Analyzing Transactions

The first step in the accounting process is to analyze every transaction (economic event) that affects the business. The accounting equation (Assets = Liabilities + Owner's Equity) must remain in balance after every transaction is recorded, so accountants must analyze each transaction to determine how it affects owner's equity and the different types of assets and liabilities before recording the transaction.

The Accounting Equation

The resources controlled by a business are referred to as its assets. For a new business, those assets originate from two possible sources:

Investors who buy ownership in the business Creditors who extend loans to the business

Those who contribute assets to a business have legal claims on those assets. Since the total assets of the business are equal to the sum of the assets contributed by investors and the assets contributed by creditors, the following relationship holds and is referred to as the accounting equation:

Assets Resources

Liabilities + Owners' Equity Claims on the Resources

Initially, owner equity is affected by capital contributions such as the issuance of stock. Once business operations commence, there will be income (revenues minus expenses, and gains minus losses) and perhaps additional capital contributions and withdrawals such as dividends. At the end of a reporting period, these items will impact the owners' equity as follows:

Assets

Liabilities + + + + -

Owners' Equity Revenues Expenses Gains Losses Contributions Withdrawals

These additional items under owners' equity are tracked in temporary accounts until the end of the accounting period, at which time they are closed to owners' equity.

The accounting equation holds at all times over the life of the business. When a transaction occurs, the total assets of the business may change, but the equation will remain in balance. The accounting equation serves as the basis for the balance sheet, as illustrated in the following example.

(ASC) accounting standard council

The Accounting Standards Council (ASC) is empowered under the Accounting Standards Act to prescribe accounting standards for use by companies, charities, co-operative societies and societies. The broad policy intention is to adopt the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Convergence with international accounting standards would achieve greater transparency and comparability of financial information among companies and help lower compliance costs for companies investing in Singapore as well as local companies going overseas. However, while the ASC will track closely the introduction of new IFRS for possible adoption in Singapore, it will also take into account the local economic and business circumstances and context, as well as the entity to which the IFRS would apply to.

(IASC) International accounting standard council

The International Accounting Standards Committee (IASC) is an independent private-sector organization that in its own words is a "body working to achieve uniformity in the accounting principles that are used by businesses and other organizations for financial reporting around the world." As stated in its constitution the IASC's goals are to "formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance," and to "work for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements." The IASC was founded in London in 1973 and by 1998 its membership included 143 accounting organizations representing 2 million accountants in 103 countries.

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing, and in the preparation of financial statements. The term "GAAP" is an abbreviation for Generally Accepted Accounting Principles (GAAP). GAAP is a codification of how CPA firms and corporations prepare and present their business income and expense, assets and liabilities on their financial statements. GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions. The basic principles underlying GAAP accounting are set forth below.

transaction affecting only the income statement account

Only one side of the accounting equation will be affected when one asset is used to acquire another asset or to replace another asset, when one liability replaces another liability, when stock is issued to replace a liability, when a cash dividend or stock dividend is declared. There are many other situations as well. Here are some specific examples when only the left side of the accounting equation is affected. 1) A customer cannot pay an amount it owes and provides the company with a notes receivable. The companys asset Accounts Receivable will decrease and its asset Notes Receivable will increase. 2) A company prepays its insurance. As a result its asset Cash decreases and its asset Prepaid Insurance increases. 3) A company buys equipment for cash. The asset Cash decreases and the asset Equipment increases. Here are some transactions that will affect only the right side of the accounting equation. 1) A company refinances its short-term debt with long-term debt. Short-term liabilities will decrease and long-term liabilities will increase. 2) A corporation issues common stock to replace its convertible bonds. The result is that liabilities decrease and stockholders equity increases. 3) A corporation declares a cash dividend. A current liability Dividends Payable is created and the Retained Earnings (part of stockholders equity) will decrease. 4) A stock dividend is declared. The paid-in capital section of stockholders equity will increase and the retained earnings section will decrease.