BU1002 Lecture Notes - Lecture 3: Double-Entry Bookkeeping System, Accounts Payable, Accounting Software
14 Jun 2018
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Topic 3
Business Transaction
- Business transactions are occurrences that affect the assets, liabilities and equity
items in an entity
- A business transaction is recorded when
o It can be reliably measured in monetary terms
o It occurs at ar’s legth
- Accounting Entity concept: every entity must keep records of its business
transactions separate from any personal transactions of the owners.
- Examples
o Contribution of capital (cash or assets) by owners
o Payment of salaries
o Receipt of bank interest
o Recept of GST Refund
o Purchase of laptop on credit
o Payment of accounts payable
o Depreciating of office equipment
o Purchase of accounting software
o Charing interest on overdue a/c receivable
o Payment of advertising
o Withdrawal of capital
o Cash purchases
o Cash sales
Personal Transactions and Business Events
- Personal transactions are transactions of the owners, partners or shareholders that
are unrelated to the operation of the business (accounting entity concept)
- Business events are occurrences that will probably affect the entity in some way, but
are not recorded as business transactions until an exchange of goods occur between
the entity and an outside / external entity
o Example: when we hire someone to work in our business, not until they begin
work when the exchange of goods occur (transacting occurs)
Accounting equation
- Assets – Liabilities + Equity
- Assets = resources controlled by entity
- Liabilities = External sources of funds (present obligation)
- Equity = Internal sources of funds (from owners)
- Assets need to be funded by owners and lenders
Concept of Duality or Double Entry Accounting
- The accounting equation must be kept in balance after a transaction is entered
o I.e Assets MUST = liabilities + equity
o In order to keep the equation in balance, a transaction must have two sides
of have a positive and negative effect on the one side, thereby resulting in no
change to the overall value of the equation
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- A transaction has a dual effect on the equation
o Cash movement effect
o Category of transaction effect
- Cash movement
o Money paid or received (cash account)
o Money going to be paid or received (accounts payable / accounts receivable)
- Category of the transaction
o What is the nature of the transaction
▪ Purchase an asset = asset account
▪ Receipt of money from sale = revenue account
▪ Obtain money from a bank loan = liability account
- Example: The purchase of a motor vehicle via a loan
o Cash effect = loan payable increase (liability), present obligation requiring
payment in the future
o Category effect = Motor vehicle increase (asset)
▪ This is the purchase (control) of a motor vehicle to support the
business in the form of transportation (future economic benefit)
whilst the business generates revenue.
▪ A = L + OE
increase motor vehicle = increase loan
Expanded Accounting Equation
- Recall Topic 1
o Income produces an increase in equity
o Expenses result in decrease in equity
- Therefore
o Profit (loss) is added to (subtracted from) opening equity on the Balance
Sheet
- ASSETS = LIABILITIES + EQUITYbeginning + INCOME – EXPENSES
- End of year start during during
The Accounting Worksheet
- Summaries the duality associated with each business transaction with each business
transaction
- All business transactions of the equity can be entered into the worksheet (working
papers, not formal recording process)
- Then the individual columns of the worksheet can be totalled and used as the basis
for preparing financial statements
Transaction Analysis using a Worksheet
1. Read the transaction
2. Identify the accounts involved in the transaction
3. Identify the amounts involved in the transaction
4. Check the equation balances (double entry accounting)
Accounting errors
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Business transactions are occurrences that affect the assets, liabilities and equity items in an entity. It can be reliably measured in monetary terms. Accounting entity concept: every entity must keep records of its business transactions separate from any personal transactions of the owners. Personal transactions are transactions of the owners, partners or shareholders that are unrelated to the operation of the business (accounting entity concept) Equity = internal sources of funds (from owners) Assets need to be funded by owners and lenders. Liabilities = external sources of funds (present obligation) The accounting equation must be kept in balance after a transaction is entered. In order to keep the equation in balance, a transaction must have two sides of have a positive and negative effect on the one side, thereby resulting in no change to the overall value of the equation. A transaction has a dual effect on the equation: cash movement effect, category of transaction effect.
