We present nine transactions to illustrate how a company’s
accounting equation stays in balance.
When a company records a business transaction, it is not entered into an accounting equation, per se. Rather, transactions are recorded into specific accounts contained in the company’s general ledger. Each account is designated as an asset, liability, owner's equity, revenue, expense, gain, or loss account. The general ledger accounts are then used to prepare the balance sheets and income statements throughout the accounting periods.
In the examples that follow, we will use the following accounts:
Sole Proprietorship Transaction #1.
Let’s assume that J. Ott forms a sole proprietorship called Accounting Software Co. (ASC). On December 1, 2011, J. Ott invests personal funds of $10,000 to start ASC. The effect of this transaction on ASC’s accounting equation is:
As you can see, ASC’s assets increase by $10,000 and so does ASC’s owner's equity. As a result, the accounting equation will be in balance.
You can interpret the amounts in the accounting equation to mean that ASC has assets of $10,000 and the source of those assets was the owner, J. Ott. Alternatively, you can view the accounting equation to mean that ASC has assets of $10,000 and there are no claims by creditors (liabilities) against the assets. As a result, the owner has a claim for the remainder or residual of $10,000.
This transaction is recorded in the asset account Cash and the owner’s equity account J. Ott, Capital. The general journal entry to record the transactions in these accounts is:
When a company records a business transaction, it is not entered into an accounting equation, per se. Rather, transactions are recorded into specific accounts contained in the company’s general ledger. Each account is designated as an asset, liability, owner's equity, revenue, expense, gain, or loss account. The general ledger accounts are then used to prepare the balance sheets and income statements throughout the accounting periods.
In the examples that follow, we will use the following accounts:
Cash(To view a more complete listing of accounts for recording transactions, see the Explanation of Chart of Accounts.)
Accounts Receivable
Equipment
Notes Payable
Accounts Payable
J. Ott, Capital
J. Ott, Drawing
Service Revenues
Advertising Expense
Temp Service Expense
Sole Proprietorship Transaction #1.
Let’s assume that J. Ott forms a sole proprietorship called Accounting Software Co. (ASC). On December 1, 2011, J. Ott invests personal funds of $10,000 to start ASC. The effect of this transaction on ASC’s accounting equation is:
| Assets | = | Liabilities | + | Owner’s Equity | |
| +$10,000 | = | No Effect | + | +$10,000 |
As you can see, ASC’s assets increase by $10,000 and so does ASC’s owner's equity. As a result, the accounting equation will be in balance.
You can interpret the amounts in the accounting equation to mean that ASC has assets of $10,000 and the source of those assets was the owner, J. Ott. Alternatively, you can view the accounting equation to mean that ASC has assets of $10,000 and there are no claims by creditors (liabilities) against the assets. As a result, the owner has a claim for the remainder or residual of $10,000.
This transaction is recorded in the asset account Cash and the owner’s equity account J. Ott, Capital. The general journal entry to record the transactions in these accounts is:
| Date | Account Titles | Debit | Credit |
| Dec. 1, 2011 |
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