Understanding the Accounting Equation
The accounting equation is foundational to double-entry bookkeeping, represented as:
Assets = Liabilities + Equity
When goods are purchased, they affect the accounting equation significantly.
Transaction Details
- Purchase Amount: 40,000
- Cash Payment: 39,955
- On Account: 45
Impact on the Accounting Equation
1. Increase in Assets
- The inventory or goods purchased worth 40,000 increases the assets.
- Cash decreases by 39,955 due to payment.
2. Increase in Liabilities
- The amount of 45 on account indicates a liability, as it represents a future payment obligation.
Effects on the Equation
- Assets: Increase by 40,000 (Inventory) and decrease by 39,955 (Cash)
- Liabilities: Increase by 45 (Accounts Payable)
Final Calculation
- Total Assets:
- Increase of 40,000 - 39,955 = 45
- Total Liabilities: 45
Final Accounting Equation
- Assets = Liabilities + Equity
- 40,000 (Inventory) - 39,955 (Cash) = 45 (Liabilities) + 0 (Equity)
In summary, after the transaction:
- Assets remain balanced as the increase in inventory matches the overall decrease in cash and the increase in liabilities.
This illustrates the dynamic nature of the accounting equation in recording transactions accurately.