Wednesday, February 13, 2008

Using the Expanded Accounting Equation

During 2003, the total assets of a Tax Preparation Firm increased by $12,250, and total liabilities increased by $25,650. During the year, the company issued additional stock of $14,000, and paid cash dividends of $7,000. What was their net income for the year 2003?

Treat 'increase' as a POSITIVE and 'decrease' as a NEGATIVE value.

It is essential to use the expanded accounting equation to solve this problem.

12250 = 25650 + E
E = - 13400

Now use the expanded accounting equation, more specifically that of EQUITY to solve for
Net Income.

Equity = Stock Issued- Dividends + Net income
-13400 = 14000 - 7000 + Net Income

Solving for Net Income of Tax Preparation Firm :

-20400 or net loss of 20400

Additional Help:
Accounting Equation Example

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