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College Accounting (Book Only): A ...

13th Edition
Scott + 1 other
ISBN: 9781337280570

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BuyFindarrow_forward

College Accounting (Book Only): A ...

13th Edition
Scott + 1 other
ISBN: 9781337280570
Textbook Problem

A fellow accounting student has difficulty understanding how the fundamental accounting equation stays in balance when a compound entry with one debit and two credits is recorded. Consider, for example, that a business bought equipment for $15,000, paid $5,000 in cash, and placed the remainder on account.

This means that there are two credits and one debit—one debit and one credit on the left side of the equation and the other credit on the right side of the equation. Explain to your fellow student how the equation stays in balance.

To determine

Explain the manner in which the accounting equation remains in balance if there are two credits and one debit on the left side of the equation and the other credit on the right side of the equation.

Explanation

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners.

Compound journal entry:

A Journal entry having more than two accounts is known as compound journal entry. Any number of accounts can be recorded in a compound journal entry but the debit side must always equal the credit side.

In a transaction, the  amount of debit must be equal with the amount of credit and moreover, there is a possibility of having more than one debit or credit on one side of the equation as long as the offset each other or if there are debits or credits on the other side to offset them.

In the asset side (left) of the accounting equation, there is a debit to equipment for amounting to $15,000 (considered as plus) and a credit to cash amounting to $5,000 (considered as minus)...

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