Definition and Explanation:
Analysis of business transactions means
observing the change in financial position of the
business because of business transactions.
Different business transactions make changes in
financial position of a business concern. A change
in financial position means change in one or more of
the five basic elements of accounting. The five
basic elements of accounting are:
-
Assets
-
Liabilities
-
Capital
-
Expenses
-
Revenue.
You should remember an important
principle while making the analysis of business
transactions that "every business transaction brings
about at least a double change in the financial
position of a business concern". These two changes
may take place in any one or more basic
elements of accounting. There is no exception to
this principle. For example, Mr. A purchases
machinery worth $100,000. This is a business
transaction. It will bring two changes - machinery
increases by $1,00,000 (an asset) and cash decreases
by $1,00,000 (an asset). So, both the changes have
taken place in assets (an element of accounting).
Similarly, if he buys this machinery on credit basis
from Mr. B, again it will bring two changes -
machinery increase by $1,00,000 (an asset) and a
liability increases by $1,00,000 (amount payable to
Mr. B).
Now
let us see how the analysis of various business
transactions is made. Consider the following example
for this purpose:
Example:
Transaction No. 1
Mr.
R invests $200,000 to commence his business.
Analysis:
Two
changes have taken place because of this
transaction:
-
Cash is increased in the business by $200,000
(an asset).
-
Capital or owner's equity is increased by
$200,000 (an internal liability of the
business).
Transaction No. 2:
He opens current
account with bank and deposits $60,000.
Analysis:
This transaction has
brought two changes:
-
Decrease in cash balance by $60,000 (an asset).
-
Increase in bank balance by $ 60,000 (an asset).
Transaction No. 3:
He
borrows $100,000 from Mr. S at 12% per annum.
Analysis:
The
two changes are:
-
Increase in cash balance by $100,000 (an
asset).
-
Increase in creditor by $100,000 (a liability).
Transaction No. 4:
He
purchases furniture worth $40,000 for cash.
Analysis:
The
two changes are:
-
Increase in furniture by $40,000 (an asset).
-
Decrease in cash balance by $40,000 (an asset).
Transaction No. 5:
He
purchases goods (saleable goods) from Mr. A for
$50,000 and paid cash $30,000.
Analysis:
There
are three changes in this business transaction:
-
Increase in purchases (goods) by $50,000 (an
expense).
-
Decrease in cash balance by $30,000 (an asset).
-
Increase in creditor Mr. A by $20,000 (a
liability).
In
this transaction goods worth $50,000 have been
purchased and the amount paid in cash to Mr. A
is $30,000, which means the balance amount of
$20,000 is payable to him, so it is liability of the
business.
Transaction No. 6:
He
sells goods for cash $18,000.
Analysis:
There
are two changes:
-
Increase in cash by $18,000 (an asset).
-
Decrease in goods or increase in sales (a
revenue) by $18,000.
Transaction No. 7:
He
sells goods for $10,000 to Mr. N on credit
basis:
Analysis:
The
two changes are:
-
Increase in debtor Mr. N (an asset) by
$10,000.
-
Decrease in goods or increase in sales (a
revenue) by $10,000.
Transaction No. 8:
He
purchases stationary for $6,000.
Analysis:
These
two changes are:
-
Increase in stationary by $6,000 (a consumable
asset).
-
Decrease in cash balance by $6,000 (an asset).
Transaction No. 9:
He
purchases a weighing scale and a safe for $20,000
and pays by check:
Analysis:
The
two changes are:
-
Increase in weighing scale and safe by $20,000
(an asset).
-
Decrease in bank balance by $20,000 (an asset).
Transaction No. 10:
He
pays $12,000 to Mr. A on account.
Analysis:
Mr.
A is creditor (a liability) of the business for
$20,000 and now $12,000 have been paid to him and
the balance of $8,000 is still payable to him. The
two changes are:
-
Decrease in cash by $12,000 (an asset).
-
Decrease in creditor Mr. A by $12,000 (a
liability).
In all of
the above transactions, it may be observed
that in every business transaction there are at
least two changes and in some cases there are more
than two changes. All these changes are recorded in
the books of accounts of the business in separate
accounts. Every change is supposed to be recorded in
a separate account. |
