{"id":46,"date":"2015-03-18T22:41:19","date_gmt":"2015-03-18T22:41:19","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=46"},"modified":"2017-08-10T14:23:02","modified_gmt":"2017-08-10T14:23:02","slug":"the-basic-accounting-equation","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/the-basic-accounting-equation\/","title":{"raw":"The Basic Accounting Equation","rendered":"The Basic Accounting Equation"},"content":{"raw":"An accounting transaction<\/strong> is a business activity or event that causes a measurable change in the accounting equation. An exchange of cash for merchandise is a transaction. Merely placing an order for goods is not a recordable transaction because no exchange has taken place. In the coming sections, you will learn more about the different kinds of financial statements accountants generate for businesses.\r\n\r\nIn the previous section we described specific types of accounts that business activities fall into, namely:\r\n
    \r\n \t
  1. Assets (what it owns)<\/li>\r\n \t
  2. Liabilities (what it owes to others)<\/li>\r\n \t
  3. Equity (the difference between assets and liabilities or\u00a0what it owes\u00a0to the owners)<\/li>\r\n<\/ol>\r\nThese are the building blocks of the basic\u00a0accounting equation.\u00a0\u00a0<\/strong>\u00a0The accounting equation is:\r\n

    ASSETS = LIABILITIES + EQUITY<\/strong><\/span><\/p>\r\nFor Example:\r\n\r\nA sole proprietorship business owes $12,000 and you, the owner personally invested $100,000 of your own cash into the business. The assets owned by the business will then be calculated as:\r\n\r\n$12,000 (what it owes)\u00a0+ $100,000 (what you invested) = $112,000 (what the company has in assets)\r\n\r\n\r\n\r\n\r\n
    Assets<\/span><\/td>\r\n=<\/span><\/td>\r\nLiabilities<\/span><\/td>\r\n\u00a0+ Equity<\/span><\/td>\r\n<\/tr>\r\n
    112,000<\/td>\r\n=<\/td>\r\n12,000<\/td>\r\n100,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIn a sole-proprietorship, equity is actually Owner's Equity.\u00a0 If the business in question is a corporation,\u00a0equity will be held by stockholders, which uses stockholder's equity but the basic equation is the same:\r\n\r\nASSETS = LIABILITIES + EQUITY<\/span><\/strong>\r\n\r\nFor\u00a0Example:\r\n\r\nA business owes $35,000 and stockholders (investors) have invested $115,000 by buying stock in the company. The assets owned by the business will then be calculated as:\r\n\r\n$35, 000 (what it owes) + $115,000 (what stockholders invested) = $150,000 (what the company has in assets)\r\n\r\n\r\n\r\n\r\n
    Assets<\/span><\/td>\r\n=<\/span><\/td>\r\nLiabilities<\/span><\/td>\r\n\u00a0+ Equity<\/span><\/td>\r\n<\/tr>\r\n
    150,000<\/td>\r\n=<\/td>\r\n35,000<\/td>\r\n115,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nSince each transaction affecting a business entity must be recorded in the accounting records based on a detailed account (remember, file folders and the chart of accounts from the previous section), analyzing a transaction before actually recording it is an important part of financial accounting. An error in transaction analysis could result in incorrect financial statements.\u00a0<\/span>\r\n\r\nhttps:\/\/youtu.be\/E_Kw_pFHY2w\r\n\r\nTo further illustrate the analysis of transactions and their effects on the basic accounting equation, we will analyze the activities of Metro Courier, Inc., a fictitious corporation.\u00a0 Refer to the chart of accounts illustrated in the previous section.\r\n\r\n1.\u00a0Owners invested cash<\/strong>\r\n\r\nMetro Courier, Inc., was organized as a corporation on\u00a0 January 1, the company issued shares (10,000 shares\u00a0at $3 each) of common stock for $30,000 cash to Ron Chaney, his wife, and their son. The\u00a0$30,000 cash was deposited in the new business account.\r\n\r\nTransaction analysis:\r\n