Accounting Equation

Accounting Equation Transaction Analysis Framework

Assets = Liabilities + Equity Transaction Typical Accounting Entry + + Investment by owner Dr. Cash, Cr. Owner, Capital

+/- Acquires assets for use in business; Dr. Supplies, Cr. Cash pays cash

+ + Acquires assets for use in business; Dr. Supplies, Cr. Accounts purchase “on account” Payable

- - Cash paid to creditors for account Dr. Accounts Payable, Cr. Cash purchases

+ + Revenue recognized; cash received Dr. Cash, Cr. Fees Earned from customer

+ + Revenue recognized; sale “on Dr. Accounts Receivable, Cr. account”, i.e. customer will pay later Fees Earned

+/- Cash is collected from account Dr. Cash, Cr. Accounts customer Receivable

- - Expenses incurred; cash paid to Dr. Utilities Expense, Cr. Cash supplier, employee, etc.

+ - Expenses incurred “on account”; will Dr. Utilities Expense, Cr. pay supplier, employee, etc. later Accounts Payable Accounting Equation Transaction Analysis Framework (cont.)

Assets = Liabilities + Equity Transaction Typical Accounting Entry - - Cash is paid to account creditors, e.g. Dr. Accounts Payable, Cr. Cash suppliers, employees, etc.

+ + Cash received in advance for service to Dr. Cash, Cr. Unearned Revenue be rendered in future

- - Owner withdraws cash from business Dr. Owner, Drawing, Cr. Cash

ADJUSTING ENTRIES (end of period) - - Record depreciation of fixed assets Dr. Depreciation Expense, Cr. (deferred expense) Accumulated Depreciation

- - Assets used up over time or through Dr. Supplies Expense, Cr. operation of business (deferred expense) Supplies

- + Revenue recognized as service is Dr. Unearned Revenue, Cr. Cash performed for customers who paid in advance (deferred revenue)

+ + Revenue recognized for services Dr. Accounts Receivable, Cr. provided but unbilled as of end of period Fees Earned (accrued revenue)

+ - Recognition of expenses incurred but Dr. Wages Expense, Cr. Wages unpaid as of end of period (accrued Payable expense)

CLOSING ENTRIES (end of period) No effect No effect No effect Temporary accounts closed Four steps