Skip to main content
Business LibreTexts

1.7: Transactions affecting only the balance sheet

  • Page ID
    19924
  • Since each transaction affecting a business entity must be recorded in the accounting records, analyzing a transaction before actually recording it is an important part of financial accounting. An error in transaction analysis results in incorrect financial statements.

    To illustrate the analysis of transactions and their effects on the basic accounting equation, the activities of Metro Courier, Inc., that led to the statements in Exhibit 3 follow. The first set of transactions (for June), 1a, 2a, and so on, are repeated in the summary of transactions, Exhibit 2 (Part A). The second set of transactions (for July) (1b–6b) are repeated in Exhibit 4 (Part A).

    1a. Owners invested cash

    When Metro Courier, Inc., was organized as a corporation on 2010 June 1, the company issued shares of capital stock for USD 30,000 cash to Ron Chaney, his wife, and their son. This transaction increased assets (cash) of Metro by USD 30,000 and increased equities (the capital stock element of stockholders’ equity) by USD 30,000. Consequently, the transaction yields the following basic accounting equation:

    Assets =Liabilities + Stockholders' Equity
    Trans-action Explan-ation Cash Accounts Receiv-able Trucks Office Equip-ment Accounts Payable

    Notes

    Payable +

    Capital

    Stock
    1a Beginning balances Stockholders invested cash

    $ -0-

    30,000
    $ -0- $ -0- $ -0- = $ -0- $ -0-

    $ -0-

    30,000
    Balance after transaction $ 30,000 $ 30,000

    Increased by

    $30,000

    Increased by

    $30,000

    2a. Borrowed money

    The company borrowed USD 6,000 from Chaney’s father. Chaney signed the note for the company. The note bore no interest and the company promised to repay (recorded as a note payable) the amount borrowed within one year. After including the effects of this transaction, the basic accounting equation is:

    Assets = Liabilities + Stockholder's Equity
    Trans-action Explan-ation Cash Accounts Receivable Trucks Office Equipment Accounts Payable Notes Payable

    Capital+ Stock

    Balances before transaction $ 30,000 $ -0- $ -0- $ -0- = $ -0- $ -0- $ 30,000
    2a Borrowed money 6,000 6,000
    alance after transaction $ 36,000 = $ 6,000 + $ 30,000

    Increased by

    $6,000

    Increased by

    $6,000

    3a. Purchased trucks and office equipment for cash

    Metro paid USD 20,000 cash for two used delivery trucks and USD 1,500 for office equipment. Trucks and office equipment are assets because the company uses them to earn revenues in the future. Note that this transaction does not change the total amount of assets in the basic equation but only changes the composition of the assets. This transaction decreased cash and increased trucks and office equipment (assets) by the total amount of the cash decrease. Metro received two assets and gave up one asset of equal value. Total assets are still USD 36,000. The accounting equation now is:

    Assets = Liabilities + Stockholders' Equity
    Cash Accounts Receivable Trucks Office Equipment Accounts Payable Notes Payable

    Capital+ Stock

    $ 36,000 $ -0- $ -0- $ -0- = $ -0- $ 6,000 + $ 30,000
    (21,500) 20,000 1,500

    $ 14,500

    $ 20,000 $ 1,500 = $ 6,000 + $ 30,000

    Decreased by

    $21,500

    Increased by

    $20,000

    Increased by

    $1,500

    4a. Purchased office equipment on account (for credit)

    Metro purchased an additional USD 1,000 of office equipment on account, agreeing to pay within 10 days after receiving the bill. (To purchase an item on account means to buy it on credit.) This transaction increased assets (office equipment) and liabilities (accounts payable) by USD 1,000. As stated earlier, accounts payable are amounts owed to suppliers for items purchased on credit. Now you can see the USD 1,000 increase in the assets and liabilities as follows:

    Assets = Liabilities Stockholders' Equity
    Cash Accounts Receivable Trucks Office Equipment Accounts Payable

