We will illustrate the effect of transactions on the accounting equation and on the balance sheet by using two digital scales. The scale on the left is used to report the total amount of assets. The scale on the right will report the total amount of the liabilities and stockholders’ equity. In U.S. organizations, the totals are reported in U.S. dollars.
Step 1: The corporation’s asset Cash will increase by $10,000.
Step 2: The stockholders’ equity account Common Stock will also increase by $10,000.
If a balance sheet were issued at this point, it would look like this:
Step 1: The asset Cash will decrease by $6,000.
Step 2: The asset Equipment increases by $6,000.
If a balance sheet were issued at this point, it would look like this:
Step 1: The corporation’s asset Cash (checking account) will increase by $15,000.
Step 2: The corporation’s liability Note Payable or Loan Payable increases by $15,000.
If a balance sheet were issued at this point, it would look like this:
Step 1: The corporation’s asset Accounts Receivable will increase by $5,000.
Step 2: The corporation’s retained earnings will also increase by $5,000.
If a balance sheet were issued at this point, it would look like this:
If an income statement were issued at this point, it would look like this:
The balance sheet and income statement together would look like this:
Step 1: The corporation’s Accounts Payable (a liability) will increase by $2,000.
Step 2: The corporation’s Retained Earnings will decrease by $2,000. (The decrease in Retained Earnings is caused by the Consulting Expense of $2,000 reported on the income statement.)
If a balance sheet were issued at this point, it would look like this:
If an income statement were issued at this point, it would look like this:
The balance sheet and income statement together would look like this:
Step 1: The corporation’s Cash will decrease by $1,000.
Step 2: The corporation’s asset Prepaid Insurance will increase by $1,000. (There is not an expense or decrease in Retained Earnings until February.)
If a balance sheet were issued at this point, it would look like this:
If an income statement were issued at this point, it would look like this:
The balance sheet and income statement together would look like this:
Step 1: The corporation’s Cash will increase by $4,000.
Step 2: The corporation’s Accounts Receivable will decrease by $4,000.
If a balance sheet were issued at this point, it would look like this:
If an income statement were issued at this point, it would look like this:
The balance sheet and income statement together would look like this:
Step 1: The corporation’s Accrued Liabilities will increase by $1,000 for the accrued expenses.
Step 2: The corporation’s Retained Earnings will decrease because of the $1,000 of accrued utilities and interest expenses being reported on the income statement.
If a balance sheet were issued at this point, it would look like this:
If an income statement were issued at this point, it would look like this:
The balance sheet and income statement together would look like this:
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