Assets = Liabilities + Owner’s Equity Example Exercise 1-2 Accounting Equation Assets = Liabilities + Owner’s Equity This exercise steps through an important equation in accounting called the accounting equation. This equation is stated as assets equal liabilities plus owner’s equity.

Example Exercise 1-2 Example Exercise 1-2 provides an exercise in determining the amount of owner’s equity. We are told that at the end of its accounting period, You’re A Star has assets of $800,000 and liabilities of $350,000. Based on that information, let’s insert these values into the accounting equation. First to solve for Part (a), [CLICK] the owner’s equity balance as of December 31, 2011.

Example Exercise 1-2 Assets = Liabilities + Owner’s Equity $800,000 = $350,000 + Owner’s Equity (a) Assets equal $800,000 AND liabilities equal $350,000. We can now determine the amount of owner’s equity. 3

Example Exercise 1-2 Assets = Liabilities + Owner’s Equity $800,000 = $350,000 + Owner’s Equity Owner’s Equity = $450,000 (a) Owner’s equity on December 31, 2011 is $450,000. 4

Example Exercise 1-2 In part (b), we are to determine the amount of owner’s equity, as of December 31, 2012, assuming that assets increased by $130,000 and liabilities decreased by $25,000 during the years. Understanding the change in these components of the accounting equation will help determine the change in the owner’s equity account. Then, knowing the change will help us solve for the ending balance as of December 31, 2012. 5

Example Exercise 1-2 (b) CHANGE: $130,000 = $(25,000) + Owner’s Equity Assets total $130,000 while liabilities are a negative $25,000. Using algebra, let’s determine owner’s equity. [CLICK] Next, we move the negative $25,000 to the left side of equation to make it positive. [CLICK] Then we sum the two numbers to determine that the December 31, 2011 owner’s equity increased [CLICK] $155,000. 6

Example Exercise 1-2 (b) Beginning Balance, as of December 31, 2011 XXXX Plus Increases: $155,000 Less Decreases: 0 155,000 Ending Balance, as of December 31, 2012 XXXX Now, to solve for the owner’s equity balance as of December 31, 2012. Another standard equation used in accounting is beginning balance plus increases less decreases equals the ending balance. We determined in the previous slide that owner’s equity increased $155,000.

Example Exercise 1-2 (b) Beginning Balance, as of December 31, 2011 $450,000 Plus Increases: $155,000 Less Decreases: 0 155,000 Ending Balance, as of December 31, 2012 $605,000 Plugging in the other known value, the beginning balance of $450,000, we can easily determine that the ending balance is $605,000. 8

Example Exercise 1-2  For Practice: PE 1-2A, PE 1-2B Refer to Practice Exercises PE 1-2A and PE1-2B to work through additional problems that analyze the owner’s equity accounts.  For Practice: PE 1-2A, PE 1-2B 9