Since Speakers, Inc. doesn’t have $500,000 in cash to pay for a building, it must take out a loan. Speakers, Inc. purchases a $500,000 building by paying $100,000 in cash and taking out a $400,000 mortgage. This business transaction decreases assets by the $100,000 of cash disbursed, increases assets by the new $500,000 building, and increases liabilities by the new $400,000 mortgage. Ted is an entrepreneur who wants to start a company selling speakers for car stereo systems.
Arrangement #2: Net Value = Assets – Liabilities
This includes expense reports, cash flow and salary and company investments. As you can see, all...