UNDERSTANDING TRANSACTION ANALYSIS

Across the globe, millions of transactions occur in a day. It could be paying for a purchased good in a market, paying for service rendered in a car wash, purchase of call credit via USSD code. Think of it. These are events that happen without us knowing it. Most times these events occur between two entities, the provider of the goods or service and the buyer of the goods or receiver of the service. For an ordinary individual, any event of this sort is just a mere transaction. However, in the accounting world, this is just the beginning of a chain of events.

A major activity in a business is a transaction. A transaction is any event that has a measurable financial implication on a business. The measure determines the level of impact the transaction has on the business. The level and quality of transactions carried out by a business determine how viable a business is.  

I can say that transactions in the heartbeat of a business. Imagine investing heavily in a retail shop and after one month, the only transactions recorded were the purchases made to stock the shop with products. Of course, there is also some form of transaction in the example above. If there are no sales of this product, how can the business have turnover, service its loans and pay employee salaries? The business will eventually die because there are no transactions to keep the business up and running.

Transaction analysis is an act of examining a transaction to determine how it affects the accounting equation. When analyzing a transaction, accountants first determine the type of account or the accounts affected, the value or the amount of the transaction and finally place them on the appropriate side of the equation.

Having in mind the accounting equation.

              ASSETE                =            LIABILITY           +            OWNER’S EQUITY

Let us look at some transactions and go through the process of analyzing them

1. Issues N10,000 shares of common stock for cash.
2. Purchases equipment on account for N4,000, payment due within the month.
3. Receives N5, 000 cash in advance from a customer for services not yet rendered.
4. Pays a N300 utility bill with cash.

In transaction 1, we know that cash is an asset and common stock is Owners Equity. When a business collects cash, it increases the asset because cash is coming into the business. When a company issues stock, it increases the owner equity. Therefore, assigning these identified accounts in the accounting equation.

In the second transaction, equipment is an asset, and the value is N4,000. There the equipment increases by N4,000. On the other hand, the equipment was purchased on credit, this is known as account payable which is a liability. The transaction will be as follows

In the third transaction, cash was received in advance. Cash is an asset, hence access increases by N5,000. On the other side of the equation, the N5,000 was paid for a service, not just renders. This is a liability. Therefore, liability increases by N5,000. This can be represented in the table below.

In the fourth transaction payment of cash was made which impacted cash and equity

The total transaction can be shown in the table below

If you take a look at the table above you will discover two things

1. There is a structure
2. The total amount on the left is equal to the total amount on the right.

The accounting equation must remain balanced as the asset must equal the liability

Business organizations tell a story of their financial status using the financial report. As you can see, the different transactions analyzed, summarized, and put together make up the different reports found in a financial report.

#MMBA 3