Recording transactions PM – 16:30 PM

69 changes assets then other assets, liabilities, equity, expenses, revenues or combinations of those elements change. Thus, a transaction at least will cause 2 changes. Presenting accounting information based on the elements of accounting equation is considered uninformative because one element can consist of various objects. For example, 2 firms A and B have equal total assets. εost of firm A‘s assets are account receivables, while most firm B‘s assets is buildings and machinery. Despite the fact that both have equal total assets, creditors assume that firm A is better than firm B in their ability to pay short-term liabilities. In order to present informative accounting information, the elements of accounting equations must be elaborated in detail in the forms of accounts. Each account should reflect a homogenous object. As mentioned above, a transaction at least will cause 2 changes. Therefore, recording a transaction at least will involve two accounts. In accordance with the rationality of the accounting equation, there are two types of accounts namely accounts reflecting the use of funds on the left side of the equation and accounts reflecting the sources of funds on the right side of the equation. Mathematically, it can be explained as follows: a transaction that involves 2 accounts of the same type will have reversed relationships. For example, the payment of salary increases salary expenses an element of expenses and decreases cash an element of assets. On the other hand, the purchase of supplies on account increases supplies an element of assets and account payable.

D. Understanding the Rules of Debit and Credit

Modern accounting explicitly or implicitly puts the emphasis on the need of double entry accounting system in every transaction recording. It requires a balance system between debit and credit. Although double entry system has been used widely, the literatures on mathematical formulation of the double entry and its connection to the accounting are still limited. Ellerman 1985, p.226 mentioned that only few mathematic literatures connected to the mathematics- 70 accounting double entry, and the connection is totally absent in the accounting literature..... Furthermore, Ellerman 1985 mathematically explained the rules of the debit and credit. The explanation of the rules of debit and credit is as follows. Supposed, Assets = 10, Expenses = 5, Liabilities = 2, Equity = 6, and Revenues = 7. The accounting equation is 10 + 5 = 2 + 6 + 7. Based on the ordered pairs of the group of differences construction see Ellerman 1985, the assets with the value of 10 can be recorded either at one side, i.e 14 is recorded to the debit and 4 to the credit, or 4 to debit and 14 to the credit. According to the mathematics formulation, however, the first alternative should be applied because the assets have positive value and it is located at the left side of the accounting equation. The interpretation is that 4 on the credit deduct 14 on the debit. As a result, the additional of assets is recorded on the debit while the deduction of assets is recorded on the credit. Such rules are also applicable to the liabilities for creating a balance condition. Let us consider the liability is 2 and it can be recorded either 20 on the debit and 18 on the credit or 18 on the debit and 20 on the credit. When the mathematics formulation is implemented into the double entry, the second alternative should be applied because the liability has positive value and it is located on the right side of the accounting equation. The number of 18 on the debit deducts the number 20 which on the credit. Therefore, the increase of liabilities is recorded on the credit while its decrease is recorded on the debit.

E. Understanding types of business transactions

Accounting equation can be implemented in identifying various real business transactions. If there are five elements of basic accounting equation, there will be 15 types of transactions as follows. 1. Transaction that changes assets types A; firm A purchases supplies in cash.