Basic equation of Accounting

Please explain the basic equation by the example given below.
Assets = Equity - Liabilities
and if you add income and expenses
Assets = Equity - Liabilities + ( Income - Expenses )
so what values would you give to the above accounts in the following case and make sure the equation remains correct.
I have $100 in my pocket. My bike has no fuel so I spend $10 for fuel and ride to the vegetable market. I buy potatoes for the remaining $90. Then I go door to door to sell those potatoes. At the end of the day I come home with $125 in my pockets having sold all potatoes. bike is again empty.
thx.
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Kitwe Boy wrote:

Sorry. It should be
Assets = Equity + Liabilities
in both equations.
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Kitwe Boy wrote:

I hope to goodness this isn't homework, but here goes:
1. Fuel Expense    10         Cash         10 To purchase gas for your bike
2. Groceries     90     Cash        90 To purchase groceries (swap one asset [Cash] for another [Groceries])
3. Cash        125     Groceries Revenue    125 To record receipt of cash and record revenue made from sale of groceries
4. Groceries Expense    90     Groceries        90 To remove groceries from your inventory (what you have available to sell)
Note that in Step 2, there's no expense recorded. If you purchase the groceries intending to turn around and sell them, then they represent inventory. You expense inventory at the time that you sell it, which is what happens in Step 4. The fuel is not an inventory item (you are not going to re-sell it, rather you are going to consume it yourself), so it gets expensed immediately -- when you bought it. It benefits you JUST "today," so you expense it "today."
The Accounting Equation then looks like this:
Assets = Cash 125 (fuel expensed immediately, veggies all sold) Liabilities = 0 Equity = Assets - Liabilities => 125 - 0 = 125
The Revenue and Expenses work like this:
Net Income is roughly Revenue - Expenses. So, it is 125 (Grocery Revenue) - 90 (Grocery Expense) - 10 (Fuel Expenses) = 25 (Net Income). You started with 100 cash, and that had to come from somewhere, so we'll just say it was what you contributed as "ownership" to this little business you have set up of reselling vegetables. So, you started out with 100 dollars' "worth" of equity in the business. So, your beginning Equity was 100.
Equity on the balance sheet is, in very simple terms, a sum of whatever equity you had "before", plus your Retained Earnings for this period. In this case, your Retained Earnings is comprised *only* of your Net Income, so that 25 in Net Income calculated above "rolls into" Retained Earnings, and therefore into the Equity section of the accounting equation (and the bottom of the balance sheet):
So, you started with 100 in Equity, and it went up by 25 (Net Income): 100 + 25 = 125.
And therefore:
Assets - Liabilities = Equity 125 - 0 = 125
Get it?
If this was homework, then shame on you. (well, and me some, too)
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Holly J. Sommer wrote:

Thx. It isn't HW. Just got my self into a personal Project which I thought would be easily done by modifying a previous sales/purchase program I wrote in VB. That didn't have much accounting stuff except debit/credit of parties involved.
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