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Accounting Equation For A Sole Proprietorship: Transactions 1-2

The document discusses accounting transactions for a sole proprietorship. It provides an example where the sole proprietor, J. Ott, invests $10,000 to start the business Accounting Software Co. This increases the company's assets and owner's equity by $10,000 each, keeping the accounting equation in balance. The transaction is recorded by increasing the Cash asset account and the owner's equity J. Ott, Capital account.

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37 views2 pages

Accounting Equation For A Sole Proprietorship: Transactions 1-2

The document discusses accounting transactions for a sole proprietorship. It provides an example where the sole proprietor, J. Ott, invests $10,000 to start the business Accounting Software Co. This increases the company's assets and owner's equity by $10,000 each, keeping the accounting equation in balance. The transaction is recorded by increasing the Cash asset account and the owner's equity J. Ott, Capital account.

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Accounting Equation for a Sole


Proprietorship: Transactions 1-2
We present nine transactions to illustrate how a company's accounting equation stays in
balance.

When a company records a business transaction, it is not entered into an accounting equation,
per se. Rather, transactions are recorded into specific accounts contained in the company's
general ledger. Each account is designated as an asset, liability, owner's equity, revenue,
expense, gain, or loss account. The general ledger accounts are then used to prepare the
balance sheets and income statements throughout the accounting periods.

In the examples that follow, we will use the following accounts:

 Cash
 Accounts Receivable
 Equipment
 Notes Payable
 Accounts Payable
 J. Ott, Capital
 J. Ott, Drawing
 Service Revenues
 Advertising Expense
 Temp Service Expense

(To view a more complete listing of accounts for recording transactions, see the Explanation of
Chart of Accounts.)

Sole Proprietorship Transaction #1.


Let's assume that J. Ott forms a sole proprietorship called Accounting Software Co. (ASC). On
December 1, 2019, J. Ott invests personal funds of $10,000 to start ASC. The effect of this
transaction on ASC's accounting equation is:

As you can see, ASC's assets increase by $10,000 and so does ASC's owner's equity. As a
result, the accounting equation will be in balance.

You can interpret the amounts in the accounting equation to mean that ASC has assets of
$10,000 and the source of those assets was the owner, J. Ott. Alternatively, you can view the
accounting equation to mean that ASC has assets of $10,000 and there are no claims by
creditors (liabilities) against the assets. As a result, the owner has a claim for the remainder or
residual of $10,000.

This transaction is recorded in the asset account Cash and the owner's equity account J. Ott,
Capital. The general journal entry to record the transactions in these accounts is:

After the journal entry is recorded in the accounts, a balance sheet can be prepared to show
ASC's financial position at the end of December 1, 2019:

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