The

Accounting
Equation
 Effects of Owner’s Investment/Withdrawal and Cash Acquisition of Assets
Illustration
Give the effect of the following transactions on the assets and owner’s equity:
Transaction Assets Liabilities Owner’s Equity Analysis
1. Owner invests Assets increase   Capital Cash increases because
cash in the Increases owner invests cash in the
business. business which is an asset.
Owner’s interest in the
business increases as
represented by an increase
in capital.

2. Owner invests Assets increase   Capital Assets increase because

furniture. Increases owner invests furniture in
the business which is an
asset. Owner’s interest in
the business increases
because of the investment
as represented by an
increase in capital.
3. Owner Assets   Capital Assets decreases
withdraws cash decrease decreases because owner
for personal withdraws cash which is
use. an asset. Owner’s
interest in the business
decreases because of
the withdrawal as
represented by a
decrease in capital.
4. Owner Assets     Supplies increase
purchases increase/ because of the purchase
supplies using decrease but cash decreases
cash. because of the payment.
Since both are assets,
one asset increases
while another asset
correspondingly
decreases.
5. Owner gets Assets     Cash increases because
cash refund for increase/ of the refund but supplies
returning decrease decrease because of the
damaged return. Since both are
supplies assets, one asset
bought on increases while another
cash. asset correspondingly
decreases.
6. Owner Assets increase/     Furniture increases because of
purchases furniture decrease the purchase but cash
using cash decreases because of the
payment. Since both are
assets, one asset increases
while another asset
correspondingly decreases.

7. Owner makes Assets increase   Capital increase Assets increase because owner
additional cash invests additional cash in the
investment business which is an asset.
Owner’s interest in the business
increases because of the
investment as represented by
an increase in capital.

8. Owner Assets decrease   Capital decreases Assets decreases because

withdraws supplies owner withdraws supplies from
for personal use the business which is an asset.
Owner’s interest in the business
decreases because of the
withdrawal as represented by a
decrease in capital.
Effects of Income earned and payment of Expenses
 
Illustration
 
Give the effect of the following transactions on the assets and owner’s equity:
Transaction Assets Liabilities Owner’s Equity Analysis
1. Rendered Assets increase   Capital Assets increase because
services for increases owner collected cash as a
cash result of services
rendered. Owner’s equity
increases because the
business earned income
for services rendered.

2. Rendered Assets increase   Capital Assets increase because

services on increases of account collectible from
credit the customer which is an
asset as a result of
services rendered.
Likewise, owner’s equity
increases because of
income earned from
services rendered.
3. Paid Assets decrease   Capital Assets decrease because
telephone bill decreases owner pays cash for the
telephone bill. Owner’s
equity decreases because
the telephone bill represents
utilities expense which
decreases capital.
 Effects of Transactions on the Accounting Equation
The following are illustration on the effect of transactions on the accounting equation.
The abbreviations in the examples shall mean the following:
INC – Increase DEC – Decrease NC – No Change

Transaction Assets Liabilities Owner’s Equity Analysis

1. Owner invests INC NC INC An entity separate and distinct
cash from the owner is created. The
cash investment of the owner
increases the assets of the
business and the capital of the
owner.
2. Owner invests INC NC INC The equipment increases the
equipment assets of the business. Since
this is an investment of the
owner, capital of the owner
increases correspondingly.
3. Renders services INC NC INC The business earned an income
for cash by rendering services and
collecting revenues in cash. The
effect in the accounting
equation is an increase in cash
for the cash collected and an
increase in capital as revenue
increases capital.
4. Renders services INC NC INC Assets increase by the amount
on credit of revenue expected to be
collected from the customer to
whom the services were
rendered. Capital also increases
since rendering of services
represents revenue.

5. Collects account INC/DEC NC NC Assets increase as there is cash

in transaction No. 4 inflow in the amount of the
collection. However, assets
correspondingly decrease with
the amount of the collection as
the accounts receivable, an
asset account, will decrease.
This is because the amount the
customer owes has already
been collected.

6. Purchases INC INC NC Supplies increase the assets of

supplies on credit the business and the liabilities
correspondingly increase as the
supplies were bought on
account or credit.
7. Returns DEC DEC NC Assets decrease with the
defective supplies amount of supplies returned.
Liabilities correspondingly
decrease as the returned
supplies decrease the amount
owed.
8. Pays the DEC DEC NC The transaction is a payment
supplies bought of account. Since there is
on account or cash outflow representing the
credit payment of an existing liability,
assets decrease in the
amount of cash paid and
liabilities decrease in the
amount of liability on supplies
paid.
9. Borrows cash INC INC NC Cash increases the assets of
issuing a note the business as there is an
inflow of cash because the
business borrowed money.
Notes payable increases the
liabilities of the business as it
represents an obligation on
the part of the business to pay
at a future date.
10. Purchases INC/DEC NC NC Land increases the assets
land using cash of the business but cash
correspondingly decreases
due to the payment for the
purchase of land.

11. Pays utilities DEC NC DEC Payment represents cash

expense for the outflow decreasing the
month assets of the business.
Expenses decrease the
capital as they have
opposite effect on income.

12. Pays the DEC DEC NC The transaction is a

note in full payment of liability. Since
there is cash outflow
representing the payment
of the note, assets
decrease in the amount of
cash paid and liabilities
decrease in the amount of
the notes payable.
Show the effects on the accounting equation. Write + for increase, – for decrease, and NC for No Change.

Asset Liability Capital

1.Paid account to creditors

2.Sold truck for cash at price equal its cost
3.Collected an account receivable
4.Purchased a typewriter in cash
5.Paid utilities for the month
6.Owner withdrew cash for personal use
7.Owner borrowed money from the bank
8.Owner made an additional investment in the business
9.Owner purchased a typewriter on account
10.Bought truck paying 10% down and balance on account