Mort Thanatopolis, a licensed mortician, has decided to open a funeral home specializing in very low cost funerals. The business will be called “Can U Dig It?” Here is a list of his first month’s cash transactions:
December 1, Mort opens a business checking account with a deposit of $5,000 of his own funds.
December 3, Mort pays $1,000 for 1,000 extra large, heavy duty, plastic bags.
December 5, Mort borrows $1,500 from his sister Morticia.
December 5, Mort purchases $500 of newspaper advertising.
December 8, Mort collects $1,200 in fees for three funeral services.
December 9, Mort pays $155 to a local minister to officiate at the three funerals.
December 10, Mort uses 3 plastic bags at the funerals.
The table below illustrates the effect of these transactions on the fundamental accounting equation:
Notice that the basic accounting equation is maintained after each transaction. In the first equation an asset is increased by $5,000 while equity increases by the same amount. In some transactions, like the second, only one side of the equation is changed. One asset, cash, decreased, while another asset, funeral supplies, increased by the same amount. In the third transaction, cash increased and so did a liability in the same amount. The final four transactions involved revenue and expenses, which are increases and decreases in equity. The revenue transaction increased both cash and equity by the same amount. The expenses decreased both assets and equity by the same amount. These transactions and final account balances lead to the following simple balance sheet and income statement.