140 Accounting: Business Reporting for Decision Making
Summary of learning objectives
4.1 Describe the characteristics of business transactions.
A business transaction involves the exchange of resources between an entity and another entity or
individual, and must be at arm’s length distance.4.2 Differentiate between a business transaction, a personal transaction and a business event.
For a business transaction to be recognised there must be an exchange of resources between an
entity and another entity or individual (e.g. the purchase of office equipment for cash). Personal
transactions do not involve an exchange of goods between the entity and another party. Similarly,
no exchange of resources takes place when a business event occurs, such as when the contract of a
new employee is being negotiated or when the entity is being advised that the loan interest rate will
increase from 1 July in the current year. These two events will become business transactions at some
later stage when the exchange of resources takes place.4.3 Explain the accounting equation process of the double-entry system of recording.
The accounting equation expresses the relationship between the assets controlled and owned by
the entity, and the claims on those assets — whether it is by outside funds (known as liabilities)
or through inside funds (known as the equity of the business). The expanded accounting equation
includes the profit or loss of the entity, which is represented by the entity’s income less expenses.4.4 Identify the impact of business transactions on the accounting equation.
Every business transaction will have a dual effect. As a result, the accounting equation remains in
balance after each business transaction is recorded in the journals or ledgers of the entity. For the
contribution of capital, the dual effect would be an increase in the cash account and an increase in
the capital account. In the accounting equation, this would be illustrated by assets increasing and
equity increasing, that is:Cash (assets) = Capital (equity)
4.5 Prepare an accounting worksheet and a simplified statement of profit or loss and balance sheet.
The accounting worksheet summarises the duality associated with each of the business transactions.
The column totals provide the basis for the preparation of the financial statements. The information
in the profit or loss column will be used to prepare the statement of profit or loss, and the profit or
loss will be transferred to the equity section of the balance sheet at the end of the reporting period.
The information in the asset, liability and equity columns will form the basis of the balance sheet.4.6 Discuss how journals and ledger accounts can help in capturing accounting information
efficiently and effectively.
Accounting information can be captured efficiently and effectively through the use of journals and
ledger accounts. Frequent transactions such as cash receipts and cash payments are recorded in
separate journals. Ledger accounts can be used in place of a journal, or to record the summarised
information from the journal. Both journals and ledger accounts summarise and classify the infor-
mation, thereby enabling the financial statements to be more easily prepared.
4.7 Apply debit and credit rules, and record simple transactions in the journals and ledgers of
the business.
A debit entry is used to increase assets and expenses, and to decrease liabilities, equity and revenue.
A credit entry is used to increase liabilities, equity and income, and to decrease assets and expenses.
Each journal or ledger entry will consist of a debit entry and a credit entry to at least two separate
accounts.
4.8 Explain the purpose of a trial balance.
A trial balance assists in the preparation of the financial statements and checks the accuracy of the
ledger or journal entries. If the trial balance does not balance, then the preparer needs to retrace the