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22 views

Effects

Uploaded by

faheemsadatkhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Assets = Liabilities + Equity (Capital)

Let's explore the effects of various transactions on these elements with detailed examples:

1. Asset Transactions

Purchasing Inventory for Cash

 Effect: Decreases one asset (cash) and increases another asset (inventory).
 Example: Buying $1,000 worth of inventory for cash.
 Journal Entry:
 Debit: Inventory $1,000 (increases inventory)
 Credit: Cash $1,000 (decreases cash)

Buying Equipment on Credit

 Effect: Increases an asset (equipment) and increases a liability (accounts payable).


 Example: Purchasing equipment worth $5,000 on credit.
 Journal Entry:
 Debit: Equipment $5,000 (increases equipment)
 Credit: Accounts Payable $5,000 (increases liabilities)

2. Liability Transactions

Taking a Loan

 Effect: Increases an asset (cash) and increases a liability (loan payable).


 Example: Borrowing $10,000 from a bank.
 Journal Entry:
 Debit: Cash $10,000 (increases cash)
 Credit: Loan Payable $10,000 (increases liabilities)

Paying Off Accounts Payable

 Effect: Decreases a liability (accounts payable) and decreases an asset (cash).


 Example: Paying off $2,000 of accounts payable.
 Journal Entry:
 Debit: Accounts Payable $2,000 (decreases liabilities)
 Credit: Cash $2,000 (decreases cash)

3. Capital (Equity) Transactions

Issuing Shares

 Effect: Increases an asset (cash) and increases equity (share capital).


 Example: Issuing shares worth $15,000.
 Journal Entry:
 Debit: Cash $15,000 (increases cash)
 Credit: Share Capital $15,000 (increases equity)

Declaring Dividends

 Effect: Increases a liability (dividends payable) and decreases equity (retained earnings).
 Example: Declaring $3,000 in dividends.
 Journal Entry:
 Debit: Retained Earnings $3,000 (decreases equity)
 Credit: Dividends Payable $3,000 (increases liabilities)

4. Expense Transactions

Paying Salaries

 Effect: Increases an expense (salaries expense) and decreases an asset (cash).


 Example: Paying $4,000 in salaries.
 Journal Entry:
 Debit: Salaries Expense $4,000 (increases expenses)
 Credit: Cash $4,000 (decreases cash)

Accruing Utilities Expense

 Effect: Increases an expense (utilities expense) and increases a liability (utilities payable).
 Example: Accruing $500 in utilities expense.
 Journal Entry:
 Debit: Utilities Expense $500 (increases expenses)
 Credit: Utilities Payable $500 (increases liabilities)

5. Revenue Transactions

Earning Service Revenue

 Effect: Increases an asset (accounts receivable) and increases revenue.


 Example: Earning $6,000 from services provided, to be paid later.
 Journal Entry:
 Debit: Accounts Receivable $6,000 (increases assets)
 Credit: Service Revenue $6,000 (increases revenue)

Receiving Cash for Sales

 Effect: Increases an asset (cash) and increases revenue.


 Example: Receiving $8,000 in cash for sales made.
 Journal Entry:
 Debit: Cash $8,000 (increases cash)
 Credit: Sales Revenue $8,000 (increases revenue)

Comprehensive Examples

Example 1: Purchasing Inventory on Credit

 Transaction: Purchasing $2,500 worth of inventory on credit.


 Effect: Increases inventory (asset) and accounts payable (liability).
 Journal Entry:
 Debit: Inventory $2,500 (increases inventory)
 Credit: Accounts Payable $2,500 (increases accounts payable)

Example 2: Selling Goods on Credit

 Transaction: Selling goods costing $1,500 for $2,000 on credit.


 Effect:
 Increases accounts receivable (asset) and sales revenue.
 Increases cost of goods sold (expense) and decreases inventory (asset).
 Journal Entries:
 For Sale:
 Debit: Accounts Receivable $2,000 (increases accounts receivable)
 Credit: Sales Revenue $2,000 (increases revenue)
 For Cost:
 Debit: Cost of Goods Sold $1,500 (increases expenses)
 Credit: Inventory $1,500 (decreases inventory)

Example 3: Paying Rent

 Transaction: Paying $1,200 in rent.


 Effect: Increases rent expense and decreases cash (asset).
 Journal Entry:
 Debit: Rent Expense $1,200 (increases expenses)
 Credit: Cash $1,200 (decreases cash)

Summary of Effects

 Asset Increase: Debit the asset account.


 Asset Decrease: Credit the asset account.
 Liability Increase: Credit the liability account.
 Liability Decrease: Debit the liability account.
 Equity Increase: Credit the equity account (e.g., revenue, share capital).
 Equity Decrease: Debit the equity account (e.g., expenses, dividends).
 Revenue Increase: Credit the revenue account.
 Expense Increase: Debit the expense account.

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