Chapter 1
Financial Statements: Personal Accounting
13
1. Earn and deposit $5,000 in salary. Cash increases by $5,000 which increases the total assets in
the accounting equation.Why did cash increase? Because you deposited your salary. Net worth
increases, which is shown as revenue on the income statement.
2. Pay $1,000 in cash for food expenses. Cash decreases by $1,000 which decreases the total assets
in the accounting equation. Why did cash decrease? Because you bought some food.Thus, net
worth decreases, which is shown as food expense on the income statement.
3. Record a $500 credit card bill for gasoline expenses (due in one month). Cash is not affected;
however, you have a debt which must be paid next month. Debt increases which increases the
total liabilities in the accounting equation. Why did your debt increase? Because you will have
to pay for the gasoline at some point in the future. Net worth decreases, which is shown as
gasoline expense on the income statement.
4. Record a $1,500 credit card bill for entertainment expenses. Debt increases which increases the
liabilities in the accounting equation. Why did your debt increase? Because you will have to
pay for the entertainment at some point in the future. Net worth decreases, which is shown as
entertainment expense on the income statement.
PERSONAL INCOME STATEMENT
SURPLUS (DEFICIT)
EXPENSES
2
ASSETS
PERSONAL BALANCE SHEET
LIABILITIES
CASH
PREPAID
EXPENSES
HOUSE
AUTOMOBILE
CONTENTS
OF HOME
UNPAID ACCOUNTS
MORTGAGE
LOANS
NETWORTH
1. + $5,000
2. -1,000
= $4,000
3. + $500
4. + 1,500
= $2,000
+ $2,000
REVENUE
DEPRECIATION
FOOD
ENTERTAINMENT
INTEREST
MAINTENANCE
MISCELLANEOUS
UTILITIES
$2,000 surplus
GASOLINE
1. + $5,000
4. + $1,500
3. + $500
2. + $1,000
January
Remember: Everything that is shown on the income statement will impact net worth
______________
FIGURE 1.23
