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Understanding the Accounting Equation: A Case Study of Softbyte Transactions

This article analyzes the financial transactions of Softbyte, a computer programming service founded by Ray Neal. It illustrates the fundamental accounting equation: Assets = Liabilities + Equity, through various transactions, including investments, equipment purchases, service revenues, and expenses. Each transaction highlights how changes in assets, liabilities, and equity affect the overall financial position. This case study serves as an educational resource for understanding practical applications of accounting principles in a business context.

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Understanding the Accounting Equation: A Case Study of Softbyte Transactions

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  1. EFFECT OF ACCOUNTING EQUATION

  2. Rules of Equation Asset = Liabilities + Equity ↑ = ↑ ↓ = ↓ ↓ ↑ ↑ ↓

  3. Transaction Analysis Transaction (1):Ray Neal decides to open a computer programming service which he names Softbyte. On September 1, 2012, Ray Neal invests $15,000 cash in the business. SO 7

  4. Transaction Analysis Transaction (2): Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash. SO 7

  5. Transaction Analysis Transaction (3): Softbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months. The purchase is made on account. SO 7

  6. Transaction Analysis Transaction (4): Softbyte receives $1,200 cash from customers for programming services it has provided. SO 7

  7. Transaction Analysis Transaction (5): Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date. SO 7

  8. Transaction Analysis Transaction (6): Softbyte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account. SO 7

  9. Transaction Analysis Transaction (7): Softbyte pays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200. SO 7

  10. Transaction Analysis Transaction (8): Softbyte pays its $250 Daily News bill in cash. SO 7

  11. Transaction Analysis Transaction (9): Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)]. SO 7

  12. Transaction Analysis Transaction (10): Ray Neal withdraws $1,300 in cash from the business for his personal use. Illustration 1-8 Tabular summary of Softbyte transactions SO 7

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