Accounting Equation for a Corporation: Transactions C7–C8
Corporation Transaction C7.
On December 7, 2016 ASI uses a temporary help service for 6 hours at a cost of $20 per hour. ASI records the invoice immediately, but it will pay the $120 when it is due in 10 days. This transaction has the following effect on the accounting equation:
The accounting equation shows that ASI's liabilities increase by $120 and the expense causes stockholders' equity to decrease by $120.
The liability will be recorded in Accounts Payable and the expense will be recorded in Temp Service Expense. The general journal entry for utilizing the temp service is:
The effect of the first seven transactions on the accounting equation can be viewed here:
The totals show us that the corporation has assets of $17,200 and the sources are the creditors with $7,120 and the stockholders with $10,080. The accounting equation totals also reveal that the corporation's creditors have a claim of $7,120 and the stockholders have a claim for the remaining $10,080.
The financial position of ASI as of midnight of December 7, 2016 is presented in the following balance sheet:
**The income statement (which reports the corporations' revenues, expenses, gains, and losses for a specified time period) is a link between balance sheets. It provides the results of operations—an important part of the change in stockholders' equity.
The income statement for the first seven days of December is shown here:
Corporation Transaction C8.
On December 8, 2016 ASI receives $500 from the clients it had billed on December 6. The effect on the accounting equation is:
The corporation's cash increases and one of its other assets (accounts receivable) decreases. Liabilities and stockholders' equity are unaffected. (There are no revenues on this date. The revenues were recorded when they were earned on December 6.)
The general journal entry to record the increase in Cash and the decrease in Accounts Receivable is:
The effect on the accounting equation from the transactions through December 8 is shown here:
The totals after the first eight transactions indicate that the corporation has assets of $17,200. The creditors have provided $7,120 and the company's stockholders have provided $10,080. The accounting equation also indicates that the company's creditors have a claim of $7,120 and the stockholders have a residual claim of $10,080.
ASI's balance sheet as of midnight of December 8, 2016 is shown here:
**The income statement (which reports the corporation's revenues, expenses, gains, and losses for a specified time period) is a link between balance sheets. It provides the results of operations—an important part of the change in stockholders' equity.
The income statement for ASI's first eight days of operations is shown here: