Chapter 2

Accounting Equation,
Transaction Analysis and
Preparation of Financial
Statement
Weygandt Kimmel Keiso
9th Edition)

Basic Accounting Equation

Asset = Liabilities + Owners Equity
A
= L
+ OE

Components of Accounting
Equation
1) Asset:
Resources owned by a business.
Used in carrying out activities such as
production.
Capacity to provide future benefit.

2) Liabilities :
Claims against asset.
Existing debt and obligation.
3) Owners Equity:
Owner claims against asset.
Equals to total asset minus total liability.

Increase and Decrease of Owners

Equity

Owners Equity

Investment by owner
Revenues

Withdrawal by owner
Expenses

Transaction
Transaction:
Economic events that are recorded are 2
types:
a) internal
b) external
Dual Effect of each Transaction :
The transaction must have a dual effect
on the equation.

Transaction Analysis
Some Transaction Analysis :
1. Mr. Ray Neal decides to open a computer
programming service which he names
Softbyte. On September1, 2010 he
invested $15,000 cash in the business.
2. Softbyte purchases computer equipment
for $7,000 cash.
3. Softbyte purchases computer paper and
other supplies for $1,600 from Acme
Supply Company.

4. Softbyte receives $1,200 cash from

customers for programming services it has
provided.
5. Softbyte receives a bill for $250 for the Daily
News for advertising but postpones payment
until a later date.
6. Softbyte provides $3,500 of programming
services for customers. The company
receives cash of $1,500 from customers and
it bills the balance of $2,000 on account.

7. Softbyte pats the following expenses

in cash for September : store rent $600,
salaries of employees $900 and utilities
$200.
8. Softbyte pays its Daily news bill in cash
$250.
9. Softbyte receives $600 in cash from
customers who had been billed for
services in transaction 6.

10. Ray Neal withdraws $1,300 in cash from

the business for his personal use.
Instructions:
a. Prepare a Tabular Summary from the
above transactions.
Or
Show the effects of the above transactions on
Accounting Equation.
b. Prepare an Income Statement , Owners
Equity Statement and Balance Sheet at
September 30, 2010.