University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

310

Pages:

2
Author:

stud_ice13

Transaction Analysis Using the Accounting Equation Business transactions impact a company’s financial position by affecting assets, liabilities, and equity. The accounting equation ensures that all transactions maintain the balance: Assets=Liabilities+Equity Each transaction will either increase or decrease these components, reflecting changes in the company’s financial health. Let’s analyze the four transactions for Tata Company in the same way that FastForward's transactions were analyzed: 1. Investment by Owner o Transaction: Jamsetji Tata invests $4,000 cash in exchange for common stock. o Effect: Cash (an asset) increases by $4,000, and equity increases by $4,000 in Common Stock. o Accounting Equation: Assets+4,000=Liabilities+4,000 (Equity - Common Stock) 2. Purchase of Equipment on Credit o Transaction: The company purchases $2,000 worth of equipment on credit. o Effect: Assets (Equipment) increase by $2,000, and Liabilities (Accounts Payable) increase by $2,000. Equity remains unaffected. o Accounting Equation: Assets+2,000=Liabilities+2,000+Equity 3. Providing Services on Credit o Transaction: Tata Company provides services worth $540 to a client on credit. o Effect: Assets (Accounts Receivable) increase by $540, and Equity (Revenues) increases by $540. o Accounting Equation: Assets+540=Liabilities+540 (Equity - Revenues) 4. Payment of Salary o Transaction: The company pays $250 cash as an employee's salary. o Effect: Assets (Cash) decrease by $250, and Equity (Expenses) decreases by $250. o Accounting Equation: Assets−250=Liabilities+Equity−250 (Expenses) Summary of Tata Company’s Transactions Below is a summary table reflecting the impact of the transactions on Tata Company’s accounting equation: Transaction 1. Owner investment 2. Purchase equipment on credit 3. Provide services on credit 4. Pay employee’s salary Assets Liabilities +4,000 (Cash) +2,000 (Equipment) Equity (Common Stock, Revenues, Expenses) +4,000 (Common Stock) +2,000 (Accounts Payable) +540 (Accounts Receivable) +540 (Revenues) -250 (Cash) -250 (Expenses) After these transactions, the accounting equation remains balanced, demonstrating that: Assets=Liabilities+Equity This process helps keep track of how each business activity affects the company's financial status.