Assets = Liabilities + Equity
Assets are resources a company owns or controls. Examples instruments, lands, cars and furniture
Liabilities are creditors’ claims on assets.
Equity is the owner’s claim on assets. Equity is equal to assets minus liabilities. This is the reason equity is also called net assets or residual equity.
Equity is called owner’s equity—increases and decreases as follows:-
Owner investments are assets an owner puts into the company and are included under the generic account Owner, Capital.
Revenues are sales of products or services to customers. Revenues increase equity
Owner withdrawals are assets an owner takes from the company for personal use. Owner withdrawals decrease equity
Expenses are the costs necessary to earn revenues. Expenses decrease equity. Examples :- use of supplies, and advertising, utilities, and insurance services from others.
This breakdown of equity yields the following expanded accounting equation.
Net income occurs when revenues exceed expenses. Net income increases equity.
A net loss occurs when expenses exceed revenues, which decreases equity
The effect of transactions and events on Accounting Equation
Transaction 1: Investment by Owner
On December 1, Chas Taylor forms a consulting business, named FastForward and set up as a proprietorship
Taylor personally invests $30,000 cash in the new company and deposits the cash in a bank account
Transaction 2: Purchase Supplies for CashFastForward uses $2,500 of its cash to buy supplies of brand name footwear for performance testing over the next few months.