Transaction Analysis With Journal Entries Explanations - Effects of Transactions On The Accounting Equation

Without knowing that how to make transaction analysis, no one can record the transaction in the Journal, so it is the basic of recording a transaction. Here, we discuss some of the most important transactions of the business that take place in every business’s life which have effects on the Accounting Equation (Assets = Liabilities + Equity).

If you do not know about Transaction then, Please Read this Article about 
 What is a Transaction

Before making transaction analysis and its effects on the accounting equation, we must take into account following three important points to know:

1. Assets affect the asset side of Accounting Equation.

2. Liabilities & Capital or Equity affects the Liabilities & Equity side.

3. Revenues & Expenses also affect the Liabilities & Equity side of accounting equation as these are the results of profitable activities of the owners of the business so revenues are added to Equity while expenses are deducted from it.

Transaction 1

Mr. A started business with cash or investing cash in the business for Rs.50,000.

Analysis-1

First of all, we see how many accounts are involved in that transaction. Surely, there are two accounts are involved in this transaction:

First one is Cash account which is a Current Asset. Second one is Capital because, we know that any amount invested in the business is called capital. After deciding the number of accounts involved in this transaction, now we see which account is increased or decreased.

When we invest cash in the business, cash in the business increases, so cash is increased. Similarly, the amount of capital is increased due to the cash provided by the owner to the business. We know that when an asset increases, we debit it and when capital account is increased, we credit it. Cash affects asset side and Capital affects Liabilities & Equity side of Accounting Equation.

Note: Always remember that in order to order to record the transactions in the books of accounts, see all the transactions from business points of view.

Transaction 2

Mr. A deposited Cash into the Bank Rs.90,000

Analysis-2

Accounts involved in this transaction are Cash (Cash in Hand) and Bank (Cash at Bank). Cash in Hand means those cash which you do not deposit into the bank. Cash at Bank means those cash that you have deposited into the Bank.

Note: There is no difference between Cash in Hand and Cash at Bank. It is just a way to show what amount of cash you have in your business and what amount of cash the business has in the bank account.

As Cash is gone out of the business, so cash decreases and cash is deposited into the bank account, so cash at bank decreases, so Bank account is increased. Again Cash or Bank Account is an Asset, so it affect the asset side of Accounting Equation. 

Transaction 3

Mr. A gets Cash or borrows from Mr. B for Rs. 40,000.

Analysis-3

Accounts involved Cash which is a current asset and Mr. B, the creditor for the business from which Mr. A borrows the cash.

As we take loan from our creditor, so the amount of loan is increased as it is taken by the business. Our creditor is also increasing, because we take our Cash from him / her.

Transaction 4

Mr. A purchases Machinery for Rs. 30,000.

Analysis-4

Accounts involved in this transaction are Cash and Machinery which is a Fixed Asset.

Cash is decreased as it is paid by the business and it is gone out of the business. Machinery is increased as it is come into the business.

Transaction 5

Mr. A purchases goods for Rs.40,000 and paid Cash to Mr. B for Rs.30,000 only.

Analysis-5

Accounts involved in this transaction are Cash account, goods purchases from supplier means Credit Purchases Account and the creditor, Mr. B because we do not pay him / her full amount.

Cash is decreased as it is gone out of the business. Purchases increases as the goods purchases come into the business and our creditor is also increasing because we have to pay them the remaining amount of goods purchased.

Transaction 6

Mr. A sold goods for Rs.50,000.

Analysis-6

Cash and Sales account are involved in this transaction. Cash is increased and Sales are also increased because we sell our products to our customers.

Transaction 7

Mr. A sold goods for Rs.70,000 on account to Mr. B.

Analysis-7

Now, the sales are made on credit, so our debtor account is created. Sales increased as we are selling our products to our customers. Our debtor account is also increasing as the customer has to pay us the amount of goods sold to him / her.

Transaction 8

Mr. A purchases stationary items, like pencils, ink and other daily routine items for Rs.30,000.

