All the business transactions are built upon the fundamental accounting equation where: Assets=liabilities + Owner’s Equity ( Ngonzi, 2016). For every transaction to be effective, this equation must balance.
Increase an asset account and increase a liability account
Transaction. The business purchases a printer on credit for $3,000. In this case, the new printer is an added asset whereas liability increased since the business owns the seller or vendor $3,000.
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Decrease an asset account and decrease the owner’s equity account
Transaction: Assume that the business paid a monthly rent amounting to $950. This is an expense that reduces cash (asset account) and decreases owner's equity $950.
Increase an asset account and increase the owner’s equity account.
Transaction: The business made sales worth $1,500 cash. For the business, sales of goods are a source of revenue that increases owner’s equity ( Pott, 2017). The cash which is an asset increase whereas the revenue generated increases owner's equity ( Warsono, 2017).
Decrease an asset account and decrease a liability account.
Transaction: Assume that the vendor who supplied printer on credit is paid $3,000 in cash. Cash asset account decreases and creditor account which is a liability decreases with $3,000 ( Narayanaswamy, 2016) .
Increase one asset account and decrease another asset account
Transaction: Assume the new printer supplied was received and paid in cash $3,000 on the same day. The printer asset account will increase and cash account decrease by $3,000.
Decrease one liability account and increase another liability account.
Transaction: Assume that the vendor who supplied printer on credit $3,000 is paid by taking a bank loan at the end of the period. In this case, the creditor account (liability) decreases whereas the bank loan account increases ( Juárez, 2016) . Creditor account will be “debited” while bank loan account is “credited” with $3,000.
References
Juárez, F. (2016). Assets value change in the accounting equation. WSEAS Transactions on Business and Economics , 13 , 384-392.
Narayanaswamy, R. (2016). Accounting Equation.
Narayanaswamy, R. (2016). The effect of Transactions on the Accounting Equation-Part 3.
Ngonzi, T. (2016). Debating the ‘Evolution of Accounting Equation’: A Cross-Case Analysis Approach. Journal of Finance and Accounting , 4 (4), 2016.
Pott, C. (2017). Financial accounting: A concepts-based introduction, D. Kolitz. Routledge, London and New York (2017),(616 pages,€ 48.49, $89.95 ISBN: 9781138844971).
Warsono, S. (2017). The Accounting Equation and Revisiting the Theory of Double-Entry Bookkeeping.
