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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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In analyzing a transaction, can a transaction only affect one side of the accounting equation? If so, give an example.

To determine

Effect on accounting equation

Accounting equation broadly means the total assets must be equal to liabilities and Stockholder’s equity (i.e. one side is Total assets and other side is Total Liabilities and Stockholder’s equity). However, the different elements on each side of equation may depend upon the business entities for which the accounts are being prepared. Each transaction must have at least two effects on each element of accounts and after recording the effects, the accounting equation must match. Therefore, it is not necessary that the transaction must affect the elements of both the sides, but it may affect two elements of same side, but the important thing is that the accounting equation must match after recording the effects of the transactions.

The examples of transactions affecting one side of Accounting equation.

Explanation

The Accounting equation is Total assets (One side) must be equal to Total liabilities and Stockholder’s equity (other side). Each transaction must have an effect on at least two elements of financial statements, but not necessary to be on different sides but after recording accounting equation must match. And this must be adhered to.

There are various instances where the transactions effects the two elements on a single side i.e. one element increases and other elements decreases, so as to keep the accounting equation balanced. Some of the transactions are as under:

  1. Cash received from Accounts received: Here the Total assets are only effected. And the Cash account get increased and Accounts received decreases. Keeping the Total assets as same...

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