Accounting Equation

An accounting transaction is a business activity or event that causes a measurable change in the accounting equation. An exchange of cash for a business activity is a transaction. Merely placing an order for goods is not a recordable transaction because no exchange has taken place

Types of accounts that business activities are made up of are:

1. Assets.
2. Liabilities.
3. Equity

These are the building blocks of the basic accounting equation.   The accounting equation is:

Asset = Liabilities + Owners Equity.

 Owners invested cash

Ajao Ltd on  January 1, the company issued shares (10,000 shares at $3 each) of common stock for $30,000 cash to Obed, his wife, and their son. The $30,000 cash was deposited in the new business account.

Transaction analysis:

• The new corporation received $30,000 cash in exchange for ownership in common stock (10,000 shares at $3 each).
• We want to increase the asset Cash and increase the equity Common Stock.

Let’s check the accounting equation:  Assets $30,000 = Liabilities $0 +  Equity $30,000

2. Purchased equipment for cash

Ajao Ltd paid $ 5,500 cash for equipment (two computers).

Transaction analysis:

• The new corporation purchased new asset (equipment) for $5,500 and paid cash.
• We want to increase the asset Equipment and decrease the asset Cash since we paid cash.

Let’s check the accounting equation:  Assets $30,000 (Cash $24,500 + Equipment $5,500)  = Liabilities $0 +  Equity $30,000

3. Purchased truck for cash

Ajao ltd paid $ 8,500 cash for a truck.

Transaction analysis:

• The new corporation purchased new asset (truck) for $8,500 and paid cash.
• We want to increase the asset Truck and decrease the asset cash for $8,500.

Let’s check the accounting equation: Assets $30,000 (Cash $16,000 + Equipment $5,500 + Truck $8,500)  = Liabilities $0 + Equity $30,000

4. Purchased supplies on account.

Ajao Ltd  purchased supplies on account from Office Lux for $500.

Transaction analysis:

• The new corporation purchased new asset (supplies) for $500 but will pay for them later.
• We want to increase the asset Supplies and increase what we owe with the liability Accounts Payable.

Let’s check the accounting equation: Assets $30,500 (Cash $16,000+ Supplies $500 + Equipment $5,500 + Truck $8,500)  = Liabilities $500 +  Equity $30,000

5. Making a payment to creditor.

Ajao issued a check to Office Lux for $300 previously purchased supplies on account.

Transaction analysis:

• The corporation paid $300 in cash and reduced what they owe to Office Lux.
• We want to decrease the liability Accounts Payable and decrease the asset cash since we are not buying new supplies but paying for a previous purchase.

Let’s check the accounting equation: Assets $30,200 (Cash $15,700 + Supplies $500 + Equipment $5,500 + Truck $8,500)  = Liabilities $200 +  Equity $30,000

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