Business Transaction and Accounting Equation

Objectives:

1. Understanding to the business transaction
2. Understanding to the accounting equation
3. Analyzing to the effect of business transaction to the accounting equation

 A. The Definition of Business Transaction

1. A business transaction is an economic event that has some effect on the resources of a firm or on the sources of a firm’s assets
2. These business transactions will effect to the financial condition of the company and they must be recorded by a company

 Classification of the business transaction

1.A business transaction can be classified into 2 (two) groups:

• External transaction
• Internal transaction

2. External transaction is concerned with an external party of the

    company
3. Internal transaction is an economic event that occurred in this

    company

  For example :

External transaction: purchase raw materials, payment of salaries expenses, payment building rent expenses, etc

Internal transaction: using of supplies, allocating cost of using fixed assets, to recognize an expense not previously recorded (like salaries payable), etc

All of these transactions will effect to three components of accounting equation, that are assets, liabilities, and equities

1. A transaction business will give an effect to at least two components of the accounting equation
2. For example: An increase of assets will effect to:

• Decrease of other asset, or
• Increase of the liability, or
• Increase of the equity