Chapter One
Asset, Liability, Owner’s Equity, Revenue, and
Expense Accounts
Edited by Nancy GoehringEdited by Nancy Goehring
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Performance Objectives
1. Define and identify asset, liability, and owner’s equity accounts
2. Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity
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Performance Objectives
3. Define and identify revenue and expense accounts
4. Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation
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Fundamental Accounting Equation
• A = L + OE
• Assets = Liabilities + Owner’s Equity
Itemsowned
Amountsowed tocreditors
Owner’sinvestment
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Performance Objective 1
Define and identify asset, liability, and owner’s equity
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Define Asset
• Asset– Cash, properties, and other things of value
owned by an economic unit or business entity
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Identify Assets
• Examples of assets:– Cash– Trucks– Buildings– Shoes in a shoe store– Kites in a kite store– Accounts Receivable
• The amount owed to you or the business
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Define Accounts Receivable
• Accounts Receivable– An account used or record of the amounts
owed by charge customers (legal claims against charge customers)
• Look for the words:– “Sold on account”
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Define Liability
• Liability– Debts or amounts owed to creditors
• In one word:– Debt
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Identify Liabilities
• Examples of Debts/Liabilities– Loans (borrowing money)– Accounts Payable account
• Buy goods/services on credit• Receive a bill, but don’t pay until later• Buy supplies from a store, but pay for them
later
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Define Accounts Payable
• Accounts Payable– A liability account used for short-term
liabilities or charge accounts, usually due within thirty days
• Look for the words:– “Bought/purchased on account”
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Define Owner’s Equity
• The owner’s right to or investment in the business
• A – L = OE
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Identify Owner’s Equity
• What is left over for the owner after all the debts have been paid– Remember: Creditors must be paid before
the owners are paid
• The Capital account
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Fundamental Accounting Equation
• A = L + OE
• Assets = Liabilities + Owner’s Equity– The equals sign means that one side must
always equal the other side– We’ll use this equation later to determine
whether we have recorded our business transactions correctly
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Fundamental Accounting Equation
Suppose the total value of the assets is $26,000 and the business entity does not owe any amount against the assets.
Assets = Liabilities + Owner’s Equity
$26,000 = $0 + $26,000
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Fundamental Accounting Equation
Suppose the total value of the assets consists of a truck that costs $23,000. The owner invested $11,000 in the truck and borrowed $12,000 from the bank.
Assets = Liabilities + Owner’s Equity
$23,000 = $12,000 + $11,000
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Determine Assets
Mr. Stan’s insurance agency has liabilities of $2,000; his investment (his equity) amounts to $9,000.
Assets = Liabilities + Owner’s Equity
? = $2,000 + $9,000
Assets = Liabilities + Owner’s Equity
$11,000 = $2,000 + $9,000
$2,000 Liabilities
+ 9,000 Owner’s Equity
= 11,000 Assets
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Determine Owner’s Equity
Mr. Stan’s insurance agency has assets of $36,000; his liabilities amount to $5,000.
Assets = Liabilities + Owner’s Equity
$36,000 = $5,000 + ?
Assets = Liabilities + Owner’s Equity
$36,000 = $5,000 + $31,000
$36,000 Assets
- 5,000 Liabilities
= 31,000 Owner’s Equity
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Determine Liabilities
Mr. Stan’s insurance agency has assets of $32,000; his investment (his equity) amounts to $20,000.
Assets = Liabilities + Owner’s Equity
$32,000 = ? + $20,000
Assets = Liabilities + Owner’s Equity
$32,000 = $12,000 + $20,000
$32,000 Assets
- 20,000 Owner’s Equity
= 12,000 Liabilities
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Performance Objective 2
Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity
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Recording Business Transactions
We will be recording business transactions for a company with the following details:
Owner’s name: L.P. Arch
Business name: Arch Copy Co.
