(business transactions) are a business’s economic events
recorded by accountants. Transactions may be external or internal.
External transactions involve economic events between the company and
some outside enterprise. For example, Campus Pizza’s purchase of cooking
equipment from a supplier, payment of monthly rent to the landlord,
and sale of pizzas to customers are external transactions. Internal transactions are
economic events that occur entirely within one company. The use of cooking and
cleaning supplies are internal transactions for Campus Pizza.
Companies carry on many activities that do not represent business transactions.
Examples are hiring employees, answering the telephone, talking with customers,
and placing merchandise orders. Some of these activities may lead to business transactions:
Employees will earn wages, and suppliers will deliver ordered merchandise.
The company must analyze each event to find out if it affects the components of the
accounting equation. If it does, the company will record the transaction. Illustration
1-7 (page 15) demonstrates the transaction-identification process.
Each transaction must have a dual effect on the accounting equation. For example,
if an asset is increased, there must be a corresponding: (1) decrease in another
asset, or (2) increase in a specific liability, or (3) increase in owner’s equity.
Two or more items could be affected. For example, as one asset is increased
$10,000, another asset could decrease $6,000 and a liability could increase $4,000.
Any change in a liability or ownership claim is subject to similar analysis
recorded by accountants. Transactions may be external or internal.
External transactions involve economic events between the company and
some outside enterprise. For example, Campus Pizza’s purchase of cooking
equipment from a supplier, payment of monthly rent to the landlord,
and sale of pizzas to customers are external transactions. Internal transactions are
economic events that occur entirely within one company. The use of cooking and
cleaning supplies are internal transactions for Campus Pizza.
Companies carry on many activities that do not represent business transactions.
Examples are hiring employees, answering the telephone, talking with customers,
and placing merchandise orders. Some of these activities may lead to business transactions:
Employees will earn wages, and suppliers will deliver ordered merchandise.
The company must analyze each event to find out if it affects the components of the
accounting equation. If it does, the company will record the transaction. Illustration
1-7 (page 15) demonstrates the transaction-identification process.
Each transaction must have a dual effect on the accounting equation. For example,
if an asset is increased, there must be a corresponding: (1) decrease in another
asset, or (2) increase in a specific liability, or (3) increase in owner’s equity.
Two or more items could be affected. For example, as one asset is increased
$10,000, another asset could decrease $6,000 and a liability could increase $4,000.
Any change in a liability or ownership claim is subject to similar analysis
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