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Business Transactions And Accounting Equation
Effect of Transactions on the elements of the accounting equation
Date : 08/03/2018
Author Information
Uploaded by : Reetika
Uploaded on : 08/03/2018
Subject : Accounting
Business
Transactions and Accounting Equation Accounting equation signifies that the Assets of a business are
always equal to the Liabilities and Owner s Equity (Capital). This is expressed
in the following format:Asset =
Liabilities + CapitalNow, from the above equation, we are clear that the accounting
equation has three main elements&
i.e.1.
Assets2.
Liabilities3.
Capital(Owner s Equity)It is a golden rule that Accounting
Equation remains balanced all the time . The reason being that any change
resulting from the business transaction also balances its equation
simultaneously. Business transaction may affect either only one element (Asset,
Liabilities or Capital) or two elements (Assets Liabilities, Asset
Capital or Liabilities Capital). In some cases, business transactions may
affect all the three elements, simultaneously in a single transaction.In this article, we will see the effect of business transaction
on one element. In my next article, I will explain the effect of business
transactions on two or all the three elements. Transactions
Affecting Only One Main Element These transactions are further classified into three types of
transactions& i.e.: I.
Transactions affecting assets only,II.
Transactions affecting liabilities only,III.
Transactions affecting capital only. I.
Transactions
Affecting Assets Only:Business transaction may affect one asset on the one hand and
another asset on the other hand. Example:Transaction:Purchase of goods in cash.Affect:This will increase asset (Stock) on the one hand and decrease
asset itself (Cash) on the other hand. II.
Transactions
Affecting Liabilities Only:A business transaction may affect one liability on the one hand
and another liability on the other hand.Transaction:Bills Payable issued to Creditors.Affect:This will reduce one liability (Creditors) on the one hand and
increase another liability (Bills Payable) on the other hand.III. Transactions Affecting Capital Only:These types of transactions affect capital only.Transaction:Charging interest on drawings.Affect:Being an income of the business, this will increase the
proprietor s capital with the amount of interest on drawings and decreases
proprietor s capital with same amount. Transaction:Interest on capital.Affect:Being an expense of the business, this will reduce the capital
by the amount of interest and on the other hand interest on capital would be
added to the capital of the proprietor. Hope you understand the effect of the transactions in three elements,
individually. We will learn about the transactions affecting two and all the
three elements in my next article. Stay Tuned!!
This resource was uploaded by: Reetika