So far George has financed his business through his own funds as well as through a loan from the bank. Now what is he going to do with these funds?
c) George decides 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.
Okay, so what the hell happens now?!
I know it's getting a bit more complex. Don't worry, and don't panic...
In order to simplify things, let's analyze the assets of George’s Catering before and after the transaction, as well as the changes that occurred:
As you can see, we are essentially ‘swapping’ one asset for another, and so 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.
George’s Catering still consists of assets of $20,000, but this is now made up of baking equipment to the value of $12,000, and $8,000 cash.
If you are having any difficulty with understanding the example above, return to the lesson entitled What are Assets? to review this key concept.
Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)
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Cash Purchase of Asset
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