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Analysis of Business Transactions:

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Definition and Explanation:

Analysis of business transactions means observing the change in financial position of the business because of business transactions. Different business transactions make changes in financial position of a business concern. A change in financial position means change in one or more of the five basic elements of accounting. The five basic elements of accounting are:

  1. Assets

  2. Liabilities

  3. Capital

  4. Expenses

  5. Revenue.

You should remember an important principle while making the analysis of business transactions that "every business transaction brings about at least a double change in the financial position of a business concern". These two changes may take place in any one or more basic elements of accounting. There is no exception to this principle. For example, Mr. A purchases machinery worth $100,000. This is a business transaction. It will bring two changes - machinery increases by $1,00,000 (an asset) and cash decreases by $1,00,000 (an asset). So, both the changes have taken place in assets (an element of accounting). Similarly, if he buys this machinery on credit basis from Mr. B, again it will bring two changes - machinery increase by $1,00,000 (an asset) and a liability increases by $1,00,000 (amount payable to Mr. B).

Now let us see how the analysis of various business transactions is made. Consider the following example for this purpose:

Example:

Transaction No. 1

Mr. R invests $200,000 to commence his business.

Analysis:

Two changes have taken place because of this transaction:

  1. Cash is increased in the business by $200,000 (an asset).

  2. Capital or owner's equity is increased by $200,000 (an internal liability of the business).

Transaction No. 2:

He opens current account with bank and deposits $60,000.

Analysis:

This transaction has brought two changes:

  1. Decrease in cash balance by $60,000 (an asset).

  2. Increase in bank balance by $ 60,000 (an asset).

Transaction No. 3:

He borrows $100,000 from Mr. S at 12% per annum.

Analysis:

The two changes are:

  1. Increase in cash balance by $100,000 (an asset).

  2. Increase in creditor by $100,000 (a liability).

Transaction No. 4:

He purchases furniture worth $40,000 for cash.

Analysis:

The two changes are:

  1. Increase in furniture by $40,000 (an asset).

  2. Decrease in cash balance by $40,000 (an asset).

Transaction No. 5:

He purchases goods (saleable goods) from Mr. A for $50,000 and paid cash $30,000.

Analysis:

There are three changes in this business transaction:

  1. Increase in purchases (goods) by $50,000 (an expense).

  2. Decrease in cash balance by $30,000 (an asset).

  3. Increase in creditor Mr. A by $20,000 (a liability).

In this transaction goods worth $50,000 have been purchased and the amount paid in cash to Mr. A is $30,000, which means the balance amount of $20,000 is payable to him, so it is liability of the business.

Transaction No. 6:

He sells goods for cash $18,000.

Analysis:

There are two changes:

  1. Increase in cash by $18,000 (an asset).

  2. Decrease in goods or increase in sales (a revenue) by $18,000.

Transaction No. 7:

He sells goods for $10,000 to Mr. N on credit basis:

Analysis:

The two changes are:

  1. Increase in debtor Mr. N (an asset) by $10,000.

  2. Decrease in goods or increase in sales (a revenue) by $10,000.

Transaction No. 8:

He purchases stationary for $6,000.

Analysis:

These two changes are:

  1. Increase in stationary by $6,000 (a consumable asset).

  2. Decrease in cash balance by $6,000 (an asset).

Transaction No. 9:

He purchases a weighing scale and a safe for $20,000 and pays by check:

Analysis:

The two changes are:

  1. Increase in weighing scale and safe by $20,000 (an asset).

  2. Decrease in bank balance by $20,000 (an asset).

Transaction No. 10:

He pays $12,000 to Mr. A on account.

Analysis:

Mr. A is creditor (a liability) of the business for $20,000 and now $12,000 have been paid to him and the balance of $8,000 is still payable to him. The two changes are:

  1. Decrease in cash by $12,000 (an asset).

  2. Decrease in creditor Mr. A by $12,000 (a liability).

In all of the above transactions, it may be observed that in every business transaction there are at least two changes and in some cases there are more than two changes. All these changes are recorded in the books of accounts of the business in separate accounts. Every change is supposed to be recorded in a separate account.

 

More study material from this topic:

 Analysis of Business Transaction
 Double Entry System
 Single Entry System
 Difference Between Double Entry System and Single Entry System
 What is An Account?
Questions and Answers

 

 
 

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Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
----------------------------------------------------------------------------
  Work Sheet
----------------------------------------------------------------------------
  Capital and Revenue Items
----------------------------------------------------------------------------
  Valuation of Inventories
----------------------------------------------------------------------------
  Accounts of Non-profit Making Organizations
----------------------------------------------------------------------------
  Statement of Cash Flows
----------------------------------------------------------------------------
  Accounting Ratios Analysis
----------------------------------------------------------------------------
  Depreciation, Provisions and Reserves
----------------------------------------------------------------------------
  Accounting Dictionary
----------------------------------------------------------------------------
  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
----------------------------------------------------------------------------
  Variable Costing System
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  Materials and Inventory Cost Control
----------------------------------------------------------------------------
  Activity Based Costing System
----------------------------------------------------------------------------
  Standard Costing and Variance Analysis
----------------------------------------------------------------------------
  Balanced Scorecard
----------------------------------------------------------------------------
  Capital Investment Analysis/Capital Budgeting
 
 

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