How Does an Organization Accumulate and Organize the Information Necessary to Prepare Financial Statements?


The computers’ accumulated depreciation is $8,000. Debit your Cash account $4,000, and debit your Accumulated Depreciation account $8,000. There are a few ways you can calculate your depreciation expense, including straight-line depreciation. Straight-line depreciation is the easiest method, as you evenly spread out the asset’s cost over its useful life.

Debits increase asset or expense accounts and decrease liability, revenue or equity accounts. When recording a transaction, every debit entry must have a corresponding credit entry for the same dollar amount, or vice-versa. A credit made to notes payable is recorded as a credit within the notes payable T-account. After all entries are posted, the current balance for any account can be determined by adding the debit and the credit sides of the T-account and netting the two. A company paid $2,500 cash for a computer. A company paid cash to a creditor for a previous purchase of supplies on account. How does this transaction affect the company’s assets, liabilities, and owner’s equity?

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Her work has appeared in Business Insider, Forbes, and The New York Times, and on LendingTree, Credit Karma, and Discover, among others. You can learn more about her work at ™ Copyright © 2023. In short, depreciation lets you spread out the asset’s cost over its useful life (how long you expect it’ll last).

Describe how the issued capital stock for cash affects the three elements of the accounting equation. Explain how transactions affect the accounting equation.

Matching Assets and Liabilities

To the total cash, credit the account because asset accounts are reduced by recording credit entries. You have received more cash from customers, so you want the total cash to increase. Cash is an asset, and assets increase with debit entries, so debit cash. In the journal entry, Cash has a debit of $4,000. You will notice that the transaction from January 3 is listed already in this T-account. The next transaction figure of $4,000 is added directly below the $20,000 on the debit side. Unearned Revenue has a credit balance of $4,000.

You are now paying down some of the you owe on that account. Since you paid this money, you now have less of a liability so you want to see the liability account, accounts payable, decrease by the amount paid. Liability accounts decrease with debit entries. A company borrowed $6,265 from the bank on a note payable.

Unbalanced Transactions

The equation remains balanced because there is a $3,500 increase on the asset side, and a $3,500 increase on the liability and equity side. This change to assets will increase assets on the balance sheet. The change to liabilities will increase liabilities on the balance sheet. Borrowed $20,000 from a local bank.b. Lent $7,000 to an affiliate; accepted a note due in one year.c. Sold additional stock to investors for $1,000 cash.d. Purchased $15,000 of equipment, paying $6,000 cash and the rest on a note due in one year.e.

What affects the accounting equation?

Profits retained in the business will increase capital and losses will decrease capital. 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.

Common Stock had a credit of $20,000 in the journal entry, and that information is transferred to the general ledger account in the credit column. The balance at that time in the Common Stock ledger account is $20,000. You can see at the top is the name of the account “Cash,” as well as the assigned account number “101.” Remember, all asset accounts will start with the number 1. The date of each transaction related to this account is included, a possible description of the transaction, and a reference number if available.

Assets = Liabilities + Stockholders’ Equity

The date of January 3, 2019, is in the far left column, and a description of the transaction follows in the next column. Cash had a debit of $20,000 in the journal entry, so $20,000 is transferred to the general ledger in the debit column. The balance in this account is currently $20,000, because no other transactions have affected this account yet. Accounts payable include all goods and services billed to the company by suppliers that have not yet been paid. Accrued liabilities are for goods and services that have been provided to the company, but for which no supplier invoice has yet been received.

  • The Retained Earnings account normally has a credit balance.
  • You probably depend on equipment to run your business.
  • This causes $500 to be deducted from the cash account, which occupies the assets side of the equation.
  • The credit column totals $7,500 (300 + 100 + 3,500 + 3,600).
  • According to the revenue recognition principle, the company cannot recognize that revenue until it provides the service.