Analysis-8

Stationary is our expenses. Cash is decreased as we purchase stationary and stationary is increased as it is come into the business.

Transaction 9

Mr. A purchases Plant and Machinery for Rs.60,000.

Analysis-9

Plant & Machinery is our fixed asset and it is increased as it is come into the business but cash is decreasing as we pay our cash to buy our fixed asset.

Transaction 10

Mr. A paid Rs.9,000 to his / her creditor, Mr. B

Analysis-10

Cash is decreasing as we pay our credit amount to our creditor, so cash is going out of the business. Creditor, Mr. B account is also decreasing as now he / she is receiving the amount that he / she gave us.

Transaction 11

Mr. A returns defective goods for Rs.3,000 to his / her supplier, Mr. B.

Analysis-11

As we purchase the goods from our supplier, so we are debtor, buyer or purchaser and our supplier is our creditor or seller. Now we are returning those goods we find defective. So from the point of view of our business, it is purchase return. So purchase return and Creditor accounts are involved in this transaction. Purchases are expenses and debit in nature. Now our purchases are decreasing and we return some defective goods to our creditor, therefore, our purchases or expenses are decreasing. This expense is named as “purchase return”, in order to show that we return the goods to our supplier. Now our creditor account is also decreasing, because, the amount pay to them by us is decreasing.

Transaction 12

Mr. B, our customer returned goods Rs. 15,000 to us.

Analysis-12

In this case, from the point of view of the business, we are the seller and we sold goods to our customer or debtor. But some of them are not in good position or whatsoever is the reason. So, the customer returns them to us. So, our sales are decreasing and sales return account is created. Our debtor account is also decreasing because, the amount of those defective goods paid by our customer is decreasing.

Transaction 13

Mr. A paid Rs.3500 to Mr. B before due date the remaining amount in his / her full settlement of Rs.4,000.

Analysis-13

Now, we get discount received from our creditor as we make payments to our creditor before due date. Discount received is an income, so our income increases as we are earning it. Our creditor account is decreasing and now has zero balance as we make full payments to them.

Transaction 14

Mr. A received cash Rs.39,000 from his / her our customer before due date in full settlement of Rs.40,000.

Analysis-14

When we give discount to our customer then it is an expense for us because we are receiving less amount than the actual one. Basically, this is the credit terms which we decide with our customers that if he / she make payments to us before due date we give a particular discount to him / her.

Expense is increasing and our debtor is also decreasing because he / she is making payment to us and now debtor account has zero balance.

Transaction 15

Mr. B, who is an owner, withdrew Cash Rs.4,000 and Goods Rs.2,000 from the business for his / her own use.

Analysis-15

Anything taken by the owner from the business for his personal use creates drawings and these are deducted from the Owner’s Equity because Owner’s Equity is the right of the owner to the business and as he / she withdraws the amount from the business, so the amount given by him / her to business decreases. Drawings account is decreasing as the owner withdraws the amount from the business. Both Cash account and Purchases accounts are decreasing. Goods taken by the owner affect our purchases, because now we cannot use purchases for business purposes.

Some Special Transactions

Transaction 16

Mr. A paid salaries to his / her employees for Rs.20,000.

Analysis-16

Cash is decreasing and Salaries as an expense for the business increases.

Transaction 17

Goods worth Rs.5000 and Cash Rs.10,000 are given by the business as Charity.

Analysis-17

Cash account is decreasing. Goods are decreases as it reduced our purchases. Charity is considered as expense or loss for the business in accounting language because it reduces our profits.

Transaction 18

Goods distributed as free sample for promoting our products (Advertisements) to newly market for Rs.4000.

Analysis-18

Our purchases account is decreasing. Our advertisements are our expenses so these are increasing.

Transaction 19

Goods Worth Rs.3,000 are destroyed by fire, theft, etc.

Analysis-19

Our purchases account is decreasing and loss due to fire, theft, etc. is increasing and it affects our profits.

Hopefully, now you will understand the transaction analysis.