The effect of an asset use transaction (assets and claims decrease) on the basic accountingequation is as follows: Illustration 6: Effect of expense recognition Equity Assets = Liabilities + Contributed Capital + Retained Earnings Beginning balance $10,000 = $2,000 + $5,000 + $3,000 Effect of expenses (1,000) = + + (1,000) Ending balance $9,000 = $2,000 + $5,000 + $2,000 Take a note of how decreases or negative amounts are shown in accounting records. Instead of prefixing a minus sign ("-"), a number is taken into parenthesis. This is a common way of showinga decrease in accounting. 5) If a business chooses to transfer part of its assets (particularly its retained earnings) to the owners, the transfer is calleddistribution. Assume Friends Company transfers $500 of assets to its owners. This is an asset use transaction: Illustration 7: Effect of cash distribution Equity Assets = Liabilities + Contributed Capital + Retained Earnings Beginning balance $9,000 = $2,000 + $5,000 + $2,000 Effect of distribution (500) = + + (500) Ending balance $8,500 = $2,000 + $5,000 + $1,500 Both distributions and expensesresult in decreases in retained earnings and thus, in equity. The table below is a summary of the effects of the three asset source transactions (events 1 through 3) and two asset use transactions (events 4 and 5): Illustration 8: Summary of transaction effects Equity Assets = Liabilities + Contributed Capital + Retained Earnings Beginning balance $0 = $0 + $0 + $0 Effect of contribution +5,000 = + +5,000 + Effect of borrowing +2,000 = +2,000 + + Effect of revenue +3,000 = + + +3,000 Effect of expenses (1,000) = + + (1,000) Effect of distribution (500) = + + (500) Ending balance $8,500 = $2,000 + $5,000 + $1,500 8. Closing the books: permanent and temporary accounts At the end of an accounting period, all accounts are prepared for the next period. In this regard,it is important to distinguish between permanent and temporary accounts. Balance sheet accounts (i.e., assets, liabilities, and equity) have a continual nature; therefore, they are not closed after each period. That's why they are calledpermanent accounts. Permanent accountsare balancesheet accounts. They are not closed after each period. Their balances are carried forward intothe next period. Permanent accounts are also calledreal accounts. In contrast, revenue, expense, anddistribution accounts are used to collect information about a single accounting period. At the end of aperiod, amounts in revenue, expense, and distribution accounts are transferred to the Retained Earningsaccount. Accordingly, the revenue, expense,and distribution accounts must have zero balances after closing the books at the end of one accounting period and at the beginning of the next period. Temporary accountsare closed at the end of each period. These are mostly income statement accounts, except for a distribution account that is an equity statement account. Temporary accounts are also callednominal accounts. The process of transferring the balances from the temporary accounts to the permanent account (i.e., the Retained Earnings account), is referred to asclosing the accountsorclosing the books.