Transactions Simple Equation
Accounting Equation
Property = Property Rights
Let's use our simple or abbreviated accounting equation
Property = Property Rights and get an overview of the types of transactions that can occur and their effects on our simple equation.
The table below illustrates the four basic types of transactions represented by the letters (a) (b) (c) and (d) and their effects on our Simple or Abbreviated Accounting Equation.
A result of a transaction can:
- Increase both sides of the equation.
- Decrease both sides of the equation
- Increase and Decrease the same side of the equation.
Property = | Property Rights | Types Of Transactions Examples-See Transaction Number in Table Below |
Left Side = | Right Side | |
| (a) Increase In Property | (a) Increase In Property Rights | #1, #2, #4, #5, #10 |
| (b) Decrease In Property | (b) Decrease In Property Rights | #3, #6, #7 |
| (c) Increase In One Type Of Property | #8 | |
| (c) Decrease In Another Type Of Property | #8 | |
| (d) Increase In One Type Of Property Rights | #9 | |
| (d) Decrease In Another Type Of Property Rights | #9 |
What does the table tell us ?
Transactions may require increases to both sides of the equation (left and right side both increase) – transaction type (a) ,
Transactions may require decreases to both sides of the equation (left and right side both decrease )- transaction type (b) ,
Transactions may require an increase and decrease on the same side of the equation (increase and decrease on the left side – transaction type (c).
Transactions may require an increase and decrease on the same side of the equation (increase and decrease on the right side - transaction type (d).
Regardless of the type of transaction, the Accounting Equation must always balance .
Did you also notice we made two entries for each of the example transactions illustrated in our table ? There’s that double entry thing again. The table also illustrates that by using double entry bookkeeping the dollar amount of the property will at all times equal the dollar amount of the property rights.
Business Transactions and Their Effects on The Accounting Equation
The remainder of this lesson will be examples used to demonstrate recording transactions using the double entry bookkeeping system in conjunction with our accounting equation.
Our analysis will use the Simple or Abbreviated Accounting Equation to demonstrate the transaction effects.
ABC Transactions
We are now going to analyze the effects of typical types of business transactions and how they affect our Accounting Equation. We will use the fictional ABC business which is a service type business (lawn mowing), sole proprietorship, uses double entry accounting, and the accrual basis of accounting for our example.
A brief analysis of the effects follows each transaction. A more in depth analysis is presented in later lessons.
1. ABC mows a client’s yard and receives a check from the customer for $50 for the service provided.
The property cash is increased and the owner’s property rights (claims to the property) are increased.
2. ABC purchases $100 worth of office supplies for inventory and stores them in their storage room. The office supply store gives them an invoice that allows them to pay for them in 15 days (on account).
The property office supplies is increased and the creditor’s property rights (claims to the property) are increased.
3. ABC places an ad in the local newspaper receives the invoice from the supplier and writes a check for $25 to the newspaper.
The property cash is decreased and the owner’s property rights (claims to the property) are decreased.
4. ABC purchases five mowers for $10,000 and finances them with a note from the local bank.
The property equipment (mowers) is increased and the creditor’s property rights (claims to the property) are increased.
5. ABC mows another customer’s yard and sends the customer a bill (invoice) for $75 for the service they performed. They allow their customer 10 days to pay them for this service (on account).
The property amounts owed by customers is increased and the owner’s property rights (claims to the property) are increased.
6. The owner of ABC needs a little money to pay some personal bills and writes himself a check for $500.
The property cash is decreased and the owner’s property rights (claims to the property) are decreased.
7. ABC pays the office supply company $100 with a check for the office supplies that they charged (promised to pay).
The property cash is decreased and the creditor’s property rights (claims to the property) are decreased.
8. ABC receives a check from the customer who they billed (invoiced) $75 for services and allowed 10 days to pay.
The property cash is increased and the property amounts owed by customers are reduced. This is actually a swap of one type of property for another.
