Real-world examples of the accounting equation in action

Real-world examples of the accounting equation in action

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1. Purchase of Inventory on Credit (Retail Business)

• Transaction: A clothing store purchases inventory worth $10,000 on credit.
• Impact on Accounting Equation:
  • Assets: Inventory increases by $10,000.
  • Liabilities: Accounts Payable increases by $10,000.
• Result:
  $\text{Assets} = \text{Liabilities} + \text{Equity}$
  $(Inventory +10,000) = (Accounts Payable +10,000) + Equity$

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2. Loan Taken for Business Expansion (Manufacturing Industry)

• Transaction: A manufacturing company takes a $50,000 loan from the bank to purchase new machinery.
• Impact on Accounting Equation:
  • Assets: Machinery increases by $50,000.
  • Liabilities: Bank Loan increases by $50,000.
• Result:
  $(Assets +50,000) = (Liabilities +50,000) + Equity$

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3. Revenue Earned from a Service (Consulting Firm)

• Transaction: A consulting firm provides services worth $5,000 to a client on credit.
• Impact on Accounting Equation:
  • Assets: Accounts Receivable increases by $5,000.
  • Equity: Retained Earnings (Revenue) increases by $5,000.
• Result:
  $(Assets +5,000) = Liabilities + (Equity +5,000)$

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4. Payment of Monthly Expenses (Food Delivery Business)

• Transaction: A food delivery company pays $2,000 for rent and $500 for utilities.
• Impact on Accounting Equation:
  • Assets: Cash decreases by $2,500.
  • Equity: Retained Earnings (Expenses) decreases by $2,500.
• Result:
  $(Assets -2,500) = Liabilities + (Equity -2,500)$

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5. Issuance of Shares (Startup or Public Company)

• Transaction: A startup issues new shares and raises $100,000 from investors.
• Impact on Accounting Equation:
  • Assets: Cash increases by $100,000.
  • Equity: Share Capital increases by $100,000.
• Result:
  $(Assets +100,000) = Liabilities + (Equity +100,000)$

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6. Dividend Payment (Publicly Traded Company)

• Transaction: A company declares and pays $10,000 in dividends to shareholders.
• Impact on Accounting Equation:
  • Assets: Cash decreases by $10,000.
  • Equity: Retained Earnings decreases by $10,000.
• Result:
  $(Assets -10,000) = Liabilities + (Equity -10,000)$

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7. Sale of Equipment (Construction Company)

• Transaction: A construction company sells old equipment for $8,000 cash (book value $6,000).
• Impact on Accounting Equation:
  • Assets: Cash increases by $8,000; Equipment decreases by $6,000.
  • Equity: Gain on sale increases Retained Earnings by $2,000.
• Result:
  $(Assets +2,000) = Liabilities + (Equity +2,000)$

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8. Employee Salary Payment (Hospitality Industry)

• Transaction: A hotel pays $15,000 in salaries for its employees.
• Impact on Accounting Equation:
  • Assets: Cash decreases by $15,000.
  • Equity: Retained Earnings (Expenses) decreases by $15,000.
• Result:
  $(Assets -15,000) = Liabilities + (Equity -15,000)$

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9. Customer Advance Payment (Event Planning Business)

• Transaction: An event planning company receives $3,000 as advance payment for future services.
• Impact on Accounting Equation:
  • Assets: Cash increases by $3,000.
  • Liabilities: Unearned Revenue increases by $3,000.
• Result:
  $(Assets +3,000) = (Liabilities +3,000) + Equity$

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10. Insurance Payment (Real Estate Business)

• Transaction: A real estate company pays $12,000 for one year of insurance coverage in advance.
• Impact on Accounting Equation:
  • Assets: Cash decreases by $12,000, Prepaid Insurance increases by $12,000.
  • Liabilities and Equity: No change.
• Result:
  $(Assets -12,000 + 12,000) = Liabilities + Equity$