CHAPTER 4 Business transactions 141transactions to ensure that the double-entry rules were correctly followed and the correct amounts
were entered.4.9 Detect errors in transaction analysis and investigate the origin of the errors.
The common recording errors are transposition errors, single-entry errors and incorrect entry. Trans-
position errors are easily identified if the difference between the total assets and total claims on
those assets (liabilities plus equity) is divisible by 9.Key terms
Accounting equation Expresses the relationship between the assets controlled by the entity and the
claims on those assets.
Arm’s length distance Parties deal from equal bargaining positions, neither party is subject to the
other’s control or dominant influence, and the transaction is treated with fairness, integrity and
legality.Asset A resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
Balance sheet Statement that reports on the assets, liabilities and equity of an entity at a particular
point in time.
Business events Events that will probably affect the entity without any immediate exchange of goods
and services between the entity and another entity.
Business transactions Occurrences that affect the assets, liabilities and equity items in an entity and
must be recognised (recorded).
Cash transactions Business transactions involving the exchange of cash for goods or services.
Chart of accounts Detailed listing/index that guides how transactions will be classified in the financial
reporting system.
Credit transactions Business transactions involving an exchange of goods and services on the proviso
that cash will be received at a later date.
Drawings Withdrawals of assets from the entity by the owner(s) that are recorded as decreases in
equity.
Duality Describes how every business transaction has at least two effects on the accounting equation.
Entity concept Separation of business transactions from any personal transactions of the owner(s).
Equity The residual interest in the assets of the entity after all its liabilities have been deducted.
Expenses Decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.Income Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets, or decreases of liabilities, that result in increases in equity, other than those
relating to contributions from equity participants.Journal An accounting record in which transactions are initially recorded in chronological order.
Ledger An account that accumulates all of the information about changes in specific account balances.
Liability Present obligation of the entity arising from past events, the settlement of which is expected
to result in an outflow from the entity of resources embodying economic benefits.
Personal transactions Transactions of the owner unrelated to the operations of the business.
Single-entry error An error created by entering only one part of a transaction.
Source documents Original documents verifying the business transaction.
Statement of profit or loss Statement that reports on the income and expenses of an entity for a
period and the resulting profit or loss.
Transposition error An error created by transposing (or switching) digits when recording
transactions.
Trial balance A list of ledger account balances prepared at the end of the period.