Transactions Effects on Accounting Equation

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Introduction to Financial Accounting. Basic information on the effects of transactions on accounting equation.

Transcript of Transactions Effects on Accounting Equation

  • Introduction to Financial Accounting Transactions Effects on Accounting Equation Created by Milan
  • Transactions Effects on Accounting Equation Created by Milan Accounting Equation Increase (+) Decrease (-) Assets Debit Credit Liability Credit Debit Owners Equity Credit Debit Revenue Credit Debit Expenses Debit Credit There are only 5 accounting equations.
  • Transactions Effects on Accounting Equation Created by Milan Assets + Expenses Owners Equity + Revenue + Liability Debit Credit Increase Decrease Debit Credit
  • Situation 1 Bought goods from supplier by cash or bank. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Asset Decrease Cash or Bank Credit Expenses Increase Purchases Debit Created by Milan There must be an account that either debit or credit. Asset Decrease = Credit Expenses Increase = Debit
  • Situation 2 Bought goods from supplier by credit. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Liability Increase Creditor Credit Expenses Increase Purchases Debit Created by Milan Both accounting equation may increase (or decrease) at the same time. Liability Increase = Credit Expenses Increase = Debit
  • Situation 3 Sold goods to customer by cash or cheque. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Asset Increase Cash or Bank Debit Revenue Increase Sales Credit Created by Milan Use the name of the person only on transactions that involve credit payment Asset Increase = Debit Revenue Increase = Credit
  • Situation 4 Sold goods to customer by credit. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Asset Increase Debtor Debit Revenue Increase Sales Credit Created by Milan Use the name of the person only on transactions that involve credit payment Asset Increase = Debit Revenue Increase = Credit
  • Situation 5 Owner brought in cash into the business. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Owners Equity Increase Capital Credit Asset Increase Cash or Bank Debit Created by Milan Owner may also brought in cash into business by deposit into business bank account. Other e.g. : Machinery, Vehicle Owners Equity Increase = Credit Asset Increase = Debit
  • Situation 6 Owner draw or used business assets for personal matters. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Owners Equity Decrease Capital Debit Asset Decrease Cash or Bank Credit Created by Milan Business Assets also involve machinery, vehicle, cash and bank. Owners Equity Decrease = Debit Asset Decrease = Credit
  • Situation 7 Customer return goods into the business. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Assets Decrease Debtor Credit Revenue Decrease Returns Inwards Debit Created by Milan Returns Inwards also known as sales return. Asset Decrease = Credit Revenue Decrease = Debit
  • Situation 8 Return goods to supplier. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Liability Decrease Creditor Debit Expenses Decrease Returns Outward Credit Created by Milan Returns Outwards also known as purchases return. Liability Decrease = Debit Expenses Decrease = Credit
  • Situation 9 Owner started the business with cash or bank or any assets. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Owners Equity Increase Capital Credit Assets Increase Cash or Bank or any assets Debit Created by Milan Continuing a business has similar effect as starting a business. Owners Equity Increase = Credit Asset Increase = Debit
  • Situation 10 Bought assets by cash or bank Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Assets Increase Machinery or Vehicle or land, etc Debit Assets Decrease Cash or Bank Credit Created by Milan Buying goods for selling purpose is recorded in Purchases Account while buying assets for business equipments and utilities are recorded in Assets account (e.g.: Machinery, Vehicle, Land) Asset Increase = Debit Asset Decrease = Credit Note: Similar accounting equation is possible as long as another decrease and another increase
  • Situation 11 Bought assets by credit Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Assets Increase Machinery or Vehicle or land, etc Debit Liability Increase Creditor Credit Created by Milan Buying goods for selling purpose is recorded in Purchases Account while buying assets for business equipments and utilities are recorded in Assets account (e.g.: Machinery, Vehicle, Land) Asset Increase = Debit Liability Increase = Credit Note: Buying assets by credit is similar as buying goods by credit, where it will be recorded in the creditor account.
  • Situation 12 Paid debts by cash or bank. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Assets Decrease Cash or Bank Credit Liability Decrease Creditor Debit Created by Milan Asset Decrease = Credit Liability Decrease = Debit
  • Situation 13 Debtors pay their debts by cash or bank. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Asset Increase Cash or Bank Debit Asset Decrease Debtor Credit Created by Milan Asset Increase = Debit Asset Decrease = Credit
  • Situation 14 Bank in cash at hand. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Asset Increase Bank Debit Asset Decrease Cash Credit Created by Milan This effect is known as contra effect. Asset Increase = Debit Asset Decrease = Credit
  • Situation 15 Withdraw cash in bank. Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Asset Increase Cash Debit Asset Decrease Bank Credit Created by Milan This effect is known as contra effect. Asset Increase = Debit Asset Decrease = Credit
  • Situation 16 Paying expenses by cash or bank Accounting Equation Increase(+) Or Decrease(-) Account Debit Or Credit Expenses Increase Any Expenses Debit Asset Decrease Cash or Bank Credit Created by Milan Examples of expenses: Bad Debts, Utilities expenses, General Expenses, Petrol, Electric Bill, Water Expenses, etc Expenses Increase = Debit Asset Decrease = Credit
  • Thank you. Created by Milan