Transaction Analysis – Accounting Journal Entries For Accounting Transactions Examples – Part 3

In this, we do step 5.  We continue with the impact of transactions on the accounting equation and we are continuing with our example is that a company and we have a transaction number 5.  Here it is said that Zeta paid from bank account for inventory which was acquired in the same month on February the third and the amount was which was paid for the inventory acquired is $1,900 so let’s see how this transaction impacts accounting equation.

Since we are paying by cash for inventory acquired previously and we are paying by— not by petty cash but we are paying by cash from bank.  We have a decrease in bank account cash which his in the bank.  Since we are paying all our liabilities for inventory which was acquired on credit we have decrease in accounts payable.  We are returning our depth to the suppliers and we have decrease in liability via $1,900 and this is on the right side of the equation under liability spot.

What we do next we need to check whether total change in assets equals to total change in equity and liabilities and we have a balance here which means that we have recorded the impact of this transaction properly and again after this transaction was recorded we look into the account equation and how it looks like after this transaction was recorded and checked whether there is an equation.  We have cash which remained unchanged after the fifth transaction.

We have cash in bank.  It decreased since we were paying by cash from bank to the suppliers prepaid insurance stationary inventory and office space and these amounts remain unchanged after the transaction number 5 since we were paying and spending only cash from bank and on the other side we have unchanged in equity and we have decreased in accounts payable so we have lower imbalance of accounts payable since we have paid part of our debt to the suppliers.

And what we do next we calculate total value of assets and we calculate total value of equity plus liabilities and in order to check whether there is an equation and you can see that there is an equation so all of the 5 transactions were recorded properly in the impact on the accounting equation was also recorded properly.  After we do this we can go in further and we can analyze the transaction number 6 here Zeta sells inventory and it is said that all inventory which was acquired on the third of February it is solved and since price is $5,600 and the customers we paid by cash for the inventory sold.

So let’s see how this transaction impacts accounting equation.  What happens when the asset side on the left side of the equation?  We have increasing cash since we have received cash from customers and that at the same time we have decreasing inventory since it is said that Zeta sold all the inventory which was acquired so we decrease inventory by $4,500 which is the cost of all the inventories at a head on hint.  What happens on the right side of the accounting equation?  On the right side we have increase equity and this increase is impacted by income, which were received for the sale of inventory so that of sold inventory and it received income.

And as you remember from previous steps income this item increases equity since it belongs to the shareholders and can be distributed to the shareholders so you have increase in equity and at the same time we should remember that inventory, it had cost therefore since we sell all the inventory we include cost of that inventory into expenses and we decrease equity by this amount basically what happens here will reflect profit on this transaction so we sold inventory for $5,600 and the cost of that inventory was $4,500 and that amount it increases equity and can be distributed to the shareholders in the form of dividends.

And there was no impact on liability since we were not paying any debt to the suppliers or we were not getting any additional liabilities and we need to calculate total change in assets and total change in equity and liabilities and compare them if we have an equation or have recorded this transaction properly.  So this is the impact of this transaction on the accounting equation and what we do next again we come back to the accounting equation and we check whether all 6 transactions were recorded properly and we look how the accounting equation looks like after this transaction number 6.

We have cash and we have a bigger balance of cash since customers paid for the inventory sold we have unchanged then balanced.  We have changed prepaid insurance.  We have stationary the same amount and please pay attention that we have inventory but value of inventory is zero since during the transaction number 6 zeta sold all the inventory we should have on hand and of space remains unchanged.  What happens on the left side started on the right side owner’s equity remained unchanged since it is a separate caption on the equity account and we show profit here and profit is a difference between income and expenses and it is a positive impact on equity but it is recorded separately in order to show what result zeta had during the transaction number 6.

So we do not add it up to the equity balance but we show it separately in order to indicate what amount was earned and how much profit Zeta earned by selling inventory and accounts payable they remain unchanged since transaction number 6 there was during transaction number 6 there was no impact on the accounts table.  What we do next again we need to calculate total value of assets and we need to calculate total value of equity and liabilities and to check whether there is an equation if there is an equation all 6 transactions were recorded properly.

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