Page 27 - Account for Ag - 2019

CH 2] Accounting Equation 2-3

Assets Liabilities
Transaction (4) Product = DuPont Chemical Co.
$35,000 $3,500
+ $3,500 = + $3,500
$38,500 $3,500

After giving effect to these changes in the equation as it appeared just prior to this transaction, the new
equation appears as follows:

Assets = Liabilities + Equity
Cash + Equipment + Product = DuPont Chem + J. Newell, Capital 2
$22,500 + $2,500 + $38,500 = $3,500 + $60,000

Inasmuch as Newell's cash would not be drastically depleted if he paid DuPont Chemical Co. the total amount
of the liability, he decides to pay $1,500 on account at this time. The effect of the transaction is as follows:

Assets Liabilities
Transaction (5) Cash DuPont Chemical Co.
$22,500 $3,500
- $ 1,500 - $1,500
$21,000 $2,000

Incorporating the foregoing transaction into the equation yields the following:
Assets = Liabilities + Equity
Cash + Equipment + Product = DuPont Chem + J. Newell, Capital
$21,000 + $2,500 + $38,500 = $2,000 + $60,000

Changes in Equity as a Result of Business Operations
A principal objective of the proprietor of a business is to increase his equity by earning a profit. This may be
accomplished by selling commodities or services at a price above cost and by keeping the expenses of operating
the business at an amount that is less than the difference between the sales price and the cost. As an example, if
wheat cost $1.40 per bushel to grow and is sold for $1.54, there is an excess of selling price over cost of
production, or a MARGIN, of 14 cents. Likewise if it costs a rancher $400 to raise a steer for market and sells the
steer for $600, again there is an excess of selling price over cost, a MARGIN, of $200. If the expenses incurred in
making the sale are less than $200, the proprietor has realized an income; if the expenses are more than $200, he
has suffered a loss.
In actual practice it is not always feasible or necessary to determine the margin on each sale nor to determine
the amount of expense incurred in making the single sale. Ordinarily the income realized or the loss incurred is
calculated for all sales and all expenses of a particular period of time. The period selected is arbitrary or
dependant on the crop and market to be reached. It may be a week, a month, a year, or some other period.

During the first month of operations, Newell, whose transactions we have been studying, sells for $4,500 in
cash merchandise that cost him $2,300, leaving a margin of $2,200. This represents the sum of numerous
individual sales to various customers. The effect of these transactions is to increase cash by $4,500, to decrease
merchandise by $2,300, and to increase J. Newell’s Capital, an equity account by $2,200.
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