The accounting equation Accounting and Accountability


Listen to the audio recording while you read the text below. Then answer the comprehension questions that follow the text. Metro Corporation paid a total of $1,200 for utility bill. Metro Corporation paid a total of $900 for office salaries. Sept. 23 A customer returned 5 games sold on 12 September and included a cheque for the amount due on the other 15 games. The games were not defective and were returned to inventory. Sept. 10 Returned 5 of the games purchased on 4 September for credit.

To further illustrate the analysis of transactions and their effects on the basic accounting equation, we will analyze the activities of Metro Courier, Inc., a fictitious corporation. Refer to the chart of accounts illustrated in the previous section. D)As per the accounting equation, assets are equal to a sum of equity and liabilities. B)It is an incorrect option as liabilities are equal to the sum of assets and equity as per the accounting equation. You may have made a journal entry where the debits do not match the credits. This should be impossible if you are using accounting software, but is entirely possible if you are recording accounting transactions manually.

Business Operations

This is the same approach we took for all the Every single transaction that occurs in your bakery will be recorded using the accounting equation.

For every transaction, both sides of this equation must have an equal net effect. Below are some examples of transactions and how they affect the accounting equation. This equation sets the foundation of double-entry accounting, also known as double-entry bookkeeping, and highlights the structure of the balance sheet. Double-entry accounting is a system where every transaction affects at least two accounts. Locate the company’s total assets on the balance sheet for the period. Assets represent the valuable resources controlled by the company, while liabilities represent its obligations.

Additional Accounting Equation Issues

Contributed capital, common stock, and retained earnings are a part of equity. This equation can be expanded to show that stockholders’ equity is equal to contributed capital plus retained earnings, and that net income is equal to revenues less expenses. Most companies maintain the accounting equation using a double-entry bookkeeping system to record financial data. Under this system, a change in one account must be matched in another account. These changes are made by debits and credits and for every entry, the sum of debits must equal the sum of credits. The beautiful thing about accounting and the three-statement models it helps inform is that they create a closed system.

In this example, we used the bank account to purchase a business asset. If we had used the owner’s personal bank account to buy the iPhone, then our owner’s equity on the credit side would have increased. The Accounting Equation is based on the double entry accounting, which says that every transaction has two aspects, debit and credit, and for every debit there is equal and opposite credit.

Which of the following is an appropriate representation of the accounting equation? a. Assets +…

The new purchased new asset for $5,500 and paid cash. A. Prepare general journal entries to record the transactions assuming that a perpetual inventory system is used. A transaction for the sale of goods or services results in an increase in owner’s equity. When an owner invests cash in a business, owner’s equity decreases. A record summarizing all the information pertaining to a single item in the accounting equation is an account.

Although the balance sheet always balances out, the accounting equation can’t tell investors how well a company is performing. For a company keeping accurate accounts, every business transaction will be represented in at least two of its accounts. The accounting equation helps to assess whether the business transactions carried out by the company are being accurately reflected in its books and accounts. Below are examples of items listed on the balance sheet.