What Are The Four Questions / Steps Used To Analyze A Transaction

How To Analyze A Business Transaction?

There are four types of steps questions used to analyze a Transaction takes place between two or more parties in the life of a business. To know the answers of these questions help us in understanding the changes occurred in different account balances.

Let’s consider a transaction as an example and then describe the four steps to be followed while Analyzing A Transaction.

Example: Sold Services For Cash for Rs. 5000.

1. Which types of accounts are involved in a business transaction

 This transaction involves Cash account and Sales account.

2. Classification of each type of account involved

Sale is a revenue account while Cash is a current asset account. Sales revenue affects owner’s equity account while cash affects assets accounts.

3. Increase / Decrease in Accounts

Sales is increasing as it is the result of profitable activities or operational activities of the owner of the business i.e., services are rendered to customers create sales for the business. Cash is also increasing as it is coming into the business.

4. Which account is debited and credited

Cash is debited as when it increases we debit it which is a normal or favorable balance for it while sales is credited as it is increasing, so we credit it which is a normal, positive or favorable balance for it.

So, we can say that there are 4 possible steps in analyzing a business transaction.