Using Accounting Equation
Gabriel A. Listianto, Ph.D., Ak.
Undergraduate Accounting Progam. Sanata Dharma University.
Using the Accounting Equation
Accounting in Action 2
Transactions (business transactions) are a business’s
economic events recorded by accountants. Transactions may be external or internal.
External transactions involve economic events between the company and some outside enterprise.
Internal transactions are economic events that occur
entirely within one company.
Using the Accounting Equation
Companies carry on many activities that do not represent business transactions.
Examples are hiring employees, answering the
telephone, talking with customers, and placing
merchandise orders.
Transaction-identification process
Accounting in Action 4
Each transaction must have a dual effect on the accounting equation. For example, if an asset is increased, there must be a
corresponding (1) decrease in another asset, (2) increase in a specific
liability, or (3) increase in equity.
Transaction Analysis
As part of this analysis, the basic accounting equation will be
expanded . The expansion will provide a better illustration of the impact of transactions on equity. Recall that equity is comprised of two parts: share capital—ordinary and retained earnings.
Share capital— ordinary is affected when the company issues new ordinary shares in exchange for cash. Retained earnings is affected when the company earns revenue, incurs expenses, or pays dividends. Folloeing Illustration shows the expanded
accounting equation.
The Expanded Accounting Equation
Accounting in Action 6
