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Accounting Equation

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Accounting Equation for a Corporation — Transactions C3–C4


Corporation Transaction C3.

On December 3, 2008 ASI spends $5,000 of cash to purchase computer equipment for use in the business. The effect of this transaction on its accounting equation is:


Assets = Liabilities + Stockholders’ Equity
+$5,000 = No Effect + No Effect
–$5,000


The accounting equation indicates that one asset increases and one asset decreases. Since the amount of the increase is the same as the amount of the decrease, the accounting equation remains in balance.


This transaction is recorded in the asset accounts Equipment and Cash. The account increases by $5,000 and the account decreases by $5,000. The journal entry for this transaction is:



Date Account Titles Debit Credit
Dec. 3, 2008 Equipment 5,000
Cash 5,000


The effect on the accounting equation from the first three transactions is:


Transaction Assets = Liabilities + Stockholders’ Equity
C1 +$10,000 = No Effect + +$10,000
C2 –$100 = No Effect + –$100
C3 +$5,000 = No Effect + No Effect
–$5,000
Totals    $9,900 =          $0 +    $9,900


The totals tell us that the corporation has assets of $9,900 and the source of those assets is the stockholders. The totals tell us that the company has assets of $9,900 and that the only claim against those assets is the stockholders’ claim.


The balance sheet dated December 3, 2008 reflects the financial position of the corporation as of midnight on December 3:


Accounting Software, Inc.
Balance Sheet
December 3, 2008
ASSETS LIABILITIES
Cash $ 4,900 STOCKHOLDERS’ EQUITY
Equipment 5,000 Common Stock $ 10,000 
Retained Earnings 0*
. Less: Treasury Stock (100)
Total Stockholders' Equity 9,900 
Total Assets $ 9,900 Total Liabilities & Stkrs' Equity $ 9,900 
.
.
Beginning Retained Earnings $
+ Net Income +
  Subtotal $
– Dividends
Ending Retained Earnings at Dec. 3 $ 0*
.


The purchase of equipment is not an immediate expense. It will become depreciation expense only after the equipment is placed in service. We will assume that as of December 3 the equipment has not been placed into service. Therefore, there is no expense in this transaction or in the earlier transactions to be reported on the income statement.





Corporation Transaction C4.

On December 4, 2008 ASI obtains $7,000 by borrowing money from its bank. The effect of this transaction on the accounting equation is:


Assets = Liabilities + Stockholders’ Equity
+$7,000 = +$7,000 + No Effect


As you see, ACI’s assets increase and its liabilities increase by $7,000.


This transaction is recorded in the asset account Cash and the liability account Notes Payable with the following journal entry:



Date Account Titles Debit Credit
Dec. 4, 2008 Cash 7,000
Notes Payable 7,000


To see the effect on the accounting equation from the first four transactions, click here:


Transaction Assets = Liabilities + Stockholders’ Equity
C1 +$10,000 = No Effect + +$10,000
C2 –$100 = No Effect + –$100
C3 +$5,000 = No Effect + No Effect
–$5,000
C4 +$7,000 = +$7,000 + No Effect
Totals $16,900 =    $7,000 +    $9,900


These totals indicate that the transactions through December 4 result in assets of $16,900. There are two sources for those assets: the creditors provided $7,000 of assets, and the stockholders provided $9,900. You can also interpret the accounting equation to say that the corporation has assets of $16,900 and the creditors have a claim of $7,000. The residual or remainder of $9,900 is the stockholders’ claim.


The balance sheet dated December 4 reports the corporation’s financial position as of that date:


Accounting Software, Inc.
Balance Sheet
December 4, 2008
ASSETS LIABILITIES
Cash $ 11,900 Notes Payable $ 7,000 
Equipment 5,000 STOCKHOLDERS’ EQUITY
Common Stock 10,000 
Retained Earnings 0*
Less: Treasury Stock (100)
. Total Stockholders' Equity 9,900 
Total Assets $ 16,900 Total Liabilities & Stkrs' Equity $ 16,900 
.
.
Beginning Retained Earnings $
+ Net Income +
  Subtotal $
– Dividends
Ending Retained Earnings at Dec. 4 $ 0*
.


The receipt of money from the bank loan is not revenue since ASI did not earn the money by providing services, investing, etc. As a result, there is no income statement effect from this transaction or earlier transactions.




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