WEEK 3

The Accounting Process,

Accounting Equation for
Business Transactions

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Business Transactions
Every transaction that occurs in a
business will have an effect on the
elements of accounting (assets,
liabilities, owner’s equity, income &
expenses).
To help analyse these effects, you
can prepare a transaction analysis
chart.

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The Accounting Equation
The relationship between these three
elements can be expressed in the form of
an equation:

Assets = Liabilities + Owner’s equity

A = L + OE

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 Liabilities
Assets +
Owner’s
Equity

(Amount owned by a (Amount owed by a

business) = business)

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THE ACCOUNTING EQUATION
The rules of accounting require that the
statement of financial position must be
balance. In other words, the totals of each
side of the statement must be equal.

Assets = Owner’s equity + Liabilities

The twofold aspect/ dual effect of every

transaction (i.e. ‘giving’ and receiving’) is
recognized in accounting records.
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The equality will caused all the
transactions in terms of the following
possibilities:

An increase in assets is followed by

an increase in liabilities or equity and
vice versa.

An increase in assets is followed by a

decrease in another asset and vice
versa.
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Regardless of the nature of the
specific transaction, the
accounting equation must stay
in balance at all times.

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BRAIN BREAKS

Question 1
Answer the following questions by filling in the boxes with
figures/ words.

(a) Assets = Owner’s equity + Liabilities

(b) Assets = Owner’s equity + Liabilities

(c) Assets = Owner’s equity + Liabilities

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Question 2
Mark whether the following statements are True
or False:

(a)An increase in assets always results in

increase in owner’s equity.
(b)Assets = Liabilities + Owner’s equity is
always true.
(c)If a company the assets is $20,000, liabilities
is $40,000 and then owner’s equity will be
$20,000.

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Transaction Analysis Chart

A transaction analysis chart shows the effects of:

Which items (accounts) are affected by the

transaction?
Is the item (account) affected an asset, liability,
owner’s equity, income or expense item?
Does the item (account) increase or decrease?
What is the amount of the increase or decrease?

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Expanded Accounting Equation
Assets = Liabilities + Owner’s equity

Assets = Liabilities + [Capital–Drawings+(Revenue–

Expenses)]

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Double entry bookkeeping
Double entry bookkeeping is based on
the idea that each transaction has an equal
but opposite effect.

Every accounting event must be entered

in ledger accounts both as a debit and as
an equal but opposite credit.

Is the method by which a business

records financial transactions.

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 Liabilities ↑
Assets ↑
OE ↑
Expenses ↑
Income ↑
Drawings ↑

CREDIT
DEBIT

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 Debits (Dr) Credits (Cr)

Things coming into Things going out of

your businesses, such your businesses, such
as money, assets and as money and sales.
purchases.

There are on the left. There are on the right.

Example: An asset Example: Owner’s

increases, an equity, income or
expenses increases. liabilities increases.

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Summary:
Accounts To record Entry in the account

Assets ↑ an increase Debit

↓ a decrease Credit

Liabilities ↑ an increase Credit

↓ a decrease Debit

Capital ↑ an increase Credit

↓ a decrease Debit

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Regardless of the nature of the
specific transaction, for every
debit, there’s a credit. Simple!!

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Brain Breaks

Question 3
What would be the double entry for:
1.Loan $500 from Molly.
2.Purchased a car for $4,000 from a bank loan.
3.Received $30 cash from a customer.
4.Paid for wages of $200.

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5. Started a business by depositing $30,000 in a
business bank account.
6. Owner withdrew $15,000 cash from the bank for
personal use.
7. Received $400 from a debtor, Alison.
8. Paid the amount of $1,000 to a creditor, Nova Trading.

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TEMPLATE for T. A. C.

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BRAIN BREAKS

Question 4
Consider each of the transactions below, prepare a transaction
analysis chart in the template provided.

(a)The business buys goods for resale (in cash) for $1,000.
(b)The business buys more goods for resale (on credit) for
$2,000.
(c)The business buys a car for $3,000 (cash).
(d)The business sells half of the goods for $2,400 (cash).
(e)The business sells the remainder of the goods for $2,800 on
credit.
(f)The business pays $600 of the amount owing on account.
(g)The business receives half of the amount from customer on
credit.
(h)The owner takes $1,200 from the business.

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Question 5
From the following selected transactions of J Capelli, motor
vehicle retailer, prepare a transaction analysis chart in the
template provided.
1 Apr 2018 Jimmy Capelli commenced business as Capelli Motors
by depositing $7,500 into a business bank account.
7 The business purchased premises on credit from A Reily
for $420,000. A cash deposit of $50,000 was paid and a
$370,000 mortgage loan was arranged to finance the
balance of the purchase price.
11 Motor vehicles for resale were purchased on credit from
Mac & Co for $25,500.
18 Cash sales of motor vehicles. $16,800.
20 Paid salesperson’s wages, $3,500.
26 Sold a vehicle on credit to P Allen for $6,500.
31 Paid advertising account with local newspaper, $250.

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Question 6
Karen Dickson is interested in knowing what effect the
following transactions would have on her financial
statement.

Since liquidity is particularly important to her, she wants

to know whether each individual item would alter the
company financial status, and by how much.

(a) Purchased $2,000 of stock for cash.

(b) Bought $15,000 of machinery by loan repayable over
8 years.
(c) Bought new car for $6,250 by cash.

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(d) Karen withdrew $2,750 of cash from the business for

private use.
(e) Paid business rates for $1,400 in cash.
(f) Borrowed $1,000 cash from the bank by way of loan
repayable over 5 years.
(g) Sold an old car with a book value of $650 for $775
cash.
(h) Bought $8,000 of stock on credit.
(i) Sold stock which had cost $4,000 for $5,000 in cash.
(j) Paid for repairs to the premises costing $820 in
cash.

Required:
Prepare the Transaction Analysis Chart for the above
transactions. 23