Effects of Business Transactions in the assets, liabilities and capital accounts

Effects of Business Transactions in the Assets, Liabilities and Equity 

Remember that a business transaction is exchange of values.  These values are reciprocal to each other and they are the agents which bring about the effects in the assets, liabilities and capital accounts.

Note that in analyzing business transactions or events it is important not just identifying the values received and parted with and discerning its monetary measurement, but also determining their connections with, or relations to the changes or effects that will lead to or result in the state, position or condition of the assets, liabilities and capital accounts.

Meaning, the bookkeeper must also determine the changes or effects in the accounts. These changes or effects may be an increase or decrease to an accounting element, to wit:

• Increase in an Asset and Increase in a Liability

• Decrease in a Liability and Decrease in an Asset

• Increase in an Asset and Decrease in Another Asset

• Increase in an Asset and Increase in Capital

Illustrations for these effects will be discussed in the next topics/articles. Revisit the discussions on the value received and value parted with to study the recording and JEs of the example transactions.  

NORMAL BALANCES OF ACCOUNTING ELEMENTS

In accounting principle, accounting elements have this so-called normal balance.  A beginner to bookkeeping must bear in mind the following:

• The ASSETS and EXPENSES Accounting Elements have a DEBIT normal balance.

• The LIABILITIES, EQUITIES and REVENUES Accounts have a CREDIT normal balance.

In mathematics, numbers or integers with the same signs means addition or adding the numbers with the same sign or increases the sum, while, integers with the different signs means subtraction or deducting the numbers or decreases the sum.

In analogy, an account with a debit normal balance increases when a like-sign amount is added, so, when an asset or expense account is debited, the account increases (because an amount is added) and when an asset or expense account is credited the account decreases (because an amount is subtracted).

Likewise, an account with a credit normal balance increases when a like-sign amount is added, so, when a liability, equity or revenue account is credited, the account increases  (because an amount is added) and when a liability, equity or revenue account is debited the account decreases (because an amount is subtracted).

Researched by:

Assets Elements

Classification of Asset

Generally, assets are classified as follows:

• Current
• Non-Current 

Assets are classified as Current Assets when any of the following criteria are met:

1. It is cash or cash equivalent which is not restricted for current use.
2. It is expected to be realized, or is held for sale or consumption in the normal course of the business' operating cycle.
3. It is held for trading purposes or for the short-term and expected to be realized within twelve months of the SFP date.

Operating cycle means the time between the acquisition of materials entering into a process and its realization in cash or an instrument that is readily convertible into cash.

Non-Current Assets are those assets which do not meet the criteria of current assets.

Generally, they include those tangible and intangible assets of a long-term nature (usually, more than 12 months from SFP date).

Examples of Assets Elements

Current Assets Elements

• Cash - 
• Accounts Receivable
• Notes Receivable
• Accrued Interest Receivable
• Inventories
• Prepaid Expenses

Non-Current Assets Elements

• Land
• Building
• Furniture and Fixture
• Equipment

Contra-Valuation Accounts

• Allowance for Doubtful Accounts
• Accumulated Depreciation

Normal Balance : Debit

Asset accounts has normal debit balances.

Researched by:

Accounting Equation

Accounting Equation


Business Transactions, its Analysis and Accounting Equation