Businesses are involved in thousands of business activities every single day. In order to record this financial data so that eventually we can produce the financial statements, we use the accounting equation and its elements to record business activities. Using these elements, we will perform an accounting transaction analysis that will allow us to correctly record every transaction.
What is an Accounting Transaction Analysis?
An accounting transaction analysis is the first step of the recording process of the accounting cycle. This is the process of analyzing business transactions to determine their effects on the books. Whenever a transaction takes place, it is analyzed to determine if any asset, liability, equity, revenue, or expense accounts need to be increased or decreases as a result of this financial activity.
If it is determined that the transaction is going to have an effect on the books, then it needs to be determined which accounts it affects. Once the accounts are identified as the ones affected by the transaction, the next step in the accounting transaction analysis is to determine whether that particular account is going to increase or decrease.
Finally, it must be determined how much the account is going to be increased or decreased. Once these steps of the accounting transaction analysis are completed, the next step of the recording process can begin.
Example of an Accounting Transaction Analysis
Referencing an illustration of the accounting equation above, let’s perform the accounting transaction analysis of a business transaction. Brian Kimberly invested $55,000 cash and office equipment valued at $8,850 in the company in exchange for its common stock.
- Which ACCOUNTS are affected?
Since cash was invested, we can tell right away that a Cash (asset) account is involved. He also gave office equipment, which means that an Office Equipment (asset) account is affected. The Common Stock (equity) account will reflect the other side of this transaction.
- Are they INCREASED or DECREASED?
Given that the company received cash and office equipment, both the Cash and Office Equipment accounts will increase. To balance an increase in two asset accounts, we will need to increase the equity account (Common Stock) as well.
- By what AMOUNT?
The Cash account will increase by the exact amount invested by Brian or $55,000. Office Equipment will also be increased by $8,850. The amount by which we will increase the Common Stock account will equal $55,000 plus $8,850 or $63,850.