Business Transactions and Their Corresponding Effect on the Accounting Equation, Essay Example

Increase in asset and increase in liability

Example: purchasing a plant on credit basis. Company A approaches a bank for a loan to finance the purchase of its plant. Once the loan is granted, this will increase the company’s liability, while the purchase of the plant will increase the company’s asset (Stickney & Weil, 2006).

Increase one asset and decrease another asset

Example: purchased/acquired plant on cash basis. If a firm uses its cash (a current asset) to purchase a plant (a fixed asset), plant account will increase while the cash account will decrease.

Decrease an asset and decrease owner’s equity.

Example: Cash drawings from the business. If a proprietor of a business withdraws cash from the business for personal use, this reduces the cash which is a current asset and the owners capital investment reduces, which forms owner’s equity.

Decrease an asset and decrease a liability

Example: paying off creditors by a cheque. When a company settles its financial obligations by issuing a cheque, this will reduce its bank account as an asset as well as creditors, who form part of the business liability.

Increase an asset and increase owner’s equity

Example: if the owner of the business introduces new/additional capital. Once a proprietor purchases an asset using money from his own pocket and puts it into full business use, this will increase the asset account of the business as well owner’s equity owing to the increased capital (Meigs, Johnson & Mosich, 1970).

Reference

Meigs, W.B., Johnson, C.E. & Mosich, A.N. (1970). Financial Accounting.  Mumbai: Tata McGraw-Hill.

Stickney, C.P. & Weil, R.L. (2006). Financial accounting: an introduction to concepts, methods, and uses. 11^th Ed. New York: Thomson/South-Western.