Lecture 3 Accounting, REI faculty, 1st year, 2015-2016

Transactions effects on the Balance Sheet Equation

Example: verify the balance sheet equation and draw a horizontal balance sheet
dated December 31, 201x for the Vulcan Corporation, based on the following items:
Balance sheet items Amount (RON) Balance sheet items Amount (RON)
Cash
30.000 Accounts receivable
80.000
Short term bank loans
65.000 Retained earnings
40.000
Share capital
60.000 Accounts payable
35.000
Equipments
75.000 Merchandise
15.000
Table 1
VULCAN CORPORATION
Balance Sheet drawn up December 31, 201x

Noncurrent assets

Owners equity

Intangible assets

Share capital

Tangible assets

Retained earnings

Financial assets

Profit for the period

Current assets

Noncurrent liabilities

Inventories

Loans

Debtors

Provisions

Investments

Current liabilities
Loans

Cash
Accounts payable
Wages payable

Total Assets =

Total OE + L = + .

Expressed like this, the equation stands for the static view of the balance sheet. As such,
the balance sheet represents the financial condition of an enterprise at a noted date (the
end of the financial year, usually, but not always, corresponding to the end of the civil
year) (in our case, the date is December 31, 201x). Yet, each passing transaction or event
brings about a change in the overall financial condition of the enterprise. Business
activities will impact various asset, liability, and/or equity items, but they will not
disturb the equality of the accounting equation.
Let's look at four specific transactions for the Vulcan Corporation. Let us see how each
transaction impacts the individual asset, liability, and equity items, without upsetting the
basic equality of the balance sheet.

Prof.univ.dr. Catalin Albu, ASE Bucharest

Lecture 3 Accounting, REI faculty, 1st year, 2015-2016

T1) Vulcan Corporation collects accounts receivable: Vulcan Corporation collected 10.000
RON from a customer on an existing account receivable (i.e., it is not a new sale, just the
collection of an amount that is due from some previous transactions).
Two items are affected by the transaction:
-, by the amount of..
-, by the amount of..
Accordingly, the balance sheet would be revised as follows:

Table 2
Noncurrent assets
Equipments

VULCAN CORPORATION
Balance Sheet after transaction 1
RON
Owners equity
Share capital
Retained earnings

Current assets
Merchandise
Accounts receivable
Cash
Total Assets

RON

Current liabilities
Bank loans
Accounts payable
Total OE & L

The equation may be rewritten as follows: ..=..+

Was the equality affected? Yes/No
T2) Vulcan Corporation buys merchandise on credit: if Vulcan Corporation purchased 5.000
RON of merchandise, agreeing to pay for it later (i.e. on credit), then the balance sheet would be
further revised as follows:
Two items are affected by the transaction:
-, by the amount of..
-, by the amount of..
Accordingly, the balance sheet would be revised as follows:
Table 3
VULCAN CORPORATION
Balance Sheet after transaction 2
Noncurrent assets
RON
Owners equity
Equipments
Share capital
Retained earnings

RON

Current assets
Current liabilities
Merchandise
Bank loans
Accounts receivable
Accounts payable
Cash
Total Assets
Total OE & L
The equation may be rewritten as follows: ..=..+
Was the equality affected? Yes/No

Prof.univ.dr. Catalin Albu, ASE Bucharest

Lecture 3 Accounting, REI faculty, 1st year, 2015-2016

T3) Vulcan Corporation pays accounts payable: Vulcan Corporation pays 15.000
RON to a supplier on an existing account payable (i.e., it is not a new purchase, just the
payment of an amount that is due from some previous transactions). Accordingly, the
balance sheet would be revised as follows:
Two items are affected by the transaction:
-, by the amount of..
-, by the amount of..
Table 4
VULCAN CORPORATION
Balance Sheet after transaction 3

Noncurrent assets

RON

Owners equity

Equipments

RON

Share capital
Retained earnings

Current assets

Current liabilities

Merchandise

Bank loans

Accounts receivable

Accounts payable

Cash

Total Assets

Total OE & L

The equation may be rewritten as follows: ..=..+

Was the equality affected? Yes/No

T4) Vulcan Corporation sells on credit half the merchandise on hand for 15.000
RON: Vulcan Corporation sells to one of its customers some 10.000 RON merchandise
for a selling price of 15.000 RON, to be collected in a subsequent period. If such a
transaction is reflected in accounts, the balance sheet is revised as follows:
The items that are affected by the transaction are:
-, by the amount of..
-, by the amount of..

Prof.univ.dr. Catalin Albu, ASE Bucharest

Lecture 3 Accounting, REI faculty, 1st year, 2015-2016

Table 5
VULCAN CORPORATION
Balance Sheet after transaction 4

Noncurrent assets

RON Owners equity

Equipments

RON

Share capital
Retained earnings

Current assets

Current liabilities

Merchandise

Bank loans

Accounts receivable

Accounts payable

Cash

Total Assets

Total OE & L

1st remark: since T4 is an exchange transaction with third parties resulting from central
activities, is also realized (in the amount of 5.000 RON).
2nd remark: the accounting treatment of this transaction is more complicated and will be
developed in further classes. Since .. is realized, the transaction requires the
recognition of . and ..
The equation may be rewritten as follows: ..=..+
Was the equality affected? Yes/No

Conclusions:
-

even if each passing transaction or event brings about a change in the overall
financial position of the enterprise, impacting various asset, liability, and/or
equity items, .
several items have not been affected by the above-mentioned transactions. These
items are:
o ..: this is because the company ..
....
o ..: this is because the company ..
....
o ..: this is because the company ..
....
o ..: this is because the company ..
....

Prof.univ.dr. Catalin Albu, ASE Bucharest