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CH 7] Business 101 7-9

Figure 7. 5 The Effect of Transactions to the Balance Sheet

Accounting Equation: Assets = Liabilities + Equity
—————————————————— —————— ——————
Cash + Equipment + Product = DuPont Chem + J. Newell, Capital

Transaction 1) $150,000 = $150,000
Transaction 2) - $ 7,500 + $ 7,500
————— ———— —–-—— ———— —————
Balances $142,500 + $7,500 + = $150,000

Transaction 3) - $45,000 + $45,000 =
————— ———— ———— ———— —————
Balances $97,500 + $7,500 + $45,000 = $150,000

Transaction 4) + +$9,000 = +$9,000
————— ———— ———— ———— —————
Balances $97,500 + $7,500 + $54,000 = $9,000 + $150,000

Transaction 5) - $3,900 + = - $3,900
————— ———— ———— ———— —————
Balances $93,600 + $7,500 + $54,000 = $5,100 + $150,000

Transaction 6) +$11,250 + - $ 5,800 = + +$ 5,450
————— ———— ———— ———— —————
Balances $104,850 + $7,500 + $48,200 = $5,100 + $155,450

Transaction 7) - $ 3,500 + = + - $ 3,500
————— ———— ———— ———— —————
Balances $101,350 + $7,500 + $48,200 = $5,100 + $151,950

$157,050 = $157,050
Accounting Equation: Assets = Liabilities + Equity

Double‑Entry Bookkeeping
Every business transaction is analyzed to determine whether it increases or
decreases assets, liabilities, or owner’s equity; the transaction is applied, and in its 7
application must maintain the equality of the accounting equation—that is keep it in
balance; the right side of the equation MUST EQUAL the left side of the equation. The
method for maintaining the balance of the accounting equation is to use two entries for
every transaction affecting the equation. This procedure, first described in a book
written in 1494 by an Italian monk named Pacioli and in use since then, is what we call
double‑entry bookkeeping. By offsetting one side of the accounting equation double-entry bookkeeping
(increasing assets) necessitates a change on the other side (say increasing liabilities) Process requiring two
will maintain the balance of the equation. entries for every transaction,
An example from the journal shown in Figure 7.4 illustrates the use of thereby keeping the
double‑entry bookkeeping. On May 5, the firm made an $16,000 machinery purchase accounting equation in
balance.
and agreed to repay FMC in two installments. The accounting equation would show:

Assets = Liabilities + Owners Equity (O.E.)
+ $16,000 = + $16,000 + $0 (No change in O.E.)
(Machinery) (Accounts Payable)

The bookkeeping entries made that reflect transactions are referred to as debits
and credits. For clarity a debit entry is a left column entry and a credit is a right
column entry of the journal or ledger account an amount is to be recorded (refer to

Everything free is paid for by someone working.
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