Accounting Equation Question?

The trick here is to find your income so that you can end up with at least the same amount of equity as you started the financial year with. All of your loan is spent on rent and salaries so you will have Assets plus 750 cash at bank from the loan 1250 Liabilities 200 plus the loan of 750 = 950 Equity 300 (1250 - 950 = 300) You will need to make more income to cover the costs of goods sold and cover the debt that you will have to repay. You can't have negative equity in a business in Australia at least. If you spend all of your loan on expenses the asset bank will return to 500 so Cash Sales of at least 750 are needed to bring this asset back to 1250. Sales (minimum) 750 You now have Sales 750 All expenses have been paid out of the loan which is a breach of accounting convention they are supposed to be paid out of operating income. Net Profit 750 Cash at Bank 750 Other Assets 500 Total Assets 1250 Liabilities 950 Net Assets 300 Equity 300 If sales were larger than this any extra would be counted as added to the equity as an increase in equity. I hope that this makes things a bit clearer. Please leave this answer up the last person a couple of us help ripped it down. Cheers!!!

we'll make a couple more assumptions, we'll assume you didn't make any revenue and didn't issue any dividends. Ending Assets= Ending Liabilities + Ending Owner's/Stockholder's Equity Ending Owner's/Stockholder's Equity= Net Income/Loss - dividends + Starting Owner's Stockholder's Equity Net Income=Revenues-Expense We're assuming 0 revenue, and your rent and salaries are expenses...so -750 revenue or Net Loss=-750 Ending Owner's/Stockholder's Equity= 500 + (-750) Beg OE/SE+ NI/NL So...ending Owner's/Stockholder's Equity is -250 assets 500 Equity -250 Liabilities 750 500=750+ (-250) The equations balances!! I've never seen this situation before, and I doubt any institution would lend money to an organization w/0 revenue for a loan greater than their net worth either...BUT if they did this is what would happen i suppose...LOL

when you got the loan you had to put the money in your bank account or petty cash before spending it on expenses etc. therefore 1. when you got the money - assets increased (dr) and liabilities increased (cr) 2. when you spent the money - expenses increased (dr) and assets decreased (cr)

Remember that equity changes by net income or loss and expenses are involvedin that so when you close out the books at the end of your accounting period the equation always balances.

we'll make a couple more assumptions, we'll assume you didn't make any revenue and didn't issue any dividends. Ending Assets= Ending Liabilities + Ending Owner's/Stockholder's Equity Ending Owner's/Stockholder's Equity= Net Income/Loss - dividends + Starting Owner's Stockholder's Equity Net Income=Revenues-Expense We're assuming 0 revenue, and your rent and salaries are expenses...so -750 revenue or Net Loss=-750 Ending Owner's/Stockholder's Equity= 500 + (-750) Beg OE/SE+ NI/NL So...ending Owner's/Stockholder's Equity is -250 assets 500 Equity -250 Liabilities 750 500=750+ (-250) The equations balances!! I've never seen this situation before, and I doubt any institution would lend money to an organization w/0 revenue for a loan greater than their net worth either...BUT if they did this is what would happen i suppose...LOL

Remember that equity changes by net income or loss and expenses are involvedin that so when you close out the books at the end of your accounting period the equation always balances.

when you got the loan you had to put the money in your bank account or petty cash before spending it on expenses etc. therefore 1. when you got the money - assets increased (dr) and liabilities increased (cr) 2. when you spent the money - expenses increased (dr) and assets decreased (cr)