Page 26 - Account for Ag - 2019

2-2 Accounting for Agriculture CH 2]

Assets
Transaction (2) Cash + Equipment
$60,000
-$2,500 + $2,500
$57,000 + $2,500

After giving effect to these changes in the original equation, the new equation now appears as follows:

Assets = Equity
Cash + Equipment = J. Newell, Capital
$57,000 + $2,500 = $60,000

Newell purchases merchandise for resale, paying $35,000 in cash. This transaction is like the preceding one
in that one type of asset is changed for another type of asset; cash for merchandise. The transaction is shown
below:

Assets
Transaction (3) Cash + Product
$57,000
-$35,000 + $35,000

Incorporating this transaction into the equation yields the following:

Assets = Equity
Cash + Equipment + Product = J. Newell, Capital

Businessmen frequently find that, in order to conduct their businesses satisfactorily, they need property in
addition to that provided by their own proprietorship. They can obtain the use of additional property in either of
two ways: (1)they can borrow money and use it to purchase assets or (2)they can purchase property on account,
that is, they can procure the property by giving a promise to pay at some future date.
Those from whom businessmen borrow or purchase on account are known as CREDITORS. The creditors of
a business have a claim on the entire assets of that business, to the extent of the indebtedness, until the proprietor
pays them in accordance with their agreement. The rights of the creditors in the assets of a business are known as
the LIABILITIES of the business.
From the previous paragraphs it is evident that the assets of a business are commonly subject to two types of
claims against it; the claims of the owner, equity, and the claims of the creditors. Consequently, to show both
types, the original equation must be expressed as follows:

Assets = Liabilities + Equity

Our example continues. Needing additional stock, Mr. Newell receives 35 tons of fertilizer from DuPont
Chemical Co. and promises to pay for it at a later date. This transaction increases his merchandise by $3,500 and,
because he is not making immediate payment, increases the total of his assets by the same amount. As a part of the
transaction, however, he grants DuPont Chemical Co. a claim against his assets, thus creating a liability of $3,500.
The amount of Newell's equity is not affected. In terms of our fundamental equation, this is what happens:
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