Accounting Transactions and Their Impact

Introduction

• Companies carry out numerous transactions daily: sales, receipts, payments, and hires.
• Only certain transactions impact the balance sheet and are recorded in financial reports.
• Understanding accounting acts and facts, and their classifications is crucial.

Main Objective of Accounting

• To record, measure, and inform about entities' assets.
• Records must impact accounting accounts related to assets, liabilities, or equity.

Accounting Acts

• Administrative events that don't affect the entity's assets.
• Represent decisions or commitments with potential future impacts.
• Do not change assets, liabilities, or equity immediately.
• Examples:
  • Budget approval sets guidelines but doesn't affect assets.
  • Opening a new bank account is a registration, not a financial movement.

Accounting Facts

• Events that change the entity's assets and are recorded in accounting.
• Classified as exchangeable, modifying, or mixed facts.

Classification of Accounting Facts

Exchangeable Facts

• Affect asset and liability elements but not equity.
• Examples:
  • Purchase of stocks in cash.

Modifying Facts

• Transactions that change equity, increasing or decreasing assets or liabilities.
• Increasing Modifying Fact: Increases equity.
  • Example: Contribution to share capital.
• Decreasing Modifying Fact: Decreases equity.
  • Example: Payment of electricity bill.

Mixed Facts

• Combine exchangeable and modifying elements.
• Affect assets, liabilities, and equity.
• Examples:
  • Receipt from a client with interest.

Examples of Transactions

• Sale of a machine for cash: Exchangeable fact (no equity impact).
• Receipt of a promissory note in cash with discount: Modifying fact (affects equity due to expense).
• Payment of a promissory note: Exchangeable fact (no equity impact).
• Receipt of rental income: Modifying fact (impacts equity).
• Receipt of a promissory note in checks with interest: Mixed fact (increases equity).
• Payment of electricity expenses: Modifying fact (decreases equity).
• Purchase of merchandise (half cash, half on credit): Exchangeable fact (asset and liability accounts).
• Change in marital status of a partner: Accounting act (no impact on assets).

Conclusion

• Accounting acts and facts are crucial to understanding what gets recorded.
• Upcoming videos will provide further insights.
• Thank you for watching.