Introduction to Accounting 120 Chapter 5: The Equity Equation

The expanded ledger and the income statement allow the owner to see how the business is fairing; however, the income statement alone does not indicate the change in equity of the owner. Periodically, throughout the fiscal period, the owner will want to check the status of their net worth. Prior to expanding the ledger, the owner needed only to look at the balance of the capital account to determine equity growth or decline. To determine a current net worth position with the new ledger format, drawings and net income or net loss are assembled with the capital figure, and the information is presented on a report form balance sheet.

The Equity Equation The formula for updating the equity figure is as follows:

The Equity Equation The formula for updating the equity figure is as follows:

The Equity Equation (Continued) Examine the following situation: –Beverly Waddell owns her own business. The capital account has a balance of $27 800, the drawings account has a balance of $1 320, the total revenue earned to date this fiscal period is $ and the total expenses incurred during this same fiscal period are $ What is Beverly Waddell's current net worth?

The Report Form Balance Sheet Previously, the financial picture of a business was displayed using an account form balance sheet in which the information is presented in a side-by-side or horizontal format. A report form balance sheet, the common reporting method, displays information in a vertical format and includes the expanded equity section.

The Report Form Balance Sheet

The Report Form Balance Sheet-The Heading The heading has not changed in any way. It displays the "who," the "what" and the "when" of the document. When Excel is used to prepare an electronic balance sheet, the heading is located in cells A1, A2 and A3. Understand and remember a balance sheet presents a picture of a business on one particular day or, more precisely, at one moment in time. Theoretically, a balance sheet is outdated minutes after it is produced (if not before). The balance sheet does not measure data over a period of time and, therefore, does not use a date like that found on an income statement.

The Report Form Balance Sheet-The Assets The asset section has a few modifications: 1.The subtitle Accounts Receivable, used on an account form balance sheet, is replaced with A/R preceding each debtor's name. 2.On an electronic balance sheet, asset account totals are listed in column C, and the total asset figure is listed in column D.

The Report Form Balance Sheet-The Liabilities Similar to the asset section, the subtitle Accounts Payable, found on the account form balance sheet, is replaced with A/P on the report form balance sheet. On an electronic balance sheet, liability account totals are listed in column C, and the total liability figure is listed in column D. (**Error: Individual liability amounts are placed in wrong column on graphic - should be column C, ruled, and total shown on next row in column D.)

The Report Form Balance Sheet-Owner's Equity The owner's equity section is expanded to include the equity equation: This provides information on both the success of the business (net income/net loss) and the progress of the owner's equity (increase/decrease in Capital). It indicates the period of time over which the equity growth or decline is measured by displaying a dated beginning capital amount and a dated ending capital amount. In this example, the balance sheet shows the change to equity over a six-month period - January to June.

The Report Form Balance Sheet-Owner's Equity (Continued) Notice format and the use of columns B-D to display the equity equation.

Decreases to Capital There are instances where capital unfortunately does not increase. A company may suffer a net loss, or the owner may withdraw more funds than there were profits generated in a given time. Examine the Owner's Equity section of a report form balance sheet under these circumstances:

Electronic Report Form Balance Sheet- Formulas Formulas are required for the following calculations: –Total assets –Total liabilities –Increase/Decrease to capital –Ending balance –Total liabilities and owner's equity The formulas for total assets and total liabilities are simple sum formulas of the appropriate account balances. To determine the total asset or total liability figures: –Click in the cell requiring the formula. –Click the sum button. –Left-click and drag to select the accounts' balances included in the total.

Electronic Report Form Balance Sheet-Equity Formulas The formula used to determine the change to capital will vary depending upon the situation: Situation One: Net Income > Drawings This is the most common situation. It is also the easiest situation to formulate The formula for increase in capital is: Net Income - Drawings.

Electronic Report Form Balance Sheet-Equity Formulas The formula used to determine the change to capital will vary depending upon the situation: Situation One: Net Income > Drawings This is the most common situation. It is also the easiest situation to formulate The formula for increase in capital is: Net Income - Drawings. To enter the formula with Excel: Click the cell in which the formula is to be entered. Enter "=." Click the net income figure. Enter "-." Click the Drawings figure. Strike the Enter key. The formula for the ending balance (Balance June 30, 200--) is: Beginning Capital (Balance January 1, 200--) + Increase in Capital. To enter the formula with Excel: Click the cell in which the formula is to be entered. Enter "=." Click the beginning capital figure. Enter "+." Click the increase in capital figure. Strike the Enter key.

Electronic Report Form Balance Sheet- Equity Formulas (Continued) Situation Two: Net Loss The formula for decrease in capital is: Net Loss + Drawings. To enter the formula with Excel: Click the cell in which the formula is to be entered. Enter "=." Click the net loss figure. Enter "+." Click the Drawings figure. Strike the enter key.

Electronic Report Form Balance Sheet- Equity Formulas (Continued) The formula for the ending balance (Balance June 30, 200--) is: Beginning Capital (Balance January 1, 200--) - Decrease in Capital. To enter the formula with Excel: Click the cell in which the formula is to be entered. Enter "=." Click the beginning capital figure. Enter "-." Click the decrease in capital figure. Strike the enter key.

Electronic Report Form Balance Sheet-Equity Formulas (Continued) Situation Three: Drawings > Net Income The formula for decrease in capital is: Net Loss - Drawings. To enter the formula with Excel: –Click the cell in which the formula is to be entered. –Enter "=." –Click the net income figure. –Enter "-." –Click the Drawings figure. –Strike the Enter key.

Electronic Report Form Balance Sheet-Equity Formulas (Continued) Notice that the decrease in capital figure is negative. The formula for the ending balance (Balance June 30, 200--) is: Beginning Capital (Balance January 1, 200--) + Decrease in Capital. To enter the formula with Excel: Click the cell in which the formula is to be entered. Enter "=." Click the beginning capital figure. Enter "+." Click the decrease in capital figure. Strike the Enter key.

Let's Review All accounts found in the general ledger are assigned a number. This number is based on account classification. Trial balance purpose and preparation remains unchanged with the introduction of the expanded ledger. The balance sheet portrays a snapshot of a business for one day or moment in time. The report form balance sheet incorporates the expansion of the ledger by displaying the equity equation.

Test Your Knowledge! This is the final lesson for Chapter 5! Go to ClassMarker.com and complete the “The Equity Equation (U5A4)” assignment. Ensure you’ve also completed the other ClassMarker assignments as well.