Transactions Effects on Accounting Equation

20
ntroduction to Financial Accounting ransactions Effects on Accounting Equat Created by Milan

description

Introduction to Financial Accounting. Basic information on the effects of transactions on accounting equation.

Transcript of Transactions Effects on Accounting Equation

Page 1: Transactions Effects on Accounting Equation

Created by Milan

Introduction to Financial AccountingTransactions Effects on Accounting Equation

Page 2: Transactions Effects on Accounting Equation

Created by Milan

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.

Page 3: Transactions Effects on Accounting Equation

Created by Milan

Transactions Effects on Accounting Equation

Assets + Expenses Owner’s Equity + Revenue + Liability

Debit

Credit

Increase

Decrease Debit

Credit

Page 4: Transactions Effects on Accounting Equation

Created by Milan

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

Page 5: Transactions Effects on Accounting Equation

Created by Milan

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

Page 6: Transactions Effects on Accounting Equation

Created by Milan

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

Page 7: Transactions Effects on Accounting Equation

Created by Milan

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

Page 8: Transactions Effects on Accounting Equation

Created by Milan

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

Page 9: Transactions Effects on Accounting Equation

Created by Milan

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

Page 10: Transactions Effects on Accounting Equation

Created by Milan

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

Page 11: Transactions Effects on Accounting Equation

Created by Milan

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

Page 12: Transactions Effects on Accounting Equation

Created by Milan

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

Page 13: Transactions Effects on Accounting Equation

Created by Milan

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

Page 14: Transactions Effects on Accounting Equation

Created by Milan

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.

Page 15: Transactions Effects on Accounting Equation

Created by Milan

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

Page 16: Transactions Effects on Accounting Equation

Created by Milan

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

Page 17: Transactions Effects on Accounting Equation

Created by Milan

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

Page 18: Transactions Effects on Accounting Equation

Created by Milan

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

Page 19: Transactions Effects on Accounting Equation

Created by Milan

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

Page 20: Transactions Effects on Accounting Equation

Created by Milan

Thank you.