Limited Time Offer: Save 10% on all 2021 and 2022 Premium Study Packages with promo code: BLOG10    Select your Premium Package »

Recording Business Transactions

Recording Business Transactions

An accounting system allows a company to translate its business activities into usable financial records. The company uses these financial records to assess its profitability, evaluate its financial position, and identify any business activity which requires further action.

Recording Business Transactions Using an Accounting System

The accounting system is usually presented in the form of a spreadsheet. In recording an activity in this spreadsheet, its financial impact is assessed before it is expressed as an accounting transaction. The following steps are involved:

  1. identification of the affected accounts, the extent to which they are affected, and whether they will increase or decrease;
  2. determination of the element type for each of the accounts identified in step (i) and where it fits in the accounting equation;
  3. use of the information derived from steps (i) and (ii) to enter amounts into the appropriate columns of the spreadsheet; and
  4. verification that the accounting equation still balances.

In accordance with the accounting equation i.e. Assets = Liabilities + Owners’ equity (in its basic form), every recorded transaction should affect at least two accounts. This will ensure that the equation remains balanced, which is a fundamental accounting concept. ‘Double-entry accounting’ is a term which describes this accounting process. For example, if a company uses cash to purchase inventory, one account, cash, decreases, while another account, inventory, increases. All through, the accounting equation remains in balance.

The following sample will help to demonstrate this concept better.

fra_4

Financial statements allow financial data that is reported in the accounting system to be presented in a more useful and meaningful manner.

Question

Company XYZ purchases new equipment for $55,000 in cash. Which of the following statements describes the correct accounting treatment to reflect this?

A. Cash increases by $55,000, while equipment decreases by $55,000

B. Cash decreases by $55,000, while equipment increases by $55,000

C. Cash decreases by $55,000, while accounts payable increases by $55,000

Solution

The correct answer is B.

Since cash is used, cash decreases, and since the equipment is acquired, equipment increases. Accounts payable does not change as a result of this transaction.

Reading 22 LOS 22d:

Describe the process of recording business transactions using an accounting system based on the accounting equation

Featured Study with Us
CFA® Exam and FRM® Exam Prep Platform offered by AnalystPrep

Study Platform

Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Online Tutoring
    Our videos feature professional educators presenting in-depth explanations of all topics introduced in the curriculum.

    Video Lessons



    Sergio Torrico
    Sergio Torrico
    2021-07-23
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    diana
    diana
    2021-07-17
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    2021-07-16
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    2021-06-28
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Marwan
    Marwan
    2021-06-22
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    2021-05-10
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.