THE EFFECT OF TRANSACTIONS ON THE BASIC ACCOUNTING EQUATION

2.3. THE EFFECT OF TRANSACTIONS ON THE BASIC ACCOUNTING EQUATION

The effect of a transaction on the accounting equation will be explained by means of examples.

1. Prince Charles invested R80 000 in a new business venture, PC Traders. (The business receives cash from the owner.) Bookkeeping entry: Dr Bank account – R80000

Cr Capital account – R80000

Effect on O=A-L: An increase in an asset account (A+); and An increase in an equity account (O+).

2. Bought equipment and paid R20 000 cash. (The purchase of a non-current asset) Bookkeeping entry:

Dr Equipment account –R20000

Cr Bank account -R20000

Effect on O=A-L An increase in an asset account (A+); and

A decrease in an asset account (A-).

3. Bought inventory (goods for resale) from clients (creditors) for R30 000, on account (The purchase of a current asset – inventory in accordance with principles of perpetual inventory system) Bookkeeping entry: Dr Inventory account

Cr Accounts payable account

Effect on O=A-L: An increase in an asset account (A+); and An increase in a liability account (L+)

4. Buy more inventory (goods for resale) and pay in cash, R18 000 (The purchase of a current asset –inventory (goods for resale) Bookkeeping entry:

Dr Inventory Account Cr Bank account

Effect on O=A-L: An increase in an asset account (A+); and

A decrease in an asset account (A-).

5. Raised a loan of R60 000 to buy premises. The p o u e e t of a loa so eti es alled e te al e uit to fi a e the purchase of property (a non-current asset) Bookkeeping entry: Dr Land & Buildings account

Cr Loan: Bond Bank

Effect on O=A-L An increase in an asset account (A+); and An increase in a liability account (L+).

6. Sold in inventory for R25 000 cash. (Cost of sales R17 000) (The sale of inventory (at a profit) is the primary source of income for the business entity. The total sale price is regarded as a profit.) Bookkeeping entry: Dr Bank account (R25 000)

Cr Sales account (R25 000)

Effect on O=A-L: An increase in an asset account (A+); and An increase in an equity account (O+).

The cost price of the inventory sold (R17000) represents the total loss of asset to the firm. Bookkeeping entry:

Dr Cost of sales account (R17 000)

Cr Inventory account (R17 000)

Effect on O=A-L:

A decrease in an equity account (O-); and

A decrease in an asset account (A-).

7. Sold inventory for R8000 on account to P. Andrew (Cost of sales R6000). (The sales of inventory, at a profit) Bookkeeping entry:

D P. A d e De to s a ou t fo ‘

Cr Sales account (R8000)

Effect on O=A+L: An increase in an asset account (O+); and An increase in an equity account (A+).

The cost price of the inventory sold (R6000) represents the total loss of assets to the firm. Bookkeeping entry:

Dr Cost of sales account (O-); and Cr Inventory account (A-)

Effect on O=A+L:

A decrease in an equity account (O-); and

A decrease in an asset account (A-)

8. Paid electricity account of R300 by cheque. (A business expenses being paid by cheque) Bookkeeping entry:

Dr Electricity account

Cr Bank account

Effect on O=A+L:

A decrease in an equity account (O-); and

A decrease in an asset account (A-).

9. Paid salaries of R2000 by cheque. (A business expense being paid by cheque) Bookkeeping entry:

Dr Salaries account

Cr Bank account

Effect on O=A+L:

A decrease in an equity account (O-); and

A decrease in an asset account (A-).

10. Received R120 commission, in cash. (A secondary profit to the business, which has the effect of increasing equity) Bookkeeping entry:

Dr Bank account Cr Commission income account

Effect on O=A+L: An increase in an asset account (A+); and An increase in an equity account (O+).

11. Paid clients (creditors) R13 000 in part –payment of the amount owing to them. (The partial settlement of a debt) Bookkeeping entry:

Dr Accounts payable account

Cr Bank account

Effect on O=A+L:

A decrease in an liability account (L-); and

A decrease in an asset account (A-).

12. The owner withdrew R1 500 by cheque for his personal use. (The procedure that the owner has of withdrawing an asset from the business for personal use) Bookkeeping entry:

Dr Drawings account

Cr Bank account

Effect on O=A-L:

A decrease in an equity account (O-); and

A decrease in an asset account (A-).

13. Invested R40 000 surplus cash in a fixed deposit. (Transferring cash to an interest – bearing investment) Bookkeeping entry:

Dr Investment account Cr Bank account

Effect on O=A-L: An increase in an asset account (A+); and

A decrease in an asset account (A-).

Exercise 1:

Sunshine Limited uses the perpetual inventory system. The following transactions occurred in the books of Sunshine Limited. The financial year-end is 31 December 2009.

1. The owner, J. John invested R100 000 in the business – deposit in current account.

2. Purchased equipment worth R60 000 on credit from Trident Equipment Ltd.

3. Sold goods to the value of R35 000 for cash. Cost of Sales is R25 000.

4. Bought stationery worth R1 000 for cash.

5. Sunshine Limited took a loan for R60 000 from Standard Bank on 1 March 2009.

6. Paid interest on loan at 10% per annum.

7. Purchased office furniture to the value of R32 000 on credit.

8. The owner took R12 000 worth of furniture for his own personal use.

9. Sold goods to Dees Limited for R34 000 on credit. (Cost of sales R22 000)

10. Purchased goods to the value of R45 000 from ABC (Pty) Ltd on credit.

11. Sold goods to the value of R25 000 for cash. Cost of sales is R18 000.

12. Paid telephone expense by cheque, R1 200.

13. Paid for the water and electricity expense, R15 000.