The principal role of accounting is to develop skills that will assist in providing information in decision-making.
The Corporate Financial Accounting course is divided into two major parts: Construction of Financial statement and Understanding & Analysis of financial statement. Transaction analysis is a very key element of a financial statement. If you are not able to do transactions very well, you may not know where to put the figures in each transaction. You cannot construct a financial statement without the knowledge of how transactions are recorded. Always remember that we have basically five destinations to put these figures. They include Statements of financial position, Profit and loss account, Change in equity, Cash flow, and Notes to the accounts or financial statement. Understanding and Analysis of financial statements help you to make sense of the financial statement.
Business activities are all about transactions. A transaction is any event that has a financial impact on the business and can be measured reliably. It must have an economic impact. However, not all events qualify as transactions. You cannot give information without a figure attached to it. It is just information and does not qualify to be a transaction. For example, the Dangote Company carries different advertisements for Dangote sugar. If nobody buys the product, that means no transaction occurred and they would not record anything. A transaction can only occur if people buy and there is a figure attached to it. For example, Bolu bought 24 cartons of sugar at N2000 per carton on 19th April 2022.
Transactions provide objective information about the financial impact on a company. Every transaction has two sides: You give something, and you receive something. We look at both sides using the accounting equation.
Asset = Liability + Owner’s Equity
It is the framework over which the transaction analysis is based. In accounting, transaction analysis involves documenting every transaction that has an impact on your company’s finances. This recordkeeping step is very important in the accounting process and helps to show how your business transactions impact your assets, liabilities, and owner’s equity.
In accounting, we always record both sides of a transaction and we must be able to measure the financial impact of the event on the business before recording it as a transaction. Transactions are one of the heartbeats of every business and it’s very important to have good background knowledge on how to record a proper transaction.
The transaction analysis process has five steps. They are to Identify the accounts, establish the nature of the accounts, determine which accounts increase and which one decreases, apply the rules of debits and credit on the accounts, and record the transactions in your journal entry.
For instance, let’s use below as an example of transaction analysis.
Joe and his brothers invested $80,000 to begin Joe’s laundry business and the business issues common stock to the stockholders. The effect of this transaction on the accounting equation of Joe laundry, Inc., is a receipt of cash and issuance of common stock, as follows:
|ASSET||=||LIABILITY||+||STOCKHOLDER’S Equity||Types of Stockholder’s equity transaction|
|Cash||Common Stock||Issued Stock|
Every transaction’s net amount on the left side of the equation must equal the net amount on the right side. The first transaction increases both the cash and the common stock of the business. To the right of the transaction, we write “Issued stock” to show the reason for the increase in stockholders’ equity.