transactions effects on accounting equation
DESCRIPTION
Introduction to Financial Accounting. Basic information on the effects of transactions on accounting equation.TRANSCRIPT
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Introduction to Financial AccountingTransactions Effects on Accounting Equation
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Transactions Effects on Accounting Equation
Accounting Equation Increase (+) Decrease (-)
Assets Debit Credit
Liability Credit Debit
Owner’s Equity Credit Debit
Revenue Credit Debit
Expenses Debit Credit
There are only 5 accounting equations.
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Transactions Effects on Accounting Equation
Assets + Expenses Owner’s Equity + Revenue + Liability
Debit
Credit
Increase
Decrease Debit
Credit
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Situation 1Bought goods from supplier
by cash or bank.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditAsset Decrease Cash or Bank Credit
Expenses Increase Purchases Debit
There must be an account that either debit or credit.
Asset Decrease = CreditExpenses Increase = Debit
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Situation 2Bought goods from supplier
by credit.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditLiability Increase Creditor Credit
Expenses Increase Purchases Debit
Both accounting equation may increase (or decrease) at the same time.
Liability Increase = CreditExpenses Increase = Debit
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Situation 3Sold goods to customer
by cash or cheque.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditAsset Increase Cash or Bank Debit
Revenue Increase Sales Credit
Use the name of the person only on transactions that involve credit payment
Asset Increase = DebitRevenue Increase = Credit
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Situation 4Sold goods to customer
by credit.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditAsset Increase Debtor Debit
Revenue Increase Sales Credit
Use the name of the person only on transactions that involve credit payment
Asset Increase = DebitRevenue Increase = Credit
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Situation 5Owner brought in cash into the business.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditOwner’s Equity Increase Capital Credit
Asset Increase Cash or Bank Debit
Owner may also brought in cash into business by deposit into business bank
account. Other e.g. : Machinery, Vehicle
Owner’s Equity Increase = CreditAsset Increase = Debit
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Situation 6Owner draw or used business assets for personal matters.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditOwner’s Equity Decrease Capital Debit
Asset Decrease Cash or Bank Credit
Business Assets also involve machinery, vehicle, cash and bank.
Owner’s Equity Decrease = DebitAsset Decrease = Credit
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Situation 7Customer return goods into the business.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditAssets Decrease Debtor Credit
Revenue Decrease Returns Inwards Debit
Returns Inwards also known as sales return.
Asset Decrease = CreditRevenue Decrease = Debit
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Situation 8Return goods to supplier.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditLiability Decrease Creditor Debit
Expenses Decrease Returns Outward Credit
Returns Outwards also known as purchases return.
Liability Decrease = DebitExpenses Decrease = Credit
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Situation 9Owner started the business with cash or bank or any assets.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditOwner’s Equity Increase Capital Credit
Assets Increase Cash or Bank or any assets
Debit
Continuing a business has similar effect as starting a business.
Owner’s Equity Increase = CreditAsset Increase = Debit
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Situation 10Bought assets by cash or bank
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditAssets Increase Machinery or
Vehicle or land, etcDebit
Assets Decrease Cash or Bank Credit
Buying goods for selling purpose is recorded in Purchases Account while
buying assets for business equipments and utilities are recorded in Assets
account (e.g.: Machinery, Vehicle, Land)
Asset Increase = DebitAsset Decrease = Credit
Note: Similar accounting equation is possible as long as another decrease
and another increase
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Situation 11Bought assets by credit
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditAssets Increase Machinery or
Vehicle or land, etcDebit
Liability Increase Creditor Credit
Buying goods for selling purpose is recorded in Purchases Account while
buying assets for business equipments and utilities are recorded in Assets
account (e.g.: Machinery, Vehicle, Land)
Asset Increase = DebitLiability Increase = Credit
Note: Buying assets by credit is similar as buying goods by credit, where it will
be recorded in the creditor account.
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Situation 12Paid debts by cash or bank.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditAssets Decrease Cash or Bank Credit
Liability Decrease Creditor Debit
Asset Decrease = CreditLiability Decrease = Debit
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Situation 13Debtors pay their debts by cash or bank.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditAsset Increase Cash or Bank Debit
Asset Decrease Debtor Credit
Asset Increase = DebitAsset Decrease = Credit
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Situation 14Bank in cash at hand.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditAsset Increase Bank Debit
Asset Decrease Cash Credit
This effect is known as contra effect.Asset Increase = DebitAsset Decrease = Credit
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Situation 15Withdraw cash in bank.
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditAsset Increase Cash Debit
Asset Decrease Bank Credit
This effect is known as contra effect.Asset Increase = DebitAsset Decrease = Credit
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Situation 16Paying expenses by cash or bank
Accounting Equation
Increase(+)Or
Decrease(-)
Account DebitOr
CreditExpenses Increase Any Expenses Debit
Asset Decrease Cash or Bank Credit
Examples of expenses:Bad Debts, Utilities expenses, General Expenses, Petrol, Electric Bill, Water
Expenses, etc
Expenses Increase = DebitAsset Decrease = Credit
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