract drawing.
Beginning capital + Net income (from income statement) - Drawing = Ending capital
In this problem, beginning capital and drawing are given, but net income is not.
Beginning capital is given: $46,700
Drawing is given: $14,300
Net income (not given) is calculated by finding the difference between total revenue and total expenses as follows:
Net income = Total revenue - Total expenses
Total revenue = Service revenue (given): $57,500
Total expenses are calculated by adding the balances of all expense accounts listed above, i.e. the accounts whose
names end with the word expense.
Total expenses = Advertising expense + Entertainment expense + Rent expense + Supplies expense
= $5,100 + $1,200 + $6,900 + $6,700
= $19,900
Now that we know the total revenue and the total expenses, the net income can be calculated:
Net income (loss) = Total revenue - Total expenses
= $57,500 - $19,900
= $37,600
Creating a basic balance sheet
On December 31, Bailey Co. had the following list of accounts.
The balance sheet communicates the following basic accounting equation:
Assets = Liabilities + Owner's Equity.
The balance sheet does this by listing the balances of all asset accounts, liability accounts, and the Capital
accounts for one specific date in the life of the business. The balance sheet is sometimes called "the snapshot
of a company," as it shows the company's resources (assets) and claims against resources (i.e., liabilities and
stockholders' equity) on one particular date.
Order of accounts on the balance sheet:
Assets are listed in the order of their liquidity, with the most liquid assets listed first. The order of
assets on the balance sheet is: Cash, Marketable Securities, Notes Receivable, Accounts
Receivable, Inventories, Supplies, and Prepaid Expenses.
Liabilities are reported on the balance sheet in the following order: Accounts Payable, Notes Payable,
Unearned Revenue, and Wages Payable.
Owner's Equity is the ending balance in the Capital account.
Basic tabular transaction
Transaction:
Laker Co. receives a cash payment of $3,900 from a customer on account.
Transaction:
Hawk Co. pays balance due of $4,000 on tools.
Transaction:
Maverick Co. pays current month's rent, $1,300.
Since cash is paid for the rent, the account Cash decreases. When the rent is paid, an expense account
(Rent Expense) increases. An increase in an expense account causes the Equity to decrease. It is accepted
policy to expense the cost of the rent even though, technically, it will not become an expense until it is fully
used by the end of the month. If a cost is going to be fully used by the end of the month, the usual practice is
to expense it at the time of the payment. Expenses reduce Net Income and in turn reduce Equity. Revenues
increase net income and in turn increase Equity.
Transaction:
Laker Co. pays salaries for the current period of $1,200.
Transaction:
Sonic Co. pays $2,000 for monthly advertising expenses.
Transaction:
Trailblazer Co. receives utility bill of $500 and paid it.
Transaction:
Owner deposits $14,000 in business bank account
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 for Financial & Managerial Accounting, 15th Edition By Carl Warren.png)
