Give one example of each transaction:
a) Increase and decrease in capital simultaneously.
b) Increase in liabilities and decrease in capital.
c) Increase in assets, capital, and liabilities simultaneously.
Answer (2)
To address the student's question, we need to examine three types of financial transactions within a business setting and understand how they affect the accounting equation, which is:
Assets = Liabilities + Equity (Capital)
Increase and Decrease in Capital Simultaneously:
An example of a transaction that increases and decreases capital at the same time is when a business makes a profit, and the owner decides to withdraw the same amount for personal use. For instance, if the business earns a profit of $10,000, the capital increases by this profit amount. If the owner simultaneously withdraws $10,000, the capital decreases by the same amount due to the withdrawal.
Increase in Liabilities and Decrease in Capital:
Consider a scenario where a business incurs a loss, and this loss is covered by taking out a loan. For example, suppose the business faces a $5,000 loss, decreasing capital by this amount. To manage this, the business might take a $5,000 loan, which increases liabilities by that amount.
Increase in Assets, Capital, and Liabilities Simultaneously:
A perfect instance of this is when a business owner contributes personal equipment to the business, which is bought on credit. Assume the equipment is valued at $8,000. The assets increase by $8,000 as the business now owns the equipment. The liabilities increase by $8,000 since the equipment was bought on credit. At the same time, capital increases by $8,000 because the owner's equity in the business increases due to their contribution.
These examples illustrate how different transactions can affect the various components of the accounting equation in a business setting.
The examples illustrate how financial transactions affect a business's accounting: simultaneous increase and decrease in capital occur when profits are withdrawn; increased liabilities and decreased capital happen when losses are covered by loans; and increases in assets, capital, and liabilities occur when personal assets are contributed to a business on credit.
;