Business type: Sole Proprietorship(one-person business)
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Some Definitions
• Sole proprietorship– A one-owner business
• Separate entity concept– The concept by which a business is treated
as a separate economic or accounting entity
– The business stands by itself, separate from its owners, creditors, and customers
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Some Definitions
• Accounts– The categories under the Assets,
Liabilities, and Owner’s Equity headings
• Double-entry accounting– The system by which each business
transaction is recorded in at least two accounts and the accounting equation is kept in balance
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Some Definitions
• Fair market value– The present worth of an asset or the amount that
would be received if the asset were sold to an outsider on the open market
• Withdrawal– The taking of cash or other assets out of a
business by the owner for his or her own use (also referred to as drawing)
– Treated as a temporary decrease in owner’s equity
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Steps in Recording a Business Transaction
1. What accounts are involved?2. What are the classifications of the
accounts involved?3. Are the accounts increased or
decreased?4. Is the equation in balance after the
transaction has been recorded?Remember: each business transaction
must affect at least two accounts
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Transaction (a): Arch deposited $70,000 in a bank account in the name of business.
Assets = Liabilities + Owner's EquityItems owned Amounts owed to creditors Owner's investment
Cash = L. P. Arch, Capital(a) + 70,000 = + 70,000
Recording Transactions (page 10)
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Recording Transactions (page 11)
Transaction (b): Bought equipment, paying cash, $33,000.
= Liabilities + Owner's EquityAmounts owed to creditors Owner's investment
Cash + Equip. = L. P. Arch, CapitalPrev. Bal. + 70,000 = + 70,000(b) - 33,000 + 33,000
New Bal. 37,000 + 33,000 = 70,00070,000 = 70,000
AssetsItems owned
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Recording Transactions (page 11)
Transaction (c): Bought equipment on account from Melton Office Supply, $7,000.
= Liabilities + Owner's Equity
Cash + Equip. = A/P + L. P. Arch, CapitalPrev. Bal. 37,000 + 33,000 = + 70,000(c) + 7,000 + 7,000New Bal. 37,000 + 40,000 = 7,000 + 70,000
=
Assets
77,000 77,000
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Transaction (d): Paid Melton Office Supply, a creditor, $2,000.
= Liabilities + Owner's Equity
Cash + Equip. = A/P + L. P. Arch, CapitalPrev. Bal. 37,000 + 40,000 = 7,000 + 70,000(d) - 2,000 - 2,000New Bal. 35,000 + 40,000 = 5,000 + 70,000
=
Assets
75,000 75,000
Recording Transactions (page 12)
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Recording Transactions (page 12)
= Liabilities + Owner's Equity
Cash + Equip. = A/P +L. P. Arch,
CapitalPrev. Bal. 35,000 + 40,000 = 5,000 + 70,000(e) + 6,200 - 6,200New Bal. 35,000 + 46,200 = 5,000 + 76,200
=
Assets
81,200 81,200
Transaction (e): Arch invested her own personal data processing equipment in Arch Copy Co. having a fair market value of $6,200.
+
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Performance Objective 3
Define and identify revenue and expense accounts
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Define Revenues (page 13)
• The amounts a business earns
• Examples– Fees earned for performing services– Sales of merchandise– Rent income, and interest income
• May take the form of cash, credit card receipts, or accounts receivable (charge accounts)
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Identify Revenue Accounts
• Fees Earned for performing services
• Sales Income from selling merchandise
• Rent Income for the use of property
• Interest Income for lending money
• Credit Sales where cash will be received at a later time– Example: Home Depot sells lumber to a
customer and lets the customer pay later
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Define Expenses (page 14)
• The costs that relate to earning revenue (the costs of doing business)
• Examples– Wages– Rent– Interest– Advertising
• May be paid in cash, immediately or at a future time (accounts payable)
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Identify Expense Accounts• Wages Expense for labor performed• Rent Expense for the use of property• Interest Expense for the use of money• Advertising Expense• Expenses may be paid in cash when
incurred (immediately) or at a later time• Expense incurred but not paid until later
– Example: Received a bill for a newspaper ad you took out last week
– Cash will be paid at a later time – involves Accounts Payable
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Owner’s Equity
• Revenues and expenses are under the umbrella of owner’s equity
• Revenue Add to Capital account
• Expenses Subtract from Capital account
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Define Chart of Accounts
The official list of account titles to be used to record the transactions of a business
111 Cash 311 L. P. Arch113 Accounts Receivable 312 L. P. Arch117 Prepaid Insurance
124 Equipment411 Income from Services
221 Accounts Payable 511 Wages Expense512 Rent Expense513 Supplies Expense514 Advertising Expense515 Utilities Expense
Chart of Accounts
Expenses (500s)
Assets (100s)
Liabilities (200s)
Owner's Equity (300s)
Revenues (400s)
, Drawing
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Performance Objective 4
Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation
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Transaction (f): Arch Copy Co. sold services for cash, $2,520.
