Chapter 1
Financial Statements: Personal Accounting
8
Soon after, if you made a cash payment of $1,000,
your assets would decrease in value. The scale
would only stay in balance if you record the
$1,000 somewhere else. Ask yourself, “Why did
I make a $1,000 payment?” If you made the
payment for rent for the month, then the $1,000
must also decrease net worth. This will be
recorded as an expense and leave the scale in
balance, as shown in Figure 1.13.
Using the logic from the discussion above, we
can see that without a logical opposite entry, the
balance sheet will not balance. Figure 1.14 shows how the transactions are analyzed using an
accounting equation.The only way to keep it in balance is to impact at least two accounts.The first
two transactions were discussed above in terms of balancing the scale.The Explanation column in
Figure 1.14 is used to provide more details on why net worth changes.
+500
700
1,400
1,500
2. Pay cash expenses of $100
1,400
≠
1,
500 (not logical)
1,400 = 1,400 (logical)
3. Pay entertainment expenses of $200 with credit card
1,400
≠
1,600 (not logical)
FIGURE 1.14
Assets = Liabilities
+ 500
700
1,500
1,000
1. Deposit $500 in wages
1,500
≠
1,
000 (not logical)
700
1,500
1,500 = 1,500 (logical)
Explanation
1,500
1,500
300
1,000
+ Net Worth
1,000
+ 500
Assets = Liabilities + Net Worth
300
+ 500
Receive wages
Assets = Liabilities
Explanation
+ Net Worth
300
+ 500
-100
1,000
+500
700
1,400
1,400
Assets = Liabilities + Net Worth
300
-100
1,000
+ 500
- 100
Pay expense with cash
Receive wages
+500
700
1,400
1,600
Assets = Liabilities + Net Worth
300
+ 500
-100
1,000
+200
- 100
+200
1,400 = 1,400 (logical)
Explanation
+500
700
1,400
1,400
Assets = Liabilities + Net Worth
300
-100
1,000
+ 500
- 100
- 200
Receive wages
Pay expense with cash
Pay expense with
credit card
8
8
8
3
3
3
In the third transaction from Figure 1.14, $200 of expenses were paid with a credit card. The
additional $200 owed on the card represents an additional liability so we increase liabilities by
$200. Because the charge was for an expense, we must also decrease net worth by $200 so that the
accounting equation remains balanced.
Decrease net worth
by
$1,000
(expense)
Assets
124,000
Liabilities + Net Worth
80,000
+
44,000
Decrease cash
by
$1,000
FIGURE 1.13
Assets = Liabilities + Net Worth
$124,000 = $80,000 + $44,000
