ANALYSIS OF BUSINESS TRANSACTIONS AND DOUBLE ENTRY SYSTEM

ANALYSIS OF BUSINESS

TRANSACTIONS AND DOUBLE ENTRY SYSTEM

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We have already seen in the previous chapter that how different business transactions make change in the accounting equation (financial position) of a business concern. In accounting equation only three basic elements of accounting (the assets, liabilities and capital) have been considered. But, practically there are five basic elements of accounting, the assets, liabilities, capital, expenses and revenues. The students are required to remember an important principle "while making the analysis of business-transactions that "Every business transaction bring* about at least a double change in the financial position of a biutness concern". These two changes may take place in any one or two basic elements of accounting, there is no exception to this principle. For example, Mr. Aatf purchases machinery worth Rs. 100,000. This is a business transaction. It will bring two changes —. machinery increases by Rs. 100,000 (an asset) and cash decreases by Rs. 100,000 (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. A, again it will bring two changes - machinery increase by Rs. 100,000 (an asset) and a liability increases by Rs. 100,000 (amount payable to Mr. A).

\ Now let us see how the analysis of various business transactions is made: kNSACflONN0.1 Mr. Rizwan invests Rs. 200,000 to comence his business.

ILYSIS: Two changes have taken place because of this transaction:

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

i .2. Capital or Owner's equity is increased by Rs. 200,000 (an internal liability of the

business).

NSACTION NO. 2

He open current account with ABL and deposits Rs. 60,000.

LYSIS:

This transaction has brought two changes:

Decrease in Cash balance by Rs. 60,000 (an asset).

Increase in Bank balance by Rs. 60,000 (an asset).

.TRANSACTION NO. 3

He borrows Ra. 100,000 firom Mr. Saleem at 12 % interest per annum. ANALYSIS;

The two changes are:

Increase jn Cash balance by Rs. 100,000

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

TRANSAQT|QN NQ. 4

. He purchases furniture worth Rs. 40,000 for cash.

ANALYSIS:

The two changes are:

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

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

TRANSACTION NO. 5

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

ANALYSIS:

. There are three changes in this business transaction:

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

Decrease in Gash balance by Rs. 30,000 (an asset)

Increase in creditor Mr. Afzal by Rs. 20,000.(a liability).

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

TRANSACTION NO. 6

He sells goods for cash Rs. 18,000. ANALYSIS:

There are two changes:

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

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

TRANS ACTION NO. 7

He sells goods for Rs. 10,000 to Mr. Naeem on credit basis. ANALYSIS:

The two changes are:

1. : Increase in debtor Mr. Naeem (an asset) by Rs. 10,000

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

•UtmeSSTMmACTTOMt AND DOUMJtNTHY SYSTEM

ION NO. 8

He purchases stationery for Rs. 6,000.

two changes are: t.

Increase in stationery by Rs. 6,000 (a consumable asset).

Decrease in Cash balance by .Rs.' 6,000 (an asset).

•ION NO. 9

He purchases a weighing scale and a safe for Rs. 20,000 and pays, by cheque,. LTSS:

Hie two changes are:

L Increase in weighing scale and safe by Rs. 20,000 (an asset). 2. Decrease in bank balance by Rs. 20,000 (an asset).

ION NO. 10

He pays Rs. 12,000 to Mr. Afzal on account. LYSIS:

r. AfzaTis creditor (a liability) of the business for Rs. 20,000 and now Rs. 12,000 have to him and the balance of Rs. 8,000 is still payable to him. The two changes are;

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

2- Decrease in creditor Mr. Afzal by Rs. 12,000 (a liability).,

ION NO. T1

He returns defective goods to Mr. Afzal worth Rs. 2,000.

LYSIS:

In (his transaction, goods purchased ,from Mr. Afzal have been returned .to him, so !will be a reduction in the amount payable (a liability) to Mr. Afzal by Rs. 2,000. The two

are: L Decrease in goods or increase in purchases returns (Decrease in expense), by

2. Decrease in creditor Mr; Afzal by Rs. 2,000-(a liability).

'ION NO. 12

Goods are returned by Mr. Naeem Rs. 1,000 to the business. .YSIS:

In this transaction goods sold to Mr. Naeem have been returned by him to the business lljOOO, so there will be a reduction in the amount receivable from Mr. Naeem (a debtor) by (1,000. The two changes are:

Decrease in debtor Mr. Naeem by Rs. .1,000 (an asset).

Increase in goods or increase in Sales returns (decrease-in revenue) by Rs. 1,000.

nu. ia

Gash paid to Mr. Afzal Rs. 5,600 in full satisfication of his claim of Rs. 6,000. ANALYSIS:

The amount payable to Mr. Afzal (a creditor), is Rs. 6,000. In this transaction, it is assumed tha.t payment is made to him before the due date and that is why, business is receiving a cash discount of Rs. 400 (a revenue) from Mr. Afzal. In full satisfaction', we mean by paying him Rs. 5,600, the liability is settled in full (Rs. 6,000). There are three changes in this transaction:

Decrease in Cash Rs. 5,600 (an asset).

Decrease in creditor Mr. Afzal (a liability) by Rs. 6,000.

Increase in discount received by Rs. 400 (a revenue).

TRANSACTION NO. 14

Cash received from Mr. Naeem (a debtor) Rs. 8,800 in fall satisfaction of his debts of Rs. 9,000.

ANALYSIS:

The amount receivable from Mr. Naeem is Rs. 9,000. In this transaction, it is assumed that Mr. Naeem is paying his debts before the due date and that is why, business allows him a discount (a concession) of Rs. 200 (an expense or loss to the. business). In full satisfaction, we mean by receiving Rs. 8,800 from him, his account is settled in full (Rs. 9,000). These are three changes in this business transaction;

Increase in Gash Rs. 8,800 (an asset).

Decrease in debtor Mr. Naeem by Rs. 9,000 (an asset).

Increase in discount allowed by Rs. 200 (an expense or loss).

TRANSACTION NO. 15

Cash withdrawn from the bank for business use Rs. 10,000. ANALYSIS:

The two changes are;

Increase in Cash balance Rs. 10,000 (an asset).

Decrease in bank balance Rs. 10,000 (an asset).

TRANSACTION NO. 16

Interest ia paid on money borrowed from Mr. Saleem Rs. 1,000.

ANALYSIS:

There are two changes:

Increase in interest expense (an expense incurred) by Rs. 1,000.

Decrease in Cash balance Rs. 1,000 (an asset).