6 Accounting Transactions: Understanding the BasicsAccounting transactions are fundamental to the financial recording process of any business. Thesetransactions involve the exchange of economic value between two entities, typically the companyand an external party. Each transaction has a dual impact on the accounting equation, which statesthat assets equal liabilities plus equity.In a basic accounting transaction, there are two main components: debit and credit. Debits increaseassets and expenses while decreasing liabilities and equity. On the other hand, credits increaseliabilities and equity while decreasing assets and expenses. The goal is to maintain the accountingequation's balance with each transaction.Let's consider an example: a company purchases inventory worth $5,000 on credit. In this case, theinventory account, representing assets, increases with a debit of $5,000. Simultaneously, theaccounts payable account, representing liabilities, increases with a credit of $5,000.It's crucial to recognize the accounting equation's balance after every transaction. Assets, liabilities,and equity must always align to maintain the integrity of the financial records. This systematicapproach ensures accurate and reliable financial reporting.Question 1explain how a credit transaction impacting both assets and liabilities could maintain the accountingequation's balance?

Accounting equations have given the foundation for double-entry bookkeeping. As per this equation,…

Answered: explain how a credit transaction…

explain how a credit transaction impacting both assets and liabilities could maintain the accounting equation's balance?

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter3: Accrual Accounting

Section: Chapter Questions

Problem 1MCQ: Which of the following statements is true? Under cash-basis accounting, revenues are recorded when a...

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Concept explainers

Bookkeeping

Bookkeeping is the process of recording the financial transactions of a company on a regular basis. With the process of bookkeeping, companies can track important financial information that helps management in making crucial decisions.

Question

Accounting Transactions: Understanding the Basics
Accounting transactions are fundamental to the financial recording process of any business. These
transactions involve the exchange of economic value between two entities, typically the company
and an external party. Each transaction has a dual impact on the accounting equation, which states
that assets equal liabilities plus equity.
In a basic accounting transaction, there are two main components: debit and credit. Debits increase
assets and expenses while decreasing liabilities and equity. On the other hand, credits increase
liabilities and equity while decreasing assets and expenses. The goal is to maintain the accounting
equation's balance with each transaction.
Let's consider an example: a company purchases inventory worth $5,000 on credit. In this case, the
inventory account, representing assets, increases with a debit of $5,000. Simultaneously, the
accounts payable account, representing liabilities, increases with a credit of $5,000.
It's crucial to recognize the accounting equation's balance after every transaction. Assets, liabilities,
and equity must always align to maintain the integrity of the financial records. This systematic
approach ensures accurate and reliable financial reporting.
Question 1
explain how a credit transaction impacting both assets and liabilities could maintain the accounting
equation's balance?

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