Acc/300 Week One Accounting Equation
The accounting equation is, Assets are equal to Liabilities plus Stockholders’ Equity. Assets are resources owned by a business. Liabilities are the debts and obligations of the business. Liabilities represent claims of creditors on the assets of a business. Stockholders’ equity represents the claims of owners on the assets of the business. This equity is divided into two parts: common stock and retained earnings. The balance sheet reports assets and claims to assets at one specific point in time. Claims to assets are subdivided into two categories: claims of creditors and claims of owners. The accounting equation must always balance. Each transaction has a dual effect on the equation. As an example if an individual asset is increased, there must be a corresponding decrease in another asset, or an increase in a specific liability, or an increase in stockholders’ equity.
Two or more items could be affected when an asset is increased. If a business were to purchase a piece of equipment costing $12,000 for example, they decide to pay $6,000 in cash and sign a note for the remaining $6,000. One asset (equipment) increases $12,000, another asset (cash) decreases $6,000, and a liability (notes payable) increases $6,000. As you can see the accounting equation in this example balances, the asset was worth $12,000, the liability, the notes payable was $6,000, and the Stockholders’ Equity, the cash was $6,000. Another example of how components of the accounting equation affect each other would be Mr. Smith starting up a bike shop. Mr. Smith contributes $7,500 in cash to get the business started, this is considered capital, which is an asset and also goes into the Owner’s Equity side. Mr. Smith buys $2,500 in bike parts by taking out a bank note. The bike parts are an asset and the bank note is a liability in the Accounts Payable category. Mr. Smith repairs bikes and collects $400 in cash and bills customers for another $700. The $400 in cash is an asset and the $700 is an
Two or more items could be affected when an asset is increased. If a business were to purchase a piece of equipment costing $12,000 for example, they decide to pay $6,000 in cash and sign a note for the remaining $6,000. One asset (equipment) increases $12,000, another asset (cash) decreases $6,000, and a liability (notes payable) increases $6,000. As you can see the accounting equation in this example balances, the asset was worth $12,000, the liability, the notes payable was $6,000, and the Stockholders’ Equity, the cash was $6,000. Another example of how components of the accounting equation affect each other would be Mr. Smith starting up a bike shop. Mr. Smith contributes $7,500 in cash to get the business started, this is considered capital, which is an asset and also goes into the Owner’s Equity side. Mr. Smith buys $2,500 in bike parts by taking out a bank note. The bike parts are an asset and the bank note is a liability in the Accounts Payable category. Mr. Smith repairs bikes and collects $400 in cash and bills customers for another $700. The $400 in cash is an asset and the $700 is an