- identify what information to be included/excluded,
- classify it according to the components of the equation,
- determine the amount of increase/decrease, and
- recalculate the equation to ensure it is still in balance.
If it is not in balance, recheck the entries until the equation is in balance.
Let’s take a look at a couple of examples to get a better understanding of transaction analysis:
Example 1:
The owner of a new company puts $3,000,- into company’s checking account. He also borrow $7,000,- from the bank and deposit it into the same checking account. All of these to start operations of the company.
Entry 1 :
Debit Checking account $3,000 (Increase in Asset)
Credit Owner’s Equity $3,000 (Increase inEquity)
Entry 2 :
Debit Checking account $7,000 (Increase in Asset)
Credit Liability $7,000 (Increase in Liability)
Recalculate equation :
Asset = Liability + Equity
3,000+7,000 = 7,000 + 3,000 (Balanced)
Example 2:
The company provides consulting services to one of its clients for $1,000,- with a cash payment.
Entry :
Debit Cash $1,000 (Increase in Asset)
Credit Consulting Revenue $1,000 (Increase in Equity)
Note that since Revenue is a component of Equity and positively correlated, when Revenue increases, Equity also increases.
Recalculate equation :
Asset = Liability + Equity
1000 = 0 + 1000 (Balanced)