Question

At the end of its first year of operations, shapiro's consulting services reported net income of $27,000. they also had account balances of: cash, $16,000; office supplies, $3,200; equipment, $24,000 and accounts receivable, $8,000. the owner's total investment for this first year was $15,000 and the owner withdrew $2,000 for personal use. what are the total liabilities of shapiro's consulting services at the end of the first year of operations?

Answer 1

Answer: $11,200

Explanation:

Using the accounting equation:

(Total Assets) = (Total Liabilities) + (Total Capital)

So,

(Total Liabilities) = (Total Assets) - (Total Capital)    (1)

Based on equation (1), in order to compute for the total liability, we need to compute the total assets and total capital.

At the end of the first year, the following are the assets Shapiro's consulting services (together with the amount):

Cash:                              $16,000
Office Supplies:                $3,200
Equipment:                     $24,000
Accounts Receivable:       $8,000
TOTAL ASSETS            $51,200

Note that the total assets is obtained by adding the amount (or value) of the all the assets listed above.

Since the net income is an increase (or decrease if it's a net loss) of capital, we classify net income as capital. In particular, the net income of Shairo's at the end of first year adds to the capital at the start of first year. 

Moreover, the withdrawal of money by the owner also decreases the capital.  

Thus, the total capital at the end of first year is calculated as follows:

Capital (start of the year):            $15,000
Net Income (end of year):           $27,000   
Withdrawal Amount:                    ($2,000)
TOTAL CAPITAL:                       $40,000

Note: ($2,000) means -$2,000. This notation is used in accounting.

Hence using equation (1), the total liabilities at the end of first year is given by

(Total Liabilities) = (Total Assets) - (Total Capital)
                           = $51,200 - $40,000
Total Liabilities = $11,200