Accounting Equation

Sole Proprietorship Transaction #7.

On December 7, 2008 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:

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:

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

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, 2008 is:

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

Sole Proprietorship Transaction #8.

On December 8, 2008 ASC receives $500 from the clients it had billed on December 6, 2008. The collection of accounts receivables has this effect on the accounting equation:

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:

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, 2008 is:

Accounting Software Co.
Balance Sheet
December 8, 2008
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, 2008
REVENUES
Service Revenues	$	900
EXPENSES
Advertising Expense		600
Temp Service Expense		120
Total Expenses		720
NET INCOME	$	180

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