Accounting Equation for a Corporation: Transactions C3–C4
Corporation Transaction C3.
On December 3, 2020, ASI spends $5,000 of cash to purchase computer equipment for use in the business. The effect of this transaction on ASI's accounting equation is:
The accounting equation shows 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 Equipment account increases by $5,000 and the Cash account decreases by $5,000. The journal entry for this transaction is:
The effect on the accounting equation from the first three transactions is:
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, 2020, reflects the financial position of the corporation as of midnight on December 3:
The purchase of equipment is not an immediate expense. It will become part of 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 to be reported on the income statement for the period of December 1-3.
Corporation Transaction C4.
On December 4, 2020, ASI obtains $7,000 by borrowing money from its bank. The effect of this transaction on the accounting equation is:
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:
The following shows the effects on the accounting equation from the first four transactions:
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:
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 or earlier transactions.