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.  

Values Received and Values Parted Wtih

Again, a business transaction is an exchange of values. There's a give and take in a business transaction. There are two items that must be considered and analyzed in a business transaction, the value received and the value parted with.

These two values reciprocate each other in terms of financial measurements or money equivalent.  (See measurement concepts)

However, the nature of the value is varied in forms and should be readily recognized. (See recognition concepts)

In the study of these values as to their ready recognition, the following must be kept in mind:

Guiding principle for recognition:  

Give and take in a business transaction.

(One value is received and another value is parted with) 

The following illustrates the ready recognition of the various forms of values (the value received or the value parted with) in a business transaction:

1. A form of property is received in exchange for money parted with.
2. A form of property is parted with in exchange for money received.
3. Use of property, or hire of services, of another person is received in exchange for money parted with.
4. Use of property, or hire of services, of another person is parted with in exchange for money received.  
5. An oral promise (from an individual or entity) to pay is received in consideration for a thing of value parted with.
6. An oral promise (by an individual or entity) to pay is parted with in consideration for a thing of value received.
7. An oral promise (from an individual or entity) is received in consideration for the hire of services by the entity.
8. An oral promise (by an individual or entity) to pay is the value parted with in consideration for the hire of services of another.
9. An oral promise (from an individual or entity) to pay is the value received in exchange for the hire (or use) of the property. 
10. An oral promise (by an individual or entity) to pay is the value parted with in exchange for the hire (or use) of the property. 
11. Cancellation of oral promise to pay is the value received in consideration for the money parted with.
12. Cancellation of oral promise to pay is the value parted with in consideration for the money received.
13. Implied promise to safeguard the proprietary interest in consideration for money or property received.
14. Reduction of its responsibility to safeguard the proprietary interest in consideration for money or property parted with.

Note, click the above various forms of values to read their examples and its analysis.

Economic Events

The first objective of any accounting system is to identify the economic events that can be expressed in financial terms by the system.

Economic Event – is any event that directly affects the financial position of the company. In other words, this means any business transaction or financial affair of the company.

Financial Position – comprises assets, liabilities and owner’s equity. 

Accounting Principles and Financial Reporting Standards – determine which events should be recorded, when the events should be recorded, and the amount at which they should be measured.

Economic Events can be classified as either external events or internal events.

External Events – involve an exchange between the company and a separate economic entity. Meaning the company receives something in exchange for something else. Examples :  Purchasing of materials for cash. Paying salaries to employees.

Internal Events – directly affect the financial position of the company but don’t involve exchange of transaction with another entity.   Examples: Depreciation of Machinery.  Use of supplies.

Analyzing and summarizing business transactions

Here's the CMO3 S2007 outline for analyzing and summarizing business transactions

3.  Analyzing and summarizing business transactions
3.1   Definitions of business transactions and source documents
3.2   Summary of business activities (financing, investing, operating)
3.3   The accounting equation
3.4   Analyzing and accounting for business transactions
3.5   Presentation of results of routine transactions by preparing the Basic Income Statement, Owner’s Equity Statement, Balance Sheet, and Statement of Cash Flows

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Economic Events 

The first objective of any accounting system is to identify the economic events that can be expressed in financial terms by the system. 

Economic Event – is any event that directly affects the financial position of the company. In other words, this means any business transaction or financial affair of the company...read more

Business transactions

A Business Transaction is exchanging of values between transacting persons/parties. 

Exchange of values means that one value is received in return or in exchange for another value parted with...read more 

Source Documents

Source Documents are the forms, invoices, receipts, legal papers, or other documents which underlie a business transaction.  These are the so-called evidential matter.   Existence of evidential matter supports and corroborates the objectivity of accounting records...read more

Varied Forms of Values

Again, a business transaction is an exchange of values. There's a give and take in a business transaction. There are two items that must be considered and analyzed in a business transaction, the value received and the value parted with...read more

Summary of business activities

• OPERATING

The Operating Activities are those business transactions which generates revenue for the organization. These include expenses incurred to produce revenues. 

The following are the transactions included under the operating activities...read more

• INVESTING

The main purpose of investing activities is to acquire assets in order to facilitate and expedite the operations of the business. 

The Investing Activities are those transactions which involve acquisition and disposal of assets other then inventory, which are necessary in the business operations...read more

• FINANCING

The Financing Activities are those transactions between the entity and its owners or creditors. 

The primary focus of financing activities is to raise working capital necessary to be used in business operations.  The owners invest to the entity and/or creditors lend capital to the entity...read more

The accounting equation

In the point of view of Financial Position, the accounting equation underlies the processes used to capture the effect of economic events.

This equation generally portrays the equality between the economic resources of entities and the claims to these resources.  Meaning, the resources of entities are provided by creditors and owners...read more 

Analyzing and accounting for business transactions

Analyzing and accounting for business transactions, one has to acquire ability to recognize the dual effects of each transaction has on the accounting equation...read more

Presentation of results of routine transactions by preparing the Basic Income Statement, Owner’s Equity Statement, Balance Sheet, and Statement of Cash Flows