1c. Business Transactions + The Accounting Equation

Question 1

1. What is a (business) transaction?
2. How does each transaction affect the basic accounting elements / accounting equation?
3. What is a combined entry?
4. What is an example of a transaction?

Answer 1

1. A transaction = any activity that changes the value of a firm’s assets, liabilities or owner’s equity (ie any of the basic accounting elements)
2. Each transaction has a DUAL EFFECT on the basic accounting elements (I.e. increases or decreases - or both - the basic elements, and because the accounting equation must always be balanced if you alter an element on one side at least one of the other elements must change)
3. COMBINED ENTRY = a transaction that affects more than two accounts in a transaction
4. Withdrawal (aka drawing)

Question 2

1. What is WITHDRAWAL (AKA. DRAWING)?

2. How does withdrawal affect the business?

Answer 2

1. Withdrawal = the removal of business assets for personal use by the owner
2. This transaction decreases the asset taken and the value of the business