Heintz and Parry (2010) define a business transaction as an event that triggers the recording of the analysis in the accounting system of the business. The general manager of a business encounters many different types of business transactions each of which has an independent impact to the accounting equation. The accounting equation involves the balancing of the assets, liabilities, capital and the total equity. This paper describes the different types of business transactions, which have varying impacts to the accounting equation.
Some transactions can increase an asset account and increase a liability account .This will for instance, result from the purchasing of either a fixed or a current asset on account. Juan (2007) gives an example of how an individual can purchase a computer on account that will result in an increase in the asset (computer) and increase the liability (the account payable). This example clearly shows a how a transaction can result in increasing an asset account and increasing a liability, as well.
There are some transactions that can decrease an asset account but decrease an owner’s equity account. The owner’s equity is the residual of assets minus liabilities. For example, if the owner withdraws cash from the business for personal use, the asset (cash in hand) reduces as well as the owner’s equity (capital). Heintz and Parrys (2010) illustrates that expenses and drawings decrease the owner’s equity and are shown in the credit side of the account as they also decrease the cash in hand. Such kind of a transaction will have a canceling effect to the balance sheet as the decrease in asset cancels out the decrease in owner’s equity.
Still, there are other transactions that can increase an asset account and increase the owner’s equity account. Such types of transactions results mainly from the owner investing more into their business. An example of this is when the owner opens a bank account with a given amount of deposit for the business. When the owner retains the earnings balance in the business, there will be an increase in the owner’s capital as well as the assets, as cited from the example done by Whittington and Delany (2010). In such a case the owner’s capital increases as the assets to the business increases also.
A transaction can also decrease an asset account and decrease a liability account. Bryan (2010) argues that some payments when made lead to a decrease of the asset, cash, as well as that of the liability accounts. For instance if cash is drawn from the account to pay for a machine which had been previously bought on credit the cash (asset account) will decrease as the creditor (liability account)decreases.
Transactions can still further lead to increase in one asset account and decrease in another asset account. This is the case when an asset (machinery) is purchased against cash. Such type of a transaction leads to an entry in the same side of the balance sheet. When a business owner purchases an asset, against cash, the result will be an increase and decrease in the same side of the balance sheet, cancelling each other out.
Furthermore, transactions can decrease one liability account and increase another liability account. To give an example, a transaction involving a loan acquired to pay off creditors will lead to the decrease in the creditors (liability) and an increase in the loan (also a liability). This type of a transaction will also result in an entry in the same side of the balance sheet, causing a zero effect.
Evidently, there are many types of transactions in a business, which a general manager will encounter. Each one of these transitions will abide by the rule of double entry and it will either lead to an increase or decrease in both sides of the accounting equation. They can also lead to a decrease and an increase in only one side of the accounting equation. Despite the difference in these transactions, managers should be well versed with each one of them.