A transaction is any activity that has economic and financial impact on the business; that is to say, business activities are all about transaction.
Double entry principle in accounting simply says, ‘for every debit entry, there must be a corresponding credit entry’. Simply put, this means there are two sides to a transaction: one is a debit, and the other is credit. Each side means different things for each class of accounts.
Recall the Accounting equation: Assets = Liabilities + Owners’ equity.
Assets refers company’s resources or investing activities. Liabilities are non-owners financing or non-owners claim to company’s resources and Owners’ equity is owners financing or owners claim on the company’s resources.
An increase in asset means the asset account is affected on the debit side and vice versa. That means; Asset increase is equal to debit and asset decrease is equal to credit.
For liabilities and owners’ equity, an increase will affect credit side and a decrease will affect the debit side. You will observe that the left side of the accounting equation works in direct opposite of the right side of the equation.
Impact of changes on the accounting equation
Asset = Liabilities + Owners’ equity
↑Debit ↓credit = ↓Debit ↑Credit ↓Debit ↑Credit
Each side of the accounting equation above are made up of several accounts. For example assets are Land and building account, Motor vehicle account, Account receivable of debtors account, inventory account and so on. Also, liabilities account includes Loan Account, Overdraft account, Account payables or Creditors account etc. Lastly, Owners’ equity has Retained earnings accounts (this account is in-turn made up of Dividend, Sales or Revenue and Expenses) Share premium account and so on.
| Class | Examples of accounts | Financial Statement posted to |
| Asset | Cash, Accountant receivable (Debtors), Land, Inventory etc | Statement of Financial position |
| Liabilities | Account payable (Creditors), Loan, Overdraft etc | Statement of Financial position |
| Owners’ Equity | Common stock | Statement of Financial position |
| Retained Earnings: (Sales or Revenue less Expenses less Dividends) | Statement of financial position but Sales and expenses are posted to Income Statement directly |
Transaction analysis
Let us consider some transactions, that we will analyze and post according to their relevant accounts.
Transaction 1: On April 1, 2022 Adeola started a business with N50,000 capital (Common Stock)
Analysis of Accounting Equation on transaction 1:
Cash in hand for the business increased by N100,000.00; because there was none before April 1 and Common Stock increased by N100,000.00. Therefore, below is the analysis:
Cash N100,000.00 increase, Zero Liability and Common Stock N100,000.00 increase
At the end of transaction 1 we have on our Account equation as follows:
| Date | Asset = Liabilities + Owners’ Equity |
| April 1 | Cash N100,000 = 0 + Common Stock N100,000.00 |
Transaction 2:
On April 5, the business collected some goods worth N80,000.00 with the promise to pay in 30days. As a result,
Analysis of transaction 2:
This transaction will affect supplies and Account payable (Creditors). Both increased by N80,000.00
Supplies N80,000 Debit = Zero Liability + Account payable N80,000.00
At the end of April 5, the accounting equation table will be:
| Date | Asset = Liabilities + Owners’ Equity |
| April 1 | Cash N100,000 = 0 + Common Stock N100,000.00 |
| April 5 | Supplies N80,000 = Creditors N80,000 + 0 |
Transaction 3:
On April 9, the business sold some of the supplies. Amount of goods sold is N65,000.00
Analysis of transaction 3:
In this instance, goods sold is sales or revenue thus; sales increased by N65,000.00 and Cash increased by N65,000.00.
At the end of April 9, the accounting equation table will be:
| Date | Asset = Liabilities + Owners’ Equity |
| April 1 | Cash N100,000 = 0 + Common Stock N100,000.00 |
| April 5 | Supplies N80,000 = Creditors N80,000 + 0 |
| April 9 | Cash N65,000 = 0 + Retained Earnings N65,000 |
Transaction 4:
On April 15, a part payment of N40,000 was paid to the creditor. Office rent was paid N2,000.00 and electricity N350.00.
Analysis of transaction 4:
These transactions reduced cash, reduced creditor (Account payable), increases Office rent and electricity.
| Date | Asset = Liabilities + Owners’ Equity |
| April 1 | Cash N100,000 = 0 + Common Stock N100,000.00 |
| April 5 | Supplies N80,000 = Creditors N80,000 + 0 |
| April 9 | Cash N65,000 = 0 + Retained Earnings N65,000 |
| April | Cash (N42,350) = Creditors (40,000) + Retained Earnings N2,350 |
To be continued ………
#EMBA27 Movies and Series