Page 28 - Account for Ag - 2019

2-4 Accounting for Agriculture CH 2]

Assets = Equity
Transaction (6) Cash + Product = J. Newell, Capital
+ $ 4,500 + - $ 2,300 = + $ 2,200

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

Assets = Liabilities + Equity
Cash + Equipment + Product = DuPont Chem + J. Newell, Capital
$21,000 + $2,500 + $38,500 = $2,000 + $60,000
+ $4,500 - $2,300 = + $ 2,200
$25,500 + $2,500 + $36,200 = $2,000 + $62,200

Various operating expenses in the amount of $1,400 have been incurred and paid during the month. The
effect of operating expenses is to reduce equity. The increase in equity by the amount of the $2,200 excess of
selling price over cost is now reduced by $1,400; thus the profit earned by the proprietor is $800. The effect of
the expenses on cash and proprietors equity is shown as follows:

Assets = Equity
Transaction (7) Cash = John Newell, Capital
- $ 1,400 = - $ 1,400

And revising the preceding equation to give effect to the payment of expenses results in the following
equation:

Assets = Liabilities + Equity
Cash + Equipment + Product = DuPont Chem + J. Newell, Capital
$25,500 + $2,500 + $36,200 = $2,000 + $62,200
- $ 1,400 = + - $ 1,400
$24,100 + $2,500 + $36,200 = $2,000 + $60,800

Summary of Illustration
The transactions of Newell's Feed and Supply Co. discussed previously are summarized in tabular form
below. The parenthetical numbers correspond to the transaction numbers. After each transaction, the balance of
each item in the equation is shown. In studying the illustration the following points should be noted:
a) Regardless of the nature of the transaction, its effect may always be stated in terms of increases and
decreases in assets, liabilities, and Equity.

b) Equality between the two sides of the equation is always maintained. This is true for each particular
transaction and also for the complete equation that reflects the financial condition of the business.
c) No particular relationship can be observed between the amount of the income earned and the
changes in the amount of any one asset or of the total assets. During the month the cash decreased
from $60,000 to $24,100 and the total assets increased from $60,000 to $62,800; but the income, as
shown by the increase in the Equity, was $800.

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