9. ABC purchased some mulch for $60 and received an invoice from their supplier who allows them 15 days to pay. The mulch was used on a customer’s yard.
The property right amount owed a supplier is increased and the owner’s claim on the property rights (claims to the property) is decreased.
10. ABC bills (prepares an invoice) the customer $80 for the mulch and mowing his yard and receives a check for $80 from the customer.
The property cash is increased and the owner’s property rights (claims to the property) are increased.
Transaction Analysis Using the Simple (Abbreviated) Accounting Equation
Property = Property Rights
Transactions | Property = | Property Rights | ||
Left Side = | Right Side | |||
Increase | Decrease | Decrease | Increase | |
| 1. ABC mows a client's yard and receives a check from the customer for $50 for the service provided. The property cash is increased and the owner's property rights (claims to the property) are increased. | 50 | 50 | ||
| Type (a) Transaction Increases Both Sides of the Equation | ||||
| 2. ABC purchases $100 worth of office supplies for inventory and stores them in their storage room. The office supply store gives them an invoice that allows them to pay for them in 15 days (on account). The property office supplies is increased and the creditor's property rights (claims to the property) are increased. | 100 | 100 | ||
Type (a) Transaction Increases Both Sides of the Equation | ||||
| 3. ABC places an ad in the local newspaper receives the invoice from the supplier and writes a check for $25 to the newspaper. The property cash is decreased and the owner's property rights (claims to the property) are decreased. | 25 | 25 | ||
Type (b) Transaction Decreases Both Sides of the Equation | ||||
| 4. ABC purchases five mowers for $10,000 and finances them with a note from the local bank. The property equipment (mowers) is increased and the creditor's property rights (claims to the property) are increased. | 10,000 | 10,000 | ||
Type (a) Transaction Increases Both Sides of the Equation | ||||
| 5. ABC mows another customer's yard and sends the customer a bill (invoice) for $75 for the service they performed. They allow their customer 10 days to pay them for this service (on account). The property amounts owed by customers is increased and the owner's property rights (claims to the property) are increased. | 75 | 75 | ||
Type (a) Transaction Increases Both Sides of the Equation | ||||
| 6. The owner of ABC needs a little money to pay some personal bills and writes himself a check for $500. The property cash is decreased and the owner's property rights (claims to the property) are decreased. | 500 | 500 | ||
Type (b) Transaction Decreases Both Sides of the Equation | ||||
| 7. ABC pays the office supply company $100 with a check for the office supplies that they charged (promised to pay). The property cash is decreased and the creditor's property rights (claims to the property) are decreased. | 100 | 100 | ||
Type (b) Transaction Decreases Both Sides of the Equation | ||||
| 8. ABC receives a check from the customer who they billed (invoiced) $75 for services and allowed 10 days to pay. The property cash is increased and the property amounts owed by customers are reduced. This is actually a swap of one type of property for another. | 75 | 75 | ||
| Type (c) Transaction Increases and Decreases Left Side of the Equation | ||||
| 9. ABC purchased some mulch for $60 and received an invoice from their supplier who allows them 15 days to pay. The mulch was used on a customer's yard. The property right amount owed a supplier is increased and the owner's claim on the property rights (claims to the property) is decreased. | 60 | 60 | ||
Type (d) Transaction Increases and Decreases Right Side of the Equation | ||||
| 10. ABC bills (prepares an invoice) the customer $80 for the mulch and mowing his yard and receives a check for $80 from the customer. The property cash is increased and the owner's property rights (claims to the property) are increased. | 80 | 80 | ||
Type (a) Transaction Increases Both Sides of the Equation | ||||
| Total | 10,380 Increase | 700 Decrease | 685 Decrease | 10,365 Increase |
| Total Net Changes | 9,680 Increase | 9,680 Increase | ||
Now let's use our Expanded Accounting Equation to illustrate the types of transactions that can occur and their effects on our expanded equation.
