How Transactions Impact the Accounting Equation

Every new transaction of business impacts the accounting equation because it can affect any asset or liability or capital. When one asset or liability or capital will change it will change other asset or liability or capital. So,  it will change whole accounting equation. We show balance sheet on the basis of basis of accounting equation.

It means, any new transaction of business will change the financial position of business. We know that accounting equation is assets = liabilities + capital. When any new transaction will happen, value of accounting equation will change.

We can explain it with following examples.


If MR. JAMS  paid $100,000 to his creditor, then the balance sheet would be revised to show that cash (an asset) decreased from $350,000 to $250,000, and accounts payable (a liability) decreased from $500,000 to $400,000. As a result total assets will change, and total liabilities  will change.


If  MR. JAMS purchased $300,000 of machine with friend's loan, agreeing to pay his loan with 10% interest, then the balance sheet would be further revised. The Example B illustration shows that machine (an asset) increased from $100,000 to $400,000, and friend's loans payable (a liability) increased from $10,000 to $310,000. As a result, both total assets and total liabilities increased by $300,000.


What would happen if MR. JAMS sells goods to any customer on credit? It will provide earning to the business which increase capital. Cost of goods sold decrease the stock asset. Because it is on credit it increase our debtor's asset. For example, he sold goods of $ 10000 on credit whose cost is $ 5000. $ 5000 is his net profit. This net profit will add in capital. $ 5000 cost will be deducted from stock asset. $ 10000 credit sale will include in the total value of debtors (asset). Both side of balance sheet will same.


When we provide any service to any body, we get right to receive its payment but if our customer did not pay the payment. This is a new transaction between us and our customer. This will impact the accounting equation. For example We have to take $ 6000 from Mr. Bond because we have  provided repair service. But still he did pay. So, Our debtors will increase with $ 6000. Our capital will increase our new earning $ 6000.

Like above transactions, there are lots other new transactions which impact the accounting equations, if you want to study more deeply, you can study at here.

Related : Accounting Equation Examples


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Accounting Education: How Transactions Impact the Accounting Equation
How Transactions Impact the Accounting Equation
Accounting Education
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