Accounting Equation for a Sole Proprietorship: Transactions 3-4
Sole Proprietorship Transaction #3.
On December 3, 2018 Accounting Software Co. spends $5,000 of cash to purchase computer
equipment for use in the business. The effect of this transaction on the accounting
The accounting equation reflects that one asset increases and another
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. Equipment increases by $5,000, and Cash decreases by $5,000. The general journal entry to record the transactions in these accounts is:
The combined effect of the first three transactions is shown here:
The totals tell us that the company has assets of $9,900 and the source
of those assets is the owner of the company. It also tells us that
the company has assets of $9,900 and the only claim against those assets
is the owner's claim.
The balance sheet dated December 3, 2018 will reflect the financial
position as of midnight on December 3:
The purchase of equipment is not an immediate expense. It will become part of
only after it is placed into service. We will assume that as of December 3 the equipment has not
been placed into service, therefore, no expense will appear on an income statement for the period
of December 1 through December 3.
Sole Proprietorship Transaction #4.
On December 4, 2018 ASC obtains $7,000 by borrowing money from its bank. The effect of this
transaction on the accounting equation is:
As you can see, ASC's assets increase and
ASC's liabilities increase by $7,000.
This transaction is recorded in the asset account Cash
and the liability account Notes Payable as shown in this accounting entry:
The combined effect on the accounting equation from the first four
transactions is available here:
The 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 owner of the company
provided $9,900. You can also interpret the accounting equation to say
that the company has assets of $16,900 and the lenders have a claim of
$7,000 and the owner has a claim for the remainder.
The balance sheet dated December 4 will report ASC's
financial position as of that date:
The proceeds of the bank loan are not considered to be revenue since ASC
did not earn the money by providing services, investing, etc.
As a result, there is no income statement effect from this
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