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Chapter 20
Chapter 3
Example 1
The transactions of a new business entity in its first five days are as follows:
Day 1 AVO commenced business introducing $1,000 cash.
Day 2 Bought a motor car for $400 cash.
Day 3 Obtained a $1,000 loan.
Day 4 Purchased goods for $300 cash.
Day 5 Sold goods for $400 on credit.
Required:
Use the accounting equation to illustrate the position of the entity at the
end of each day. (Ignore inventory for this example).
Example 1: Solution
Day 1 AVO commenced business introducing $1,000 cash.
Assets (cash) increase by $1,000
Equity (equity) increases by $1,000
AVO’s accounting equation becomes:
Assets = Equity + Liabilities
$1,000 $1,000
Day 2 Bought a motor car for $400 cash.
Assets (cash) decrease by $400
Assets (motor car) increases by $400
AVO’s accounting equation becomes:
Assets = Equity + Liabilities
$1,000 $1,000
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