# Accounting Equation

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## Accounting Equation for a Sole Proprietorship: Transactions 7–8

Sole Proprietorship Transaction #7.

On December 7, 2011 ASC uses a temporary help service for 6 hours at a cost of \$20 per hour. ASC will pay the invoice when it is due in 10 days. The effect on its accounting equation is:

 Assets = Liabilities + Owner’s Equity No Effect = +\$120 + –\$120

ASC’s liabilities increase by \$120 and the expense causes owner’s equity to decrease by \$120.

The liability will be recorded in Accounts Payable and the expense will be reported in Temp Service Expense. The journal entry for recording the use of the temp service is:

 Date Account Titles Debit Credit Dec. 7, 2011 Temp Service Expense 120 Accounts Payable 120

The effect of the first seven transactions on the accounting equation can be viewed here:

 Transaction Assets = Liabilities + Owner’s Equity 1 +\$10,000 = No Effect + +\$10,000 2 –\$100 = No Effect + –\$100 3 +\$5,000 = No Effect + No Effect –\$5,000 4 +\$7,000 = +\$7,000 + No Effect 5 –\$600 = No Effect + –\$600 6 +\$900 = No Effect + +\$900 7 No Effect = +\$120 + –\$120 Totals \$17,200 = \$7,120 + \$10,080

The totals show us that the company has assets of \$17,200 and the sources are the creditors with \$7,120 and the owner of the company with \$10,080. The accounting equation totals also tell us that the company has assets of \$17,200 with the creditors having a claim of \$7,120. This means that the owner’s residual claim is \$10,080.

The financial position of ASC as of midnight on December 7, 2011 is:

 Accounting Software Co. Balance Sheet December 7, 2011 ASSETS LIABILITIES Cash \$ 11,300 Notes Payable \$ 7,000 Accounts Receivable 900 Accounts Payable \$ 120 Equipment 5,000 Total Liabilities \$ 7,120 OWNER’S EQUITY . J. Ott, Capital \$ 10,080* Total Assets \$ 17,200 Total Liab & Owner's Equity \$ 17,200 .
 . Beginning Owner's Equity \$ 0 + Owner's Investment + 10,000 + Net Income** + 180 Subtotal \$ 10,180 – J. Ott, Drawing – 100 Ending Owner's Equity, Dec. 7 \$ 10,080* .

**The income statement (which reports the company’s revenues, expenses, gains, and losses for
a specified time interval) is a link between balance sheets. It provides the results of operations—
an important part of the change in owner’s equity.

Accounting Software Co.’s income statement for the first seven days of December is:

 Accounting Software Co. Income Statement For the Seven Days Ended December 7, 2011 REVENUES Service Revenues \$ 900 EXPENSES Advertising Expense 600 Temp Service Expense 120 Total Expenses 720 NET INCOME \$ 180

Sole Proprietorship Transaction #8.

On December 8, 2011 ASC receives \$500 from the clients it had billed on December 6, 2011. The collection of accounts receivables has this effect on the accounting equation:

 Assets = Liabilities + Owner’s Equity +\$500 = No Effect + No Effect –\$500

The company’s asset (cash) increases and another asset (accounts receivable) decreases. Liabilities and owner’s 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:

 Date Account Titles Debit Credit Dec. 8, 2011 Cash 500 Accounts Receivable 500

The combined effect of the first eight transactions is shown here:

 Transaction Assets = Liabilities + Owner’s Equity 1 +\$10,000 = No Effect + +\$10,000 2 –\$100 = No Effect + –\$100 3 +\$5,000 = No Effect + No Effect –\$5,000 4 +\$7,000 = +\$7,000 + No Effect 5 –\$600 = No Effect + –\$600 6 +\$900 = No Effect + +\$900 7 No Effect = +\$120 + –\$120 8 +\$500 = No Effect + No Effect –\$500 Totals \$17,200 = \$7,120 + \$10,080

The totals for the first eight transactions indicate that the company has assets of \$17,200. The creditors provided \$7,120 and the owner provided \$10,080. The accounting equation also indicates that the company’s creditors have a claim of \$7,120 and the owner has a residual claim of \$10,080.

ASC’s balance sheet as of midnight December 8, 2011 is:

 Accounting Software Co. Balance Sheet December 8, 2011 ASSETS LIABILITIES Cash \$ 11,800 Notes Payable \$ 7,000 Accounts Receivable 400 Accounts Payable \$ 120 Equipment 5,000 Total Liabilities \$ 7,120 OWNER’S EQUITY . J. Ott, Capital \$ 10,080* Total Assets \$ 17,200 Total Liab & Owner's Equity \$ 17,200 .
 . Beginning Owner's Equity \$ 0 + Owner's Investment + 10,000 + Net Income** + 180 Subtotal \$ 10,180 – J. Ott, Drawing – 100 Ending Owner's Equity, at Dec. 8 \$ 10,080* .

**The income statement (which reports the company’s revenues, expenses, gains, and losses during a specified period of time) is a link between balance sheets. It provides the results of operations—an important part of the change in owner’s equity.

The income statement for ASC for the eight days ending on December 8 is shown here:

 Accounting Software Co. Income Statement For the Eight Days Ended December 8, 2011 REVENUES Service Revenues \$ 900 EXPENSES Advertising Expense 600 Temp Service Expense 120 Total Expenses 720 NET INCOME \$ 180

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