General

Accounting Equation

Samuel Anene Written by Samuel Anene · 1 min read >

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.
AssetsEquity
TransactionCashCommon Stock
1. Owner invested cash+ 30,000+ 30,000

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.
Assets Equity
TransactionCashEquipmentCommon Stock
1. Owner invested cash+ 30,000+30,000
2. Purchased equipment for cash– 5,500+5,500
Balance:24,5005,50030,000

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.
Assets  Equity
TransactionCashEquipmentTruckCommon Stock
1. Owner invested cash+30,000+30,000
2. Purchased equipment for cash– 5,500+5,500
3.  Purchased truck for cash-8,500+  8,500
Balance:16,0005,500 8,50030,000

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.
Assets =   Liabilities +Equity
TransactionCashSuppliesEquipmentTruckAccounts PayableCommon Stock
1. Owner invested cash+30,000+30,000
2. Purchased equipment for cash-5,500+5,500
3.  Purchased truck for cash-8,500+ 8,500
4.  Purchased supplies on account.+ 500 +500
Balance:16,0005005,5008,50050030,000

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.
Assets =   Liabilities +Equity
TransactionCashSuppliesEquipmentTruckAccounts PayableCommon Stock
1. Owner invested cash+30,000+30,000
2. Purchased equipment for cash-5,500+5,500
3.  Purchased truck for cash-8,500+8,500
4.  Purchased supplies on account.+500+500
5.  Making a payment to creditor.-300-300
Balance:15,7005005,5008,50020030,000

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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