In Which Circumstances A Transaction Affects Only One Side Of The Accounting Equation

As we know that the two sides of an Accounting Equation must be equal otherwise, there are mistakes, errors or frauds in recording the Accounts. So, when only one side of the accounting equation is affected then the accounts involved in a transaction are debited and credited or increased and decreased with an equal amount either on the left side or on the right side of the accounting equation whichever is the case.

Few of these circumstances or cases are fixed asset purchased for cash, declared cash dividend to be paid to shareholders from Retained Earnings, etc.

For example, when Furniture purchased for Cash Rs. 5000, then it affects only the left side or asset side or only one side of the accounting equation.

The following entry for furniture purchased is recorded as shown below:

                                                                 Furniture a/c  5000

                                                                                              Cash a/c  5000

                                                        (Furniture Purchased For Cash)

 

Here furniture is a Fixed Asset while Cash is a Current Asset. Furniture account is increasing as it is coming into the business, so we debit it and cash is going out of the business and as it is decreasing from the point view of business, so we credit it . So one asset account (Furniture Account) is increasing and other asset account (Cash) is decreasing.

The effect of this transaction on accounting equation is shown below:

                                  Assets            = Liabilities  + Owner’s Equity

                               +Furniture - Cash = (Liabilities)  + Owner’s Equity

                               +5000        -5000  =          0          +          0 

                                           0                 =          0          +          0

The furniture account is increased by Rs. 5000 i.e., a debit balance and cash account is decreased by Rs. 5000 i.e., a credit balance, so the result is zero on debit side of accounting equation and hence the accounting equation remains in balance.