Cash and Credit Transactions

• Accounting is a system to record and track financial transactions

Transactions

• A transaction is a financial activity like buying, selling, spending, or receiving money
• Any purchase, sale, payment, or receipt qualifies as a transaction
• Transactions often involve the receipt or payment of money, and are referred to as cash transactions, whether the method is notes, coins, cheques, credit/debit cards or online payment

Credit Transactions

• Credit transactions occur when payment or receipt of money happens at a later date
• Buying goods for resale from suppliers on credit, with payment later, is a credit transaction
• Amounts owed to suppliers are recorded as "accounts payable" or "payables" on a balance sheet
• Selling goods on credit to customers, with payment later, is another credit transaction
• Amounts owed by customers are known as "accounts receivable" or "receivables" on a balance sheet

Learning outcomes of Unit

• Cash and credit transactions
• How transactions affect the accounting equation
• How to record transactions using statements of financial position (balance sheets)

Double-Entry Accounting System

• A transaction is a financial activity or event, and each transaction has two effects

Transaction Categories:

• Cash transactions: involve immediate money use, affecting cash in hand or at bank
• Credit transactions: payment/receipt is delayed, affecting what is owed to suppliers (accounts payable) or by customers (accounts receivable)

Parts of a Transaction:

• Include the year, month, and day
• Account title debited
• Account title credited
• Reference
• Debit
• Credit
• Short transaction description

Transaction Effects

• Equipment purchase by cheque increases equipment and reduces cash at bank
• Vehicle purchase on credit increases vehicles and accounts payable
• Owner investment increases cash (in hand or at bank) and capital
• Selling unwanted furniture for cash increases cash in hand while decreasing furniture
• Payment to a credit supplier reduces cash at bank and accounts payable
• Owner withdrawal reduces cash at bank and capital

Recording Transactions

• Each transaction affects two balance sheet items
• The accounting equation (total assets = total liabilities + capital) remains true after each transaction

Recording Guidance

• Identify the two items affected by each transaction
• Note that various combinations of assets, liabilities, and capital are possible
• Determine whether the value of each item will increase or decrease with the transaction

Balance Sheet Preparation

• Totals must still agree with the accounting equation
• Mistakes require checking the changes that have been made