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Chapter 3 Accounting Flashcards


Buying equipment is a part of the investing activities of a firm. To answer this question, recall the events that impact retained earnings. Recall the summary of debit/credit rules to answer this question. The left side is the debit side while the right side is the credit side. Wentdt Corporation Case Study It’s actually more of an accounting questions than finance… You need to know this formula to answer the question Beginning Retained Earn… Identify and explain two advantages and two disadvantages to Amin of converting his business into a private limited company.

  • Increase liabilities and increase owner’s equity.
  • Issues $20,000 shares of common stock for cash.
  • And, liabilities are decreased because part of the obligation has been settled.
  • The income statement would see an increase to revenues, changing net income .
  • True; There must be at least one debit, and one credit account.

Use the expanded accounting equation to answer each of the following questions. Assets should be initially recorded at cost and adjusted when the fair value changes.


The equation ensures that the balance sheet remains balanced. That is, each entry made on the debit side has a corresponding entry on the credit side. ABC Company buys a machine on credit for $10,000.

decrease liabilities

The new received $30,000 cash in exchange for ownership in common stock (10,000 shares at $3 each). Recall that a trial balance simply proves that total debits equal total credits recorded in the ledger. If the wrong account is debited or credited in the original journal entry, the balancing of the trial balance will not verify or identify the error. Revenue accounts have normal credit balances while asset accounts have normal debit balances. Assets and expenses have normal debit balances, but revenues have a normal credit balance.

Accounting equation:More examples and explanation

Recall that the general ledger is a record of each account and its balance. Reviewing journal entries individually can be tedious and time consuming. The general ledger is helpful in that a company can easily extract account and balance information. Here is a small section of a general ledger. Printing Plus did not pay immediately for the supplies and asked to be billed for the supplies, payable at a later date. This creates a liability for the company, Accounts Payable. This liability increases Accounts Payable; thus, Accounts Payable increases on the credit side.

increase an asset

Liabilities increase because Accounts Payable is a liability. Company X provides consulting services to Client Q in May. 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. Owner’s (Stockholders’) Equity is not involved in this transaction. Owner’s (Stockholders’) Equity will be reduced when the supplies are used.

Shareholders’ Equity in the Accounting Equation

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. Think of retained earnings as savings, since it represents the total profits that have been saved and put aside (or “retained”) for future use. Spend the student’s assets and income first, before spending parents’ assets and income.


Metro earned a total of $10,000 in service revenue from clients who will pay in 30 days. We want to increase the asset Cash and increase the revenue account Service Revenue.

Not All Transactions Affect Equity

For example, if you collect cash for a $500 sale, assets and stockholders’ equity each increase by $500. The company did provide the services. As a result, the revenue recognition principle requires recognition as revenue, which increases equity for $5,500.

  • If the owner makes any additional investments, the company reports them in the owner’s equity statement as investments.
  • They are considered assets until used.
  • In the balance sheet, the cash increase due to Prepaid Rent would be recorded as an asset, however with eac…
  • Search the Internet for “start here go places” to access free accounting resources for future CPAs and then answer the following questions.
  • The following are selected journal entries from Printing Plus that affect the Cash account.

Revenue increases stockholders’ equity. This increases the left side and right side of the accounting equation by the same amount, which keeps it in balance.


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