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Asset Example

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Next lesson: Drawings Example

Okay, so now let's see how debits and credits apply to assets...

c) Now George wants to actually set up his business. He decides to buy some baking equipment for his catering, so that he can bake various foods. The equipment costs $12,000. He pays this in cash. What do we do?

Here is an analysis of the assets of George’s Catering before and after the above transaction:

As we are essentially swapping one asset for another, the total of the assets does not change, only the value of the individual assets.

Our accounting equation is affected as follows:

External parties still have a claim of $5,000 of the business’s assets. The owner still owns $15,000 of the $20,000 assets. The only thing that has changed is the mixture of assets: the $20,000 worth of assets is now made up of baking equipment to the value of $12,000, and $8,000 cash.

The accounting entry is:

Baking equipment has increased from $0 to $12,000. It is an asset. Assets increase on the debit side (left). So, we debit baking equipment.

Bank has decreased by $12,000. It is also an asset. Which side does an asset decrease on? Well, if it increased on the debit side, then it must decrease on the credit side. So bank is credited.

Previous lesson: Liability Example
Next lesson: Drawings Example

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