• 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:

1. Assets: What the business owns
2. Liabilities: What the business owes to others
3. 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.