What has the business done?

These transactions make the basis for the simplest PROFIT AND LOSS REPORT:

Income

Gardening $50

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Total Income $50

Expense

Fuel $5

Disposal $15

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Total expense $20

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Net Profit $30

==

Which defines XE "profit, net:definition" XE "net profit:definition" NET PROFIT. For now, we will leave it in the business. As an illustration, we will "close the books" after only one transaction. (An absurd thing to do in an operating business, but it keeps the example easy to understand.)

BALANCE SHEET (After)

ASSETS LIABILITIES

Cash $10,030 Loan on truck $4,000

Truck $8,000 Loan from Bank $2,000

Tools $5,000 ------------

Total Liabilities $6,000

EQUITY

Original Investment $17,000

Retained Earnings 30

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TOTAL EQUITY $17,030

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TOTAL ASSETS $23,030 TOTAL LIABILITIES AND EQUITY $23,030

The net profit from this operation has been moved into RETAINED EARNINGS. In practice, retained earnings refers to profit and loss from prior accounting periods, less what has been paid out to owners.

The balance sheet is still in balance. But note carefully how balance has been maintained. The cash is increased by the net $30 cash received minus cash disbursed. On the claims (liabilities and equity) side of the balance sheet, a corresponding thing has happened. Equity went up $50 with the revenue operation, and down $20 from expenses incurred. The accounting equation remains valid, because like changes were made on both sides.

Equity account names are very much a matter of owner's (or accountant's) choice. QuickBooks? slightly narrows that choice, as is explained in the next chapter, Chart of Accounts.