If you recall from yesterday’s lesson, the accounting equation is:

Assets = Liabilities + Equity

As revenue increases equity and expenses decrease equity, we can think of revenues and expenses as components of equity for the purpose of analyzing transactions

Each transaction reflects an increase and/or decrease in financial statements elements (assets/liabilities, revenues/expenses)

  Remember they must BALANCE

QS: Does everyone understand what we mean by the last two bullet points?

QS: Can someone explain them in their own words?

Ensure this is clear:

-An outflow of assets (expense) is a decrease in equity

-An inflow of assets (revenues) is an increase in equity

Ensure this is clear:

– Each transaction must have a balanced accounting equation

Understanding how transactions impact the accounting equation is one of the most important concepts of accounting

We will not leave today until everyone has a good understanding of how transactions impact the accounting equation

Add: When you see a transaction, first determine the accounting statement elements impacted and then whether they increased or decreased

Ask yourself: What happened?

Since each transaction affecting a business entity must be recorded in the accounting records, analyzing a transaction before actually recording it is an important part of financial accounting.

An error in transaction analysis results in incorrect financial statements.