Withdrawals Revenues Expenses

The expanded accounting equation contains six categories: assets, liabilities, capital, withdrawals, revenues, and expenses. This information is helpful in assessing the changes in a company’s financial position.

We will conduct this discussion board like a group project. Your instructor will place you in one of the following groups:

• Withdrawals
• Revenues
• Expenses

You will be responsible for discussing your thoughts on the category of your group selection (i.e., Assets). Address the following in your discussion:

1. Identify for your category the (i) increase and decrease side of the account and (ii) normal balance side of the account
2. Describe a transaction, with amounts, that increases its component
3. Using the transaction and amounts in (b), verify the equality of the accounting equation and then explain any effects on the income statement and statement of cash flows.
4. Describe a transaction, with amounts, that decreases the category.
5. Using the transaction and amounts in (d), verify the equality of the accounting equation and then explain any effects on the income statement and statement of cash flows.

• Build on something your classmate said
• Explain why and how you see things differently
• Ask a probing or clarifying question
• Share your understanding of your classmate’s posting
• Offer and support an opinion with peer-reviewed sources or industry leading practices
• Expand on your classmate’s posting by providing constructive feedback

Hello Class!

Since my last name start with the letter S, I will be joining the Groups 4, 5, and 6. Which include withdrawals, revenues, and expenses which fall into the equity accounts.

Accounting is the process of recording financial transactions pertaining to a business. The financial statements used in accounting are a concise summary of financial transaction over an accounting period, summarizing. Company’s operations, financial position, and cash flows. One of the first rules of accounting is that the accounting equation must be balanced. The expanded accounting equation contains six categories: assets, liabilities, capital, withdrawals, revenues, and expenses. I am focusing on three categories. Withdrawals occur when funds are removed from an account. The owner will withdraw assets for personal use, resulting in a decrease in both company assets and total equity (Wild, J., Shaw, K. 2021). Meanwhile, revenue is the money generated form normal business operations. It is the top line (or gross income) figure from which costs are subtracted to determine net income. Sales revenue is posted as a credit. An expense is the cost of operations that a company incurs to generate revenue. Expenses typically have debit balances that are increased with a debit entry.

Equity = Owner Capital – Owner withdrawals + Revenues – Expenses

A normal balance is a positive balance. When an amount is accounted for on its normal balance side, it increases that account. On the contrary, when an amount is accounted on the opposite side of its normal balance, it decreases that amount. Withdrawals are a debit that has a negative impact. Revenues are a credit which increase. Finally, expenses are a debit that have a negative impact.

Withdrawals: debit (increase) credit (decrease); revenues: debit (decrease) credit (increase); expenses: debit (increase) credit (decrease)

To create a transaction that increases the equity we would need to see an increase in revenues or a return on expenses (as in an overpaid expense is being refunded). To create a scenario, the company will have 0 in withdrawals the revenue will be $50,000 and have $10,000 in expenses that will be increases instead of decreased because there will be an increase in accounts receivable due to an expense charge getting paid back to the company, while owner capital stays at $60,000. These accounts are all showing that they are increasing the total component.

100,000=60,000-(0) +50,000-(10,000).

There will be a decrease when the owner makes a withdrawal or when expenses are paid.

90,000=60,000-(10,000) +50,000-(10,000).

This equation shows how equity has decreased due to the owner making a withdrawal of $10,000.

After completing the calculation for equity you can then apply that amount to the total liabilities and add them together to get the total amount of assets.

Thank You!

Payton

References:

Wild, J., Shaw, K. (2021) Fundamentals Accounting Principles 25th edition McGraw Hill https://prod.reader-ui.prod.mheducation.com/epub/sn_8fdbc/data-uuid-e13eee1ae86d4086b086968c96ae8085#data-uuid-0c569d225444434daeb3e83c146868c8

Reaction to post#2

Hello Class,

I’m in groups 1-3 which correspond to assets, liabilities, and owner capital. From our text, the expanded accounting equation is: assets = liabilities + owner capital – owner withdrawals + revenues – expenses (Wild, J., Shaw, K. 2021). 

Let’s begin with assets.

Assets increase on the debit side and decrease on the credit side of the T-account. The normal balance is on the debit side. A sample transaction would be an addition to owner capital. This would be recorded as a credit of owner capital to reflect the increase. Cash would be debited by the same amount.

A transaction that would decrease assets could be rent expanse. Rent expense would be debited to reflect the decrease and cash would be credited to reflect it’s corresponding decrease. 

Posting these two transactions would be:

Beginning cash = 0
Cash = debit of $10,000; Capital = credit of $10,000
Cash = credit of $2,000; Rent Expense = debit of $2000
Net effect is cash (asset) = $8,000; equity = $8,000

In the statement of cash flows, changes to assets (cash, inventory, etc.) are captured as cash flows from operations. These items are also recorded at a point in time in the balance sheet.

Liabilities increase on the credit side and decrease on the debit side. Normal balance is a credit. A sample transaction to increase liabilities might be an increase in accounts payable. Suppose the business purchases machinery net 90 days. Machinery (an asset) would be debited to reflect its increase and accounts payable would be credited to reflect the increase in liabilities.

A decrease in liabilities would be full cash payment to the machinery supplier. Accounts payable (liability) would be debited and cash would be credited.

Assuming accounts payable is zero before these transactions, we would have:

Machinery = debit of $5,000; Accounts payable = credit of $5,000.
Cash = credit of $5,000; Accounts payable = debit of $5,000
Net effect is an increase in the Machinery asset, an equal decrease in cash, and zero accounts payable.

These items are recorded at a point in time in the balance sheet.

Similarly, increases in owner capital are credit increases and debit decreases, so the normal balance is a credit. Using the example from Assets above, an addition to owner capital would be recorded as a credit to reflect the increase. Cash (an asset) would be debited by the same amount. 

A withdrawal would have the opposite effect. Cash would be credited with a corresponding debit to capital (owner equity).

These two transactions might be recorded in the ledger as:

Beginning cash = 0
Cash = debit of $10,000; Capital = credit of $10,000
Cash = credit of $1,000; Withdrawal = debit of $1,000
Net effect is cash (asset) = $9,000; equity = $9,000

Changes in owner capital are recorded in the statement of owner equity and includes net income from the income statement. The capital balance is also recorded in the balance sheet. All changes in cash (including those resulting from changes in owner capital) are also recorded in the statement of cash flows.

-Michael

References

Wild, J., Shaw, K. (2021) Fundamentals Accounting Principles 25th edition McGraw Hill https://prod.reader-ui.prod.mheducation.com/epub/sn_8fdbc/data-uuid-e13eee1ae86d4086b086968c96ae8085#data-uuid-0c569d225444434daeb3e83c146868c8 (Links to an external site.)