2026 CFA Level I Exam: Learning Outcome Statements

A current liability Dividends Payable is created and the Retained Earnings (part of stockholders’ equity) will decrease. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. (b) Cash is received on signing a note payable. (a) Supplies are purchased on account.

A transaction may only affect one side, for example by increasing one asset and decreasing another asset by the same amount. Accountingo.org aims to provide the best accounting and finance education for students, professionals, teachers, and business owners. Depreciation lowers the value of assets and has no effect on liabilities. As you can tell, the accounting equation will show $50,000 on both sides. Short-term liabilities will decrease and long-term liabilities will increase. The asset Cash decreases and the asset Equipment increases.

Financial Accounting for Undergraduates

The equation asserts that a business’ assets must equal the sum of its liabilities and equity. Which of the following transactions do not affect the accounting equation of a farmer? Total assets in the business will equal the sum of liabilities and equity after the transaction (i.e., $100,000). Purchasing the car on credit will increase the total assets and total liabilities by $10,000 each.

3 Retumed \(\$ 1,500\) of equipment that was not satisfactory. Transaction Analysis and Trial Balance James Green, electrical contractor,began business on May 1. Prepare a trial balance as of August 31 .

3 Accounting transactions and the accounting equation

If a transaction decreases the total assets of a business, then the right side of the accounting equation MUST reduce as well. If a transaction decreases the total assets of a business, then the sum of its total liabilities and owner’s equity may or may not decrease depending on the nature of the transaction. These transactions only impact the right side of the accounting equation so the total assets will remain unchanged. How a transaction impacts the accounting equation depends on the type of the two or more accounts involved (assets, liabilities, or equity). If a transaction causes one side of the equation (assets) to increase, then the other side of the equation (liabilities or owner’s equity) must also increase to keep the equation in balance. A business must make at least two changes in its assets, liabilities or equity when it records an accounting transaction, known as the dual nature of accounting.

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At the same time, the business now has cash of $10,000 which is an asset. It’s also possible that an increase in one asset causes another asset to decrease. Accounting uses a technique to show how a transaction changes the business’s resources while maintaining a balance, or showing the equal value of the exchange.

Cornerstones of Financial Accounting 3rd Edition by Maryanne Mowen, Jay Rich, Don Hansen, Jeff Jones

Purchased supplies for cash. A business owner buys a car on credit for his car rental business for $10,000. 3) A corporation declares a cash dividend.

(c) Supplies of \(\$ 1,800\) are purchased on account. (b) Insurance of \(\$ 800\) is paid for the year. (a) Stockholders invested \(\$ 12,000\) in the business in exchange for commonstock. Barry Barack, a fellow student, contends that the double-entry system meanseach transaction must be recorded twice. Now you have $8000 cash and furniture worth $2000.

Note that in case of a four steps to calculating process costs corporation, instead of owner’s equity we have shareholder’s equity as many shareholders invest money and have equity stake in the corporation. 13 Collected \(\$ 8,600\) on accounts receivable. 9 Paid \(\$ 2,500\) on account for equipment purchased on May 2 .

2 Purchased equipment on account, \(\$ 4,200\). Invested cash in business. Purchased equipment for cash. Paid an account payable. Preordering books will lower the amount of cash and increase the value of receivables. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

• Rendered services to customers, for cash.
• Journalize these accounting transactions.
• The equation asserts that a business’ assets must equal the sum of its liabilities and equity.
• The result is that liabilities decrease and stockholders’ equity increases.
• This means to keep the accounting equation in balance, any change to the left side of the equation must be accompanied by a change to the right side.

Here are some specific examples when only the left side of the accounting equation is affected. Net income or loss (revenues less expenses) and dividends affect stockholders’ equity. For the following transactions, indicate the account debited and the accountcredited.

• 13 Collected \(\$ 8,600\) on accounts receivable.
• The equation is still balanced (assets worth $10,000 – $8,000 cash and $2,000 of furniture).
• Set up accounts for each item in the August 1 trial balance and enter thebeginning balances.
• Prepare a trial balance as of August 31 .
• It’s also possible that an increase in one asset causes another asset to decrease.
• For example, when an owner invests $30,000 in a business, assets (cash) are increased by $30,000 and equity (owner’s capital) is increased by $30,000.

Which of the following transactions will increase both the total assets and the total liabilities of a library? This transaction only replaces one asset (cash) with another asset (farm) which means that the total assets, liabilities, and equity should all remain unchanged. If the sum of liabilities and owner’s equity in the business is equal to $100,000 after the purchase, what is the value of total assets? This way as you make more transactions in the business, the accounting equation always stays balanced. For example, when an owner invests $30,000 in a business, assets (cash) are increased by $30,000 and equity (owner’s capital) is increased by $30,000. Yes, a business can enter a transaction that only affects the left side of the accounting equation.

(c) Employees are paid salaries in cash. (b) Why is a chart of accounts important? For the business, it’s the owner’s equity of $10,000. This concept is a part of the double-entry accounting system.

How Transactions Affect the Accounting Equation

Although unpaid wages don’t affect the total assets, it does impact the right side of the accounting equation by increasing liabilities and lowering the owner’s equity. Some transactions don’t affect the accounting equation because they increase and decrease multiple accounts of the same type (e.g., assets). The accounting equation still balances after the business records this transaction as the net effect of the total for assets on the left side of the equation remains unchanged and the transaction does not affect the right side of the equation.

So, if the business has assets worth $80,000, and owner’s equity of $20,000, then we can say that the liabilities are equal to $60,000. To revisit how accounting transactions affect the accounting equation, please refer to what you learnt in Accounting and Accountability Topic 2 and Section 2.7 (p.38-41) of the AAA textbook. For instance, when a business buys a computer for $2000 cash, asset (Computer equipment) increases by $2000 and asset (cash) decreases by $2000. It is important to note that this dual effect of accounting transactions does not necessarily mean that every transaction will affect both sides of the equation or even two elements of the equation.

This post explains everything you need to know about the effects of different types of business transactions on the accounting equation using examples and quizzes. Here are some transactions that will affect only the right side of the accounting equation. An example is when one asset increases while another decreases, such as equipment increasing while cash decreases. The equation is still balanced (assets worth $10,000 – $8,000 cash and $2,000 of furniture). Depreciation of the farm tractor will reduce the value of total assets and owner’s equity. Unlike transactions listed in previous sections, the effects of these transactions work in opposite directions because the same side of the accounting equation is involved.

Understanding how different transactions impact the accounting equation is critical for keeping the accounting books neat and tidy. This transaction results in an increase to an asset account and an increase to a liability global accounting standards account. Journalize these accounting transactions. As you can see, both sides of the accounting equation are balanced. In any case the accounting equation will always balance.

12 Paid a cash dividend, \(\$ 2,500\). 9 Paid interest on an outstanding note payable for August, \(\$ 95\). 6 Received \(\$ 21,000\) on account from clients. 4 Rendered services for various groups for cash, \(\$ 15,900\). Rendered services to customers, for cash. Rendered services to customers, on account.

Now let’s say you use $2,000 to purchase furniture for the business. Prepare a trial balance as of May 31 . 15 Paid interest for May on an outstanding note payable, \(\$ 30\). 14 Paid stockholders \(\$ 2,000\) cash as a dividend. 11 Received invoice for May advertising, to be paid in June, \(\$ 350\). 4 Purchased supplies on account, \(\$ 860\).