Let’s assume, Mr. Bill is the sole proprietor of XYZ Co. (ASC). On December 1, 2013, Mr. Bill invests personal funds of $10,000 to start XYZ Co. So after this transaction, the accounting equation will be,
Assets (+ $10,000) = Liabilities (No effect) + Owner’s equity (+ $10,000)
As you can see, the assets and owner’s equity increase by same amount ($10,000), so the accounting equation says that, XYZ Co. possesses assets of $10,000 and the source of those assets was the owner, Mr. Bill. In other words, XYZ Co. has assets of $10,000 and the owner has a claim for the remainder.
Let’s see how balance is affected by the accounting equation for a sole proprietorship,
Here is the balance sheet of ASC at the end of December 1, 2013.
XYZ Co.
Balance Sheet
December 1, 2013
Assets
Liabilities
Cash = $ 10,000
Liabilities
(Owner’s Equity, Mr. Bill Capital) = $ 10,000
Total Assets = $10,000
Total liabilities and Owner’s equity = $ 10,000