ANALYSIS OF BUSINESS

ANALYSIS OF BUSINESS
TRANSACTIONS AND DOUBLE ENTRY SYSTEM
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
considred. But, practically there are five basic elements of accounting, the
assets, liabilities, capital, expenses and revenues. The students are
Change in required to remember an important principle while making the analysis of
financial business transactions that "Every business transaction brings about at
position means leatt ° double change in the financial position of a business
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. Asif purchases machinery worth Rs. 50,000. This is a business transaction. It will bring two changes — machinery increases by Rs. 50,0000 (an asset) and cash decreases by Rs. 50,000 (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. 50,000 (an asset) and a liability increases by Rs. 50,000 (amount payable to Mr. A).
Now let us see how the analysis of various business transactions is made: TRANSACTION NO. 1
Mr. Rizwan invests Rs. 100,000 to comence his business. ANALYSIS:
Two changes have taken place because of this transaction:
1. Cash is increased in the business by Rs. 100,000 (an asset).
2. Capital or Owner's equity is increased by Rs. 100,000 (an internal liability of thebusiness).
TRANSACTION NO. 2
He open current account with ABL and deposits Rs. 30,000. ANALYSIS:
This transaction has brought two changes:
1. Decrease in Cash balance by Rs. 30,000 (an asset).Increase in Bank balance by Rs. 30,000 (an asset)