4. Illustration of applying double-entry accounting system Let's use an illustration. A company, called Huske's Consultants, started its operationson January 1, 20X6 when the owner, Mrs. Huske, contributed cash to the business. All accounts had zero beginning balances before this capital contribution. We will see how each transaction affects T accounts and the accounting equation. Transaction impacts on the financial statements will be shown in a horizontal statements model. All events are numbered and their numbers are used as recording references. Recall that there are four types of accounting events: Asset source transactions Asset use transactions Asset exchange transactions Claims exchange transactions The transaction type will be indicated for each accounting event. All transactions took place during 20X6. Due to the space limitations, we will not show all accounts while explaining a transaction. Only those accounts that are affected by a particular transaction will be shown in the accounting equation. In the cash flow section of the horizontal model,OA,FAandIAstand for operating, financing andinvesting activities, respectively. 4.1. Analysis of cash contributiontransaction Event No. 1:On January 1, 20X6 the owner made a $10,000 cash contribution. This accounting event acts to increase both assets (Cash) and equity (Contributed Capital). The increase in the Cash account is recorded as a debit and the increase in the Contributed Capital account (equity) is recorded as a credit: Illustration 2: Effect of a capital contribution in T accounts Assets = Liabilities + Equity Cash Contributed Capital Debit (1) + 10,000 Credit (1) + 10,000 This is an asset source transaction: Illustration 3: Effect of a capital contribution in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow 10,000 = n/a + 10,000 n/a - n/a = n/a 10,000 FA 4.2. Analysis of supplies purchase on account transaction Event No. 2:On May 15, Huske's Consultants purchased $400 worth of office supplies from a local supply company on account (i.e., agreed to pay for them on a later date). Purchasing supplies onaccount acts to increase assets (Supplies) and liabilities (Accounts Payable). The Supplies account is debited and the Accounts Payable account is credited: Illustration 4: Effect of a suppliespurchase in T accounts Assets = Liabilities + Equity Supplies Accounts Payable Debit (2) + 400 Credit (2) + 400 This is an asset source transaction: Illustration 5: Effect of a suppliespurchase in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow 400 = 400 + n/a n/a - n/a = n/a n/a