Home Tech Which Of The Following Economic Events Is An Accounting Transaction?

Which Of The Following Economic Events Is An Accounting Transaction?

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Which of the Following Economic Events is an Accounting Transaction? Let’s first learn some basics about this topic before we get into the details.

Accounting principles are the theories that support the accounting practices that are used to accurately represent a company’s financial situation, cash flows, performance and financial condition. These principles dictate that money is the unit of account that represents a company’s financial situation. Assets are accounted for at market value rather than cost, and transactions in financial statements refer to one economic entity. Other rules require that transactions are recorded using a basic double entry accounting equation to represent the duality principle. An extended or expanded accounting equation is used to distinguish between economic events which result in an increase in or decrease in owner’s equity.

Accounting Transaction

Accounting is the art of recording, measuring and documenting economic events that impact financial statements elements such as assets and liabilities. Recording transactions or events is done to help interested parties make educated credit and investment decisions about the company that publishes them in financial statements. An economic event, such as a sale to a consumer or acceptance of a vendor invoice, is measured in monetary terms. Each event is then classified as an accounting transaction. For example, the credit to the sales account or the credit to the vendor payables accounts. This allows for the creation of a trial balance. To confirm that the amounts are identical, the total debit and credit entries are compared in order to create financial statements.

Basic Accounting Equation

The basic accounting equation is a representation of the concept of duality because each accounting transaction is recorded using both credit and debit entries. For example, an increase in an asset accounts is countered with a decrease in liability accounts or an increase in owner’s equity. The basic accounting equation states that assets equal liabilities plus the owner’s equity. Assets = liabilities + owner equity. As shown in the equation, both creditors and owners have legitimate claims to assets of an entity.

Extended Accounting Equation

Extended or expanded accounting is used to distinguish economic events that cause owner’s equity component of the accounting equation increase or decrease. These events include capital contributions from owners of the entity and earnings from prior operations. This is the difference between revenues and expenditures. The extended accounting equation shows assets equal liabilities plus contributed and retained capital. Assets = assets + contributed capital or assets + retained earnings. Or assets = liabilities + capital and assets = assets + contributed capital or liabilities + capital and assets. In this example, retained earnings is equal to beginning retained earnings plus revenues minus expenses or dividends. Or retained earnings = beginning retained earning + revenues – expenses.

Basic Accounting Equation

Let’s say a company purchases $6000 worth office supplies using credit. A credit is applied to the vendor payable credit. The vendor invoice is sent to the company a month later. The company pays the full amount immediately. The vendor invoice is paid and the company receives the payment. The transaction has no effect on the liabilities and assets components of the basic accounting equation. In this instance, both assets and liabilities are decreased but the owner’s equity is not affected.

Which of the Following Economic Events is an Accounting Transaction?

Accounting is designed to provide a financial picture of the company’s operations. According to industry standards, financial accounting is composed of five main components. Each activity involved in financial records preparation will touch at least one of these areas.

Assets

Assets are the resources that you use to carry out your business activities. To make an asset, you must have control over the object or be authorized to use it. These criteria are most likely to apply to delivery services, such as your delivery truck.

Your company must have assets that will provide financial benefits in the future. Examples of economic benefits include cash and credit sales. Your vehicle is used to deliver goods to clients and provides you with an economic benefit. Credit is used to decrease the value of an asset while a debit is used for recording again.

Your Liabilities & Obligations

Liabilities are the obligations that your company has. These obligations are the result of past events such as securing financing to buy business equipment. Because of past events, you can’t cancel this commitment. Most liabilities can be settled by the transfer of assets.

For example, when you hire staff, you promise to pay them cash. The hiring of the person is an event in the past. Once the employee has completed the work, your promise to pay them is binding. When a paycheck is issued, the asset, cash, is transferred. Credit is given in liability again, while a debit is given to decrease the amount.

Treatment for Expenses

For a period of time, expenses can either lower assets or increase liabilities. The cost of fuel for your delivery truck is one example. You are essentially wasting your most valuable asset, your cash, by buying gas for your truck. You also increase your risk by using a credit card for gas purchases.

It is common for expenses to repeat themselves. For example, you must pay your vehicle leases every month on the same day. The accounting method you use will determine the timing of recording an expense.

Most enterprises use the accrual basis. When you use the accrual basis, the expense is recorded before it is paid. The expense account will record the debit, while the liabilities payable account will record the credit. Cash-basis accounting records expenses only when they are paid for. In this case, you record a debit to your corresponding asset account which is usually cash and a credit on the expense account.

Impact of Revenues on Accounts

Revenue is generated by the sale of goods or services. Revenues can lead to asset account growth and liabilities account declines. You increase your assets when you sell items for cash. Selling on credit terms reduces your obligations because the buyer must pay you later. To record additional revenue, you debit the account and credit it with less revenue.

Your Owner’s Equity

Owner’s equity refers to money or cash that you invest in your business. Technically speaking, equity refers to all the ways your company gets resources to operate or run efficiently.

Basic accounting equation: Assets minus liabilities equals owner’s equity. A credit is granted for equity increases, while a debit is issued for equity decreases. Equity is lower when there are withdrawals and expenses, but it rises when there are investments and earnings.

Examples for Post-Closing Entries In Accounting

Some accounts are closed at the end of an accounting period to have zero balance at the beginning of the next one. These accounts are closed to complete the zeroing process. Closing entries is the final step of the accounting cycle. Incompleteness of this step can lead to a company’s financial image being erroneous. This can be problematic during tax season, or when the company seeks out outside funding.

Earnings

Revenues earned during an accounting period are accounted for at the end of the accounting cycle. All revenue is considered sales, investment gains, or extra financial injections. Each revenue account is debited and closed. The income summary is then credited with the sum.

Fees

Each company expense account is shut down at the end of each accounting year. All expenses used in the accounting year, including rent, advertising, utilities, insurance, and other categories, are included. All expense accounts are credit and debited from income statements.

Gains and Losses

The company’s profit or loss is determined when total expenses are subtracted by total revenues on its income statement. If the company had $150,000 in revenue and $100,000 in expenses, it would have made $50,000 profit. This is called a closure entry. It involves debiting the revenue account $150,000 and crediting the expense account $100,000. Then crediting retained earnings $50,000. To show the year’s loss, expenditures exceeding revenues would be deducted from the retained earnings account.

Drawings

When an owner received a salary from the company, the payouts were recorded in a drawing account. This account records the amount that the owner drew to pay salary for the accounting year. The owner’s equity account, however, is debited. This shows how much equity was used for personal expenses.

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