    Notes

    Payable

    Capital

    Stock
    $ 14,500 $ 20,000 $ 1,500 = $ 6,000 $ 30,000
    $ 14,500 $ 20,000 $ 2,500 = $ 1,000 $ 6,000 + $ 30,000

    Increased by

    $1,000

    Increased by

    $1,000

    5a. Paid an account payable

    Eight days after receiving the bill, Metro paid USD 1,000 for the office equipment purchased on account (transaction 4a). This transaction reduced cash by USD 1,000 and reduced accounts payable by USD 1,000. Thus, the assets and liabilities both are reduced by USD 1,000, and the equation again balances as follows:

    Assets = Liabilities + Stockholders equity
    Trans-action xplanation Cash Accounts Receivable Trucks Office Equipment Accounts Payable Notes Payable + Capital Stock
    Balances before transaction $ 14,500 $ -0- $ 20,000 $ 2,500 = $ 1,000 $ 6,000 + $30,000
    5a aid an account payable (1,000) (1,000)
    alance after transaction $ 13,500 $ -0- $ 20,000 $ 2,500 $ -0- $ 6,000 +$30,000

    Decreased by

    $1,000

    Decreased by

    $1,000

    A. Summary of Transactions

    METRO COURIER, INC.

    Summary of Transactions

    Month of June 2010

    Assets =Liabilities +

    Stockholders'

    Equity
    Transaction Explanation Cash

    Accounts

    Receivable
    Trucks

    Office

    Equipment

    Accounts

    Payable

    Notes

    Payable

    Capital

    + Stock
    Beginning balances $ -0 $ -0 $ -0 $ -0 $ -0 $ -0 $ -0
    1a Stockholders invested cash 30,000 30,000
    $ 30,000 $ 30,000
    2a Borrowed money 6,000 = 6,000
    $ 36,000 = $6000 +$30,000
    3a Purchased trucks and office equipment for cash (21,500) 20,000 1,500
    $ 14,500 $20,000 $ 1,500 = $ 6,000 + $ 30,000
    4a Purchased office equipment on account 1,000 1,000 $ 6,000 + $ 30,000
    $ 14,500 $20,000 $20,000 = $ 1,000 $ 6,000 + $ 30,000
    5a Paid an account payable (1,000) (1,000)
    End-of-month balances $ 13,500(A) $ -0- $20,000(B) $ 2,500(C) = $ -0- $6,000(D) + $ 30,000(E)

    B. Balance Sheet

    METRO COURIER, INC.

    Balance Sheet

    2010 June 30

    Assets Liabilities and Stockholders' Equity
    Cash (A) $ 13,500 Liabilities:
    Trucks (B) 20,000 Notes Payable (D) $6,000
    Office equipment (C)2,500 Total Liabilities $ 6,000
    Stockholders' equity
    Capital stock (E) 30,000
    Total assets $ 36,000 Total liabilities and stockholders' equity $ 36,000

    Exhibit 3:

    Exhibit 2, Part A, is a summary of transactions prepared in accounting equation form for June. A summary of transactions is a teaching tool used to show the effects of transactions on the accounting equation. Note that the stockholders’ equity has remained at USD 30,000. This amount changes as the business begins to earn revenues or incur expenses. You can see how the totals at the bottom of Part A of Exhibit 2 tie into the balance sheet shown in Part B. The date on the balance sheet is 2010 June 30. These totals become the beginning balances for July 2010.

    Thus far, all transactions have consisted of exchanges or acquisitions of assets either by borrowing or by owner investment. We used this procedure to help you focus on the accounting equation as it relates to the balance sheet. However, people do not form a business only to hold existing assets. They form businesses so their assets can generate greater amounts of assets. Thus, a business increases its assets by providing goods or services to customers. The results of these activities appear in the income statement. The section that follows shows more of Metro’s transactions as it began earning revenues and incurring expenses.