Chapter 2
Linking Personal Accounting to Business Accounting
39
accounts of the business when the invoice is received from the supplier.
Equity decreases and it is recorded as an expense on the income
statement,which also decreases net income.Remember that recognizing
an expense results in a decrease to equity.
Now assume that two months have passed and the business pays the
$700 owed to the maintenance supplier. Figure 2.16 illustrates the
accounting impact of this transaction.This transaction is often referred
to as a “payment of account.” Equity does not change. Only an asset
(cash) and a liability (accounts payable) are affected.
Business Transactions
The ultimate goal of recording business transactions is to be able to create financial statements
and assess how well the business is performing. However, not everything the business does will
be recorded in the T-accounts and appear on the financial statements. A transaction occurs when
the business trades something of value with another person or business and this causes a change
in assets, liabilities or equity.The thing of value could include services, products, cash, a promise to
pay money, or the right to collect money.
An
event
, on the other hand, does not involve trading something of value. Since assets, liabilities
and equity are not affected by an event, nothing is recorded in the T-accounts. An event can lead
to a transaction at a later date, but it is only at that later date that anything would be recorded in
the T-accounts. For example, signing a contract with a customer to provide service in two months’
time is an event. At the signing, nothing of value has been traded, therefore nothing is recorded in
the T-accounts. However, two months later after the services have been provided, a transaction has
occurred and will be recorded in the T-accounts.
We will examine several business transactions and how they are recorded in the T-accounts. Keep
in mind that every transaction must leave the accounting equation in balance, so every transaction
must be recorded in at least two accounts. We will explain each transaction and illustrate how the
transaction will be recorded in the T-accounts. We will also illustrate how the accounting equation
will remain in balance and explain any changes to equity.The reason for the change to equity will be
listed under the explanation column and will be colour coded to match revenue, expense or equity
accounts. If there is no change to equity, the explanation column will remain empty.
2
ASSETS
BALANCE SHEET
LIABILITIES
CASH
ACCOUNTS
RECEIVABLE
PROPERTY, PLANT
& EQUIPMENT
PREPAID
EXPENSES
OFFICE
SUPPLIES
ACCOUNTS
PAYABLE
UNEARNED
REVENUE
BANK
LOAN
- $700
- $700
OWNER’S EQUITY
OWNER’S
CAPITAL
OWNER’S
DRAWINGS
No change in owner’s equity
______________
FIGURE 2.16
