Which Of The Following Economic Events Is An Accounting Transaction? – Before We Get Into The Topic, let’s Learn Some Basics Of This Topic
Accounting principles are the theoretical concepts that underpin the practical accounting practices used to ensure that a company’s performance, cash flows, and financial condition are appropriately represented in its financial statements. Money is the unit of account that represents a business’s financial position, assets are accounted for at cost rather than market value, and transactions shown in financial statements pertain to a single economic entity as a result of these principles. Other rules stipulate that transactions be recorded using a basic double-entry accounting equation that represents the duality principle, and that an extended or expanded accounting equation be used to distinguish between economic events that result in an increase or loss in owner’s equity.
Accounting is the process of identifying, measuring, and documenting economic events that have an impact on financial statement elements like assets and liabilities. The purpose of recording events or transactions is to aid interested parties in making educated investment and credit decisions about the organization that publishes the transactions in the form of financial statements. When an economic event occurs, such as a consumer sale or the acceptance of a vendor’s invoice, it is measured in monetary terms. Each event is then classified and logged as an accounting transaction, such as a credit to the sales account and a credit to the vendor payables account, allowing for a trial balance to be created. Before reporting the transactions in financial statements, the total debit entries in the trial balance are compared to the total credit entries to confirm the amounts are identical.
Basic Accounting Equation
Because each accounting transaction is recorded using both debit and credit entries, the basic accounting equation embodies the idea of duality. A rise in an asset account, for example, is countered by a fall in an asset account, a rise in a liability account, or a rise in owner’s equity. As a result, assets equal liabilities plus owner’s equity, or assets = liabilities + owner’s equity is the basic accounting equation. Both creditors and owners have genuine claims to an entity’s assets, as shown by the equation.
Extended Accounting Equation
The extended or expanded accounting equation is used to distinguish between economic events that cause the owner’s equity element of the accounting equation to increase or decrease. Capital contributions from the entity’s owners and earnings retained from previous operations, which is the difference between the entity’s revenues and expenditure, are examples of such events. As a result, the extended accounting equation is assets equal liabilities plus contributed capital and retained earnings or assets = liabilities + contributed capital and retained earnings or assets = liabilities + contributed capital and retained earnings or assets. Retained earnings equal beginning retained earnings plus revenues, minus expenses and dividends, or retained earnings = beginning retained earnings + revenues – expenses – dividends in this case.
Example Basic Accounting Equation
Assume a company buys $6000 worth of office supplies on credit, and a credit is applied to the vendor payable account. The company receives the vendor’s invoice a month later and pays the payment in full right away. The payment results in a credit of $6,000 to the cash account and a debit of $6,000 to the vendor payable account. As a result, the transaction simply affects the assets and liabilities components of the basic accounting equation. Both assets and obligations are reduced in this case, but the owner’s equity remains intact.
Which Of The Following Economic Events Is An Accounting Transaction?
Accounting’s entire purpose is to give a clear financial picture of your company’s operations. Financial accounting is made up of five main aspects, according to industry standards. Each activity in the preparation of financial records will touch on at least one of these areas.
The Importance of Assets
The resources you utilize to accomplish your business activities are known as assets. You must own or have the authority to control and utilize an object to record it as an asset. If you run a delivery service, for example, your delivery truck most certainly fits these criteria.
Assets must also deliver a financial benefit to your company in the future. Cash and credit sales are examples of economic benefits. Because you utilize your vehicle to deliver items to clients, it provides you with a financial benefit – sales – and thus fits this condition. A debit is used to record again in an asset, while credit is used to record a decrease.
Your Liabilities and Obligations
The existing obligations of your organization are referred to as liabilities. They are the result of prior events, such as securing a loan to purchase business equipment. You can’t get out of this commitment because of the events of the past. Liabilities are usually settled by transferring assets.
When you hire staff, for example, you pledge to pay them in cash. Hiring the person is a past event, and your pledge to pay is a binding obligation that you will be unable to avoid once the employee performs the work. The transfer of the asset, cash, occurs when a paycheck is issued. Credit is given again in liability, whereas a debit is given for a decrease.
Treatment of Expenses
For a given period, expenses lower assets or increase liabilities. For example, the fuel used by your delivery truck represents a cost. When you buy gas for your truck, you are depleting your cash, which is your most valuable possession. Similarly, using a credit card to purchase gas raises your liability.
Expenses frequently repeat themselves. You must, for example, pay your vehicle leases on the same day every month. The timing of when you record an expense is determined by the accounting method you choose.
The accrual basis is used by the majority of enterprises. You record the expense before paying it when you adopt the accrual basis. Debit will be recorded in the expense account, and a credit will be recorded in the liabilities payable account. If you utilize cash-basis accounting, on the other hand, you only record an expense when you pay for it. You record a debit to the corresponding asset account, which is typically cash, and a credit to the expense account in this situation.
Effect of Revenues on Accounts
The selling of goods and the provision of services generate revenue. Revenues might result in asset account growth or liabilities account decreases. When you sell things for cash, you increase your assets. Similarly, selling on credit terms lowers your obligations by requiring the buyer to pay you at a later period. You debit the account to record again in revenue and credit the account to record a decrease in revenue.
Your Owner’s Equity
The term “owner’s equity” refers to the money or cash you invest into your business. Equity, in technical terms, refers to all of the methods in which your company obtains resources to run or operate properly.
The basic accounting equation is: assets minus liabilities equals owner’s equity. Credit is given for an increase in equity, whereas a debit is given for a decline. Withdrawals and expenditure lower equity, whereas investments and earnings raise it.
Examples of Post-Closing Entries in Accounting
Certain accounts are closed after an accounting period so that they have a zero balance at the start of the next accounting period. Closing entries in the process of zeroing these accounts. The final step in the accounting cycle is closing entries. Failure to complete this step will result in an erroneous financial image for the company. This could be problematic during tax season or if the company seeks outside funding.
At the end of the accounting cycle, revenues made during the accounting period are closed out. Sales, investment gains, and extra financial injections are all considered revenue. With a debit to each account, each revenue account is closed, and the total is credited to the income summary.
At the end of the accounting year, each company expense account is closed. Rent, advertising, insurance, utilities, and other spending categories used during the accounting year are included. All expense accounts are credited, and the total amount of all expense accounts is debited from the income statement.
Losses and Gains
When total expenses are subtracted from total revenues on the income statement, the outcome is a profit or loss for the company. For example, if the company had $100,000 in expenditure and $150,000 in revenue, it would have made a $50,000 profit. By debiting the revenue account $150,000, crediting the expense account $100,000, and crediting retained earnings $50,000, this is reported as a closure entry. If expenditure exceeded revenues, the difference would be debited from the retained earnings account to show the year’s loss.
The payouts were recorded in the drawing account whenever an owner took a salary from the company. This account is credited the amount the owner withdrew for salary after the accounting year, while the owner’s equity account is debited. This illustrates how much of the owner’s equity was spent on personal costs.