Accounting Equation

Corporation Transaction C7.

On December 7, 2006 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, 2006 is presented in the following balance sheet:

The income statement for the first seven days of December is shown here:

Corporation Transaction C8.

On December 8, 2006 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:

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
C5	–$600	=	No Effect	+	–$600
C6	+$900	=	No Effect	+	+$900
C7	No Effect	=	$120	+	–$120
C8	+$500	=	No	+	No
	–$500		Effect		Effect
Totals	$17,200	=	$7,120	+	$10,080

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. The result is the stockholders have a residual claim of $10,080.

ASI’s balance sheet as of midnight of December 8, 2006 is shown here:

Accounting Software, Inc.
Balance Sheet
December 8, 2006
ASSETS			LIABILITIES
Cash	$	11,800	Notes Payable	$	7,000
Accounts Receivable		400	Accounts Payable		120
Equipment		5,000	Total Liabilities		7,120
			STOCKHOLDERS’ EQUITY
			Common Stock		10,000
			Retained Earnings		180*
			Less: Treasury Stock		(100)
		.	Total Stkr Equity		10,080
Total Assets	$	17,200	Total Liabilities & Stkrs' Equity	$	17,200
.

.
			Beginning Retained Earnings	$	0
			+ Net Income**	+	180
			Subtotal	$	180
			– Dividends	–	0
			Ending Retained Earnings at Dec. 8	$	180*
.

**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:

Accounting Software, Inc.
Income Statement
For the Eight Days Ended December 8, 2006
REVENUES
Service Revenues	$	900
EXPENSES
Advertising Expense		600
Temp Service Expense		120
Total Expenses		720
NET INCOME	$	180

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