Therefore cash (asset) will reduce by $60 to pay the interest (expense) of $60. Drawings are amounts taken out of the business by the business owner. They will therefore result in a reduction in capital. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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The inventory (asset) of the business will increase by the $2,500 cost of the inventory and a trade payable (liability) will be recorded to represent the amount now owed to the supplier. Capital essentially represents how much the owners have invested into the business along with any accumulated retained profits or losses. For example, if you were to start a sole trade business with a $1,000 investment then on the first day of trading the accounts of the business would show that it has $1,000 of cash available and that this came from an investment made by you. The capital would ultimately belong to you as the business owner.

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• Individual transactions which result in income and expenses being recorded will ultimately result in a profit or loss for the period.
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• For each of the transactions in items 2 through 13, indicate the two (or more) effects on the accounting equation of the business or company.
• Often, more than one element of the accounting equation is impacted but sometimes, like with transaction 3, the same part of the equation (in this case assets) goes up and down, making it look like nothing has happened.

As you can see, no matter what the transaction is, the accounting equation will always balance because each transaction has a dual aspect. Often, more than one element of the accounting equation is impacted but sometimes, like with transaction 3, the same part of the equation (in this case assets) goes up and down, making it look like nothing has happened. However, the detail of the transaction will be presented in different places in the financial statements (ie bookkeeping the cash balance within current assets will reduce and the motor vehicle cost balance within non-current assets will increase). The purpose of this article is to consider the fundamentals of the accounting equation and to demonstrate how it works when applied to various transactions.

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Company X bills Client Q in May for the agreed upon amount of $5,000. The sales invoice shows that the amount will be due in June.

• Information for Items 10 through 13Company X provides consulting services to Client Q in May.
• Required Explain how each of the above transactions impact the accounting equation and illustrate the cumulative effect that they have.
• Drawings are amounts taken out of the business by the business owner.
• He is the sole author of all the materials on AccountingCoach.com.
• The inventory (asset) of the business will increase by the $2,500 cost of the inventory and a trade payable (liability) will be recorded to represent the amount now owed to the supplier.
• The capital would ultimately belong to you as the business owner.

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• Income and expenses relate to the entity’s financial performance.
• Taking time to learn the accounting equation and to recognise the dual aspect of every transaction will help you to understand the fundamentals of accounting.
• As this is not really an expense of the business, Anushka is effectively being paid amounts owed to her as the owner of the business (drawings).
• The sales invoice shows that the amount will be due in June.
• As inventory (asset) has now been sold, it must be removed from the accounting records and a cost of sales (expense) figure recorded.
• The accounting equation will always balance because the dual aspect of accounting for income and expenses will result in equal increases or decreases to assets or liabilities.

A trade receivable (asset) will be recorded to represent Anushka’s right to receive which of the statements correctly represents the accounting equation $400 of cash from the customer in the future. As inventory (asset) has now been sold, it must be removed from the accounting records and a cost of sales (expense) figure recorded. The cost of this sale will be the cost of the 10 units of inventory sold which is $250 (10 units x $25). The difference between the $400 income and $250 cost of sales represents a profit of $150. The inventory (asset) will decrease by $250 and a cost of sale (expense) will be recorded. (Note that, as above, the adjustment to the inventory and cost of sales figures may be made at the year-end through an adjustment to the closing stock but has been illustrated below for completeness).