# Accounting Equation

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## Accounting Equation for a Corporation: Transactions C7–C8

Corporation Transaction C7.

On December 7, 2011 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:

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

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:

 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 + 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 Totals \$17,200 = \$7,120 + \$10,080

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, 2011 is presented in the following balance sheet:

 Accounting Software, Inc. 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 STOCKHOLDERS’ EQUITY Common stock 10,000 Retained earnings 180* Less: Treasury stock (100) . Total stockholders' 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, Dec. 7 \$ 180* .

**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:

 Accounting Software, Inc. 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

Corporation Transaction C8.

On December 8, 2011 ASI receives \$500 from the clients it had billed on December 6. The effect on the accounting equation is:

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

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:

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

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 and the stockholders have a residual claim of \$10,080.

ASI’s balance sheet as of midnight of December 8, 2011 is shown here:

 Accounting Software, Inc. 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 STOCKHOLDERS’ EQUITY Common stock 10,000 Retained earnings 180* Less: Treasury stock (100) . Total stockholders' 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, 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, 2011 Revenues Service revenues \$ 900 Expenses Advertising expense 600 Temp service expense 120 Total expenses 720 Net income \$ 180

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