= Liabilities +
Cash + Equip. = A/P + L. P. Arch, Capital + RevenuePrev. Bal. 35,000 + 46,200 = 5,000 + 76,200(f) + 2,520 + 2,520
(Income from Services)New Bal. 37,520 + 46,200 = 5,000 + 76,200 + 2,520
=83,720 83,720
Assets Owner's Equity
Recording Transactions (page 15)
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Transaction (g): Paid rent for the month, $700.
= Liabilities +
Cash + Equip. = A/P + L. P. Arch, Capital + Revenue + ExpensesPrev. Bal. 37,520 + 46,200 = 5,000 + 76,200 + 2,520(g) - 700 + 700
(Rent Expense)New Bal. 36,820 + 46,200 = 5,000 + 76,200 + 2,520 - 700
=83,020 83,020
Assets Owner's Equity
Recording Transactions (page 15)
+
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Transaction (h): Arch Copy Co. bought supplies (toner and paper) on credit. These supplies are used
immediately; therefore, they are recorded as an expense. (New IRS regulations as of 2005.)
= Liabilities +
Cash + Equip. = A/P + L. P. Arch, Capital + Revenue + ExpensesPrev. Bal. 36,820 + 46,200 = 5,000 + 76,200 + 2,520 + 700(h) + 600 + 600
(Supplies Expense)
New Bal. 36,820 + 46,200 = 5,600 + 76,200 + 2,520 - 1,300=83,020 83,020
Assets Owner's Equity
Recording Transactions (page 16)
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Transaction (i): Arch Copy Co. paid $360 for a one-year liability insurance policy.
(If the insurance is paid in advance for a period longer than one month, it has value and is therefore recorded as an asset.)
= Liabilities +
Cash + Equip. + Ppd. Ins. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,820 + 46,200 = 5,600 + 76,200 + 2,520 - 1,300(I) - 360 +360
New Bal. 36,460 + 46,200 + 360 = 5,600 + 76,200 + 2,520 - 1,300= 83,020
Assets
83,020
Owner's Equity
Recording Transactions (page 16)
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Transaction (j): Arch Copy Co. received a bill for an expense.
= Liabilities +
Cash + Equip. + Ppd. Ins. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,460 + 46,200 + 360 = 5,600 + 76,200 + 2,520 - 1,300(j) + 200 + 200
(Advertising Expense)
New Bal. 36,460 + 46,200 + 360 = 5,800 + 76,200 + 2,520 - 1,500= 83,02083,020
Assets Owner's Equity
Recording Transactions (page 17)
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Transaction (k): Arch Copy Co. completed a printing job and billed Walker Company $1,050 for services
performed.
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,460 + 46,200 + 360 = 5,800 + 76,200 + 2,520 - 1,500(k) + 1,050 + 1,050
(Income from Services)
New Bal. 36,460 + 46,200 + 360 + 1,050 = 5,800 + 76,200 + 3,570 - 1,500=84,070 84,070
Assets Owner's Equity
Recording Transactions (page 17)
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Transaction (l): Arch Copy Co. paid $1,800 to Melton Office Supply, its creditor, as part payment on account
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,460 + 46,200 + 360 + 1,050 = 5,800 + 76,200 + 3,570 - 1,500(l) - 1,800 - 1,800
New Bal. 34,660 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,500=82,270 82,270
Assets Owner's Equity
Recording Transactions (page 18)
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Transaction (m): Arch Copy Co. received and paid a bill from Regional Power Inc. for $160.
Recording Transactions (page 18)
= Liabilities +Amounts owed to creditors
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 34,660 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,500(m) - 160 + 160
(Utilities Expense)
New Bal. 34,500 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,660=82,100 82,110
Assets Owner's EquityItems owned Owner's investment
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Transaction (n): Arch Copy Co. pays on account $200 to the City News for advertising.
