An accounting transaction is a business activity or event that causes a measurable change in the accounting equation. An exchange of cash for a business activity is a transaction. Merely placing an order for goods is not a recordable transaction because no exchange has taken place
Types of accounts that business activities are made up of are:
- Assets.
- Liabilities.
- Equity
These are the building blocks of the basic accounting equation. The accounting equation is:
Asset = Liabilities + Owners Equity.
Owners invested cash
Ajao Ltd on January 1, the company issued shares (10,000 shares at $3 each) of common stock for $30,000 cash to Obed, his wife, and their son. The $30,000 cash was deposited in the new business account.
Transaction analysis:
- The new corporation received $30,000 cash in exchange for ownership in common stock (10,000 shares at $3 each).
- We want to increase the asset Cash and increase the equity Common Stock.
Assets | Equity | |
Transaction | Cash | Common Stock |
1. Owner invested cash | + 30,000 | + 30,000 |
Let’s check the accounting equation: Assets $30,000 = Liabilities $0 + Equity $30,000
2. Purchased equipment for cash
Ajao Ltd paid $ 5,500 cash for equipment (two computers).
Transaction analysis:
- The new corporation purchased new asset (equipment) for $5,500 and paid cash.
- We want to increase the asset Equipment and decrease the asset Cash since we paid cash.
Assets | Equity | ||
Transaction | Cash | Equipment | Common Stock |
1. Owner invested cash | + 30,000 | +30,000 | |
2. Purchased equipment for cash | – 5,500 | +5,500 | |
Balance: | 24,500 | 5,500 | 30,000 |
Let’s check the accounting equation: Assets $30,000 (Cash $24,500 + Equipment $5,500) = Liabilities $0 + Equity $30,000
3. Purchased truck for cash
Ajao ltd paid $ 8,500 cash for a truck.
Transaction analysis:
- The new corporation purchased new asset (truck) for $8,500 and paid cash.
- We want to increase the asset Truck and decrease the asset cash for $8,500.
Assets | Equity | |||
Transaction | Cash | Equipment | Truck | Common Stock |
1. Owner invested cash | +30,000 | +30,000 | ||
2. Purchased equipment for cash | – 5,500 | +5,500 | ||
3. Purchased truck for cash | -8,500 | + 8,500 | ||
Balance: | 16,000 | 5,500 | 8,500 | 30,000 |
Let’s check the accounting equation: Assets $30,000 (Cash $16,000 + Equipment $5,500 + Truck $8,500) = Liabilities $0 + Equity $30,000
4. Purchased supplies on account.
Ajao Ltd purchased supplies on account from Office Lux for $500.
Transaction analysis:
- The new corporation purchased new asset (supplies) for $500 but will pay for them later.
- We want to increase the asset Supplies and increase what we owe with the liability Accounts Payable.
Assets = | Liabilities + | Equity | ||||
Transaction | Cash | Supplies | Equipment | Truck | Accounts Payable | Common Stock |
1. Owner invested cash | +30,000 | +30,000 | ||||
2. Purchased equipment for cash | -5,500 | +5,500 | ||||
3. Purchased truck for cash | -8,500 | + 8,500 | ||||
4. Purchased supplies on account. | + 500 | +500 | ||||
Balance: | 16,000 | 500 | 5,500 | 8,500 | 500 | 30,000 |
Let’s check the accounting equation: Assets $30,500 (Cash $16,000+ Supplies $500 + Equipment $5,500 + Truck $8,500) = Liabilities $500 + Equity $30,000
5. Making a payment to creditor.
Ajao issued a check to Office Lux for $300 previously purchased supplies on account.
Transaction analysis:
- The corporation paid $300 in cash and reduced what they owe to Office Lux.
- We want to decrease the liability Accounts Payable and decrease the asset cash since we are not buying new supplies but paying for a previous purchase.
Assets = | Liabilities + | Equity | ||||
Transaction | Cash | Supplies | Equipment | Truck | Accounts Payable | Common Stock |
1. Owner invested cash | +30,000 | +30,000 | ||||
2. Purchased equipment for cash | -5,500 | +5,500 | ||||
3. Purchased truck for cash | -8,500 | +8,500 | ||||
4. Purchased supplies on account. | +500 | +500 | ||||
5. Making a payment to creditor. | -300 | -300 | ||||
Balance: | 15,700 | 500 | 5,500 | 8,500 | 200 | 30,000 |
Let’s check the accounting equation: Assets $30,200 (Cash $15,700 + Supplies $500 + Equipment $5,500 + Truck $8,500) = Liabilities $200 + Equity $30,000
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