Double-entry Accounting System
4.3 Illustration of applying double-entry accounting system
We will go to an illustration. A company, called Huske's Consultants, started its operations on January 1, 2006 when the owner, Mrs. Huske, contributed cash into the business. All accounts had zero beginning balances. We will see how each transaction affects T accounts and the accounting equation. Transaction impacts on the financial statements will be shown in a horizontal statements model. All the events are numbered and their numbers are used as recording references. Recall that there are four types of accounting events:
- Asset source transactions
- Asset use transactions
- Asset exchange transactions
- Claims exchange transactions
Transaction type will be indicated for each accounting event. All transactions took place during 20X6.
Due to the space limitations, we will not show all the accounts while explaining a transaction. Only those accounts that are affected by a particular transaction will be shown in the accounting equation.
In the cash flow section of the horizontal model, OA, FA and IA stand for operating, financing and investing activities, respectively.
4.3.1 Analysis of cash contribution transaction
Event No. 1. Huske's Consultants started operating on January 31 when the owner made $10,000 cash contribution. This accounting event acts to increase both assets (Cash) and equity (Contributed Capital). The increase in Cash is recorded as a debit and the increase in equity is recorded as a credit:
Illustration 4-2: Effect of a capital contribution in T accounts
| Assets |
= |
Liabilities |
+ |
Equity |
|||
| Cash |
|
|
|
Contributed Capital |
|||
| Debit |
|
|
|
|
|
|
Credit |
This is an asset source transaction:
Illustration 4-3: Effect of a capital contribution in the horizontal model
| Assets |
= |
Liabilities |
+ |
Equity |
Rev. |
- |
Exp. |
= |
Net Inc. |
Cash Flow |
|
| 10,000 |
= |
n/a |
+ |
10,000 |
n/a |
- |
n/a |
= |
n/a |
10,000 |
FA |
4.3.2 Analysis of supplies purchase on account transaction
Event No. 2. On May 15, Huske's Consultants purchased office supplies for $400 from a local supply company on account (i.e., agreed to pay for them on a later date). Purchasing supplies on account acts to increase assets (Supplies) and liabilities (Accounts Payable). The Supplies account is debited and the Accounts Payable account is credited:
Illustration 4-4: Effect of a supplies purchase in T accounts
Assets |
= |
Liabilities |
+ |
Equity |
|||
Supplies |
|
Accounts Payable |
|
|
|||
Debit |
|
|
|
Credit |
|
|
|
This is an asset source transaction.
Illustration 4-5: Effect of a supplies purchase in the horizontal model
| Assets |
= |
Liabilities |
+ |
Equity |
Rev. |
- |
Exp. |
= |
Net Inc. |
Cash Flow |
|
| 400 |
= |
400 |
+ |
n/a |
n/a |
- |
n/a |
= |
n/a |
n/a |
|
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