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 34,500 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,660(n) - 200 - 200
New Bal. 34,300 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 1,660=81,910 81,910
Assets Owner's Equity
Recording Transactions (page 19)
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Transaction (o): Arch Copy Co. pays wages for a part-time employee, $2,130.
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 34,300 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 1,660(o) - 2,130 + 2,130
(Wages Expense)
New Bal. 32,170 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 3,790=79,780 79,780
Assets Owner's Equity
Recording Transactions (page 19)
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Transaction (p): Arch Copy Co. buys additional equipment from Melton Office Supply for $3,520, paying
$620 down, with the remaining $2,900 on account
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 32,170 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 3,790(p) - 620 + 3,520 + 2,900
New Bal. 31,550 + 49,720 + 360 + 1,050 = 6,700 + 76,200 + 3,570 - 3,790=82,680 82,680
Assets Owner's Equity
Recording Transactions (page 19)
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Transaction (q): Arch Copy Co. receives $850 cash on account from a credit customer.
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 31,550 + 49,720 + 360 + 1,050 = 6,700 + 76,200 + 3,570 - 3,790(q) + 850 - 850
New Bal. 32,400 + 49,720 + 360 + 200 = 6,700 + 76,200 + 3,570 - 3,790=82,680 82,680
Assets Owner's Equity
Recording Transactions (page 19)
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Transaction (r): Arch Copy Co. receives revenue from cash customers for the rest of the month, $4,220
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 32,400 + 49,720 + 360 + 200 = 6,700 + 76,200 + 3,570 - 3,790(r) + 4,220 + 4,220
(Income from Services)
New Bal. 36,620 + 49,720 + 360 + 200 = 6,700 + 76,200 + 7,790 - 3,790=86,900 86,900
Assets Owner's Equity
Recording Transactions (page 20)
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Transaction (s): Arch withdraws $2,500 in cash from the business for her personal living costs
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,620 + 49,720 + 360 + 200 = 6,700 + 76,200 + 7,790 - 3,790(s) - 2,500 -2,500
(Drawing)
New Bal. 34,120 + 49,720 + 360 + 200 = 6,700 + 73,700 + 7,790 - 3,790=84,400 84,400
Assets Owner's Equity
Recording Transactions (page 20)
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= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue -34,120 + 49,720 + 360 + 200 = 6,700 + 73,700 + 7,790 -
=
34,120 6,70049,720 73,700
360 7,790200 3,790
Assets Owner's Equity
Left Side Equals Sign Right Side Equals Sign
CashAccts. Rec.Ppd. Ins.Equip.
A/PL. P. Arch, CapitalRevenueExpenses
Recording Transactions
Expenses 3790
_______
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Demonstration Problem
• We will be recording business transactions for a company with the following details:
Owner name: James Kirk
Business name: James Kirk, CPA
Business type: Sole proprietorship
(one-person business)
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Demonstration Problem
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Demonstration Problem
(a) Deposited $13,500 in a bank account in the name of the business
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Demonstration Problem
(b) Paid rent for the month, $1,600 (Rent Expense)
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Demonstration Problem
(c) Bought equipment, including a computer and a printer, for $9,500 from Bingham Company. Paid $6,700
in cash, with the balance due in thirty days.
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Demonstration Problem
(d) Purchased office supplies and announcements for $970 from City Stationers.
Payment is due in 30 days.
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Demonstration Problem
(e) Billed clients $5,500 for services rendered (Client Fees).
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Demonstration Problem
(f) Paid $1,450 salary to secretary/assistant for the month.
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Demonstration Problem
(g) Paid telephone bill of $210 (Telephone Expense).
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Demonstration Problem
(h) Received cash from clients previously billed on account, $2,450.
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Demonstration Problem
(i) Paid Bingham Company $970 on account.
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Demonstration Problem
(j) Paid $275 for continuing education course (Miscellaneous Expense)
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Demonstration Problem
(k) Kirk withdrew $2,200 for personal use.
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Demonstrate that the total of one side of the equation equals the total of the other side of the equation.
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