Introduction to Accounting 120
Chapter 5:
The Equity
Equation
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
The Equity Equation
• The Equity Equation
• The formula for updating the equity figure
is as follows:
The Equity Equation
• 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 $42 760 and the total expenses incurred
during this same fiscal period are $33
730.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balance sheet is outdated minutes after it is produced (if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
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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
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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
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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 SheetFormulas
•
Formulas are required for the following
calculations:
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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
Electronic Report Form Balance Sheet-Equity
Formulas
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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 SheetEquity Formulas (Continued)
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Situation Two: Net Loss
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The formula for decrease in capital is: Net Loss +
Drawings.
To enter the formula with Excel:
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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 SheetEquity Formulas (Continued)
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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.
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To enter the formula with Excel:
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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
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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
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.