About Lesson
- A business activity or event that results in a measurable change in the accounting equation is an accounting transaction.
- A transaction is, for example, the exchange of money for goods.
The specific types of accounts that business activities fall into include:
- Assets: What the business owns
- Liabilities: What the business owes to others
- Equity: The difference between Assets and Liabilities
- These are the fundamental components of the accounting equation.
The accounting formula is as follows:-
LIABILITIES + EQUITY = ASSETS
Example
A Company owes Kshs. 12,000 in debt, and the owner invested Kshs. 100,000 in the company.
The assets owned by the company will be calculated as follows:
Kshs. 12,000 (the amount owed) + Kshs. 100,000 (the amount invested) = Kshs. 112,000 (what the company has in assets)
Liabilities + Equity = Assets that is, 12,000+ 100,000 = 112,000
- Because every transaction impacting a corporate entity must be recorded in accounting records based on a detailed account, assessing a transaction before recording it is an important aspect of financial accounting.
- Financial statements could be erroneous as a result of a transaction analysis inaccuracy.
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