An audit transaction is a service activity or event that causes a measurable readjust in the accounting equation. An exchange of cash for merchandise is a transaction. Medepend placing an order for products is not a recordable transaction bereason no exchange has actually taken area. In the coming sections, you will learn more about the various kinds of financial statements accountants generate for businesses.

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In the previous area we explained particular forms of accounts that service tasks fall right into, namely:

Assets (what it owns)Liabilities (what it owes to others)Equity (the difference in between assets and liabilities or what it owes to the owners)

These are the structure blocks of the basic accounting equation.  The accounting equation is:

ASSETS = LIABILITIES + EQUITY

For Example:

A sole proprietorship business owes $12,000 and you, the owner personally invested $100,000 of your own cash into the service. The assets owned by the business will then be calculated as:

$12,000 (what it owes) + $100,000 (what you invested) = $112,000 (what the company has in assets)

Assets=Liabilities + Equity
112,000=12,000100,000

In a sole-proprietorship, equity is actually Owner’s Equity. If the organization in question is a corporation, equity will be held by stockholders, which offers stockholder’s equity but the basic equation is the same:

ASSETS = LIABILITIES + EQUITY

For Example:

A service owes $35,000 and also stockholders (investors) have actually invested $115,000 by buying stock in the agency. The assets owned by the service will certainly then be calculated as:

$35, 000 (what it owes) + $115,000 (what stockholders invested) = $150,000 (what the company has in assets)

Assets=Liabilities + Equity
150,000=35,000115,000

Since each transaction affecting a business entity should be tape-recorded in the accounting records based upon a comprehensive account (remember, file folders and the chart of accounts from the previous section), analyzing a transaction prior to actually recording it is an essential part of financial audit. An error in transaction analysis can bring about incorrect financial statements. 

To even more show the evaluation of transactions and also their effects on the basic audit equation, we will certainly analyze the tasks of Metro Courier, Inc., a fictitious corporation. Refer to the chart of accounts illustrated in the previous area.

1. Owners invested cash

Metro Courier, Inc., was arranged as a corporation on January 1, the firm issued shares (10,000 shares at $3 each) of widespread stock for $30,000 cash to Ron Chaney, his wife, and their son. The $30,000 cash was deposited in the brand-new organization account.

Transaction analysis:

The brand-new corporation obtained $30,000 cash in exreadjust for ownership in widespread stock (10,000 shares at $3 each).We desire to increase the asset Cash and also boost the equity Common Stock.
AssetsEquity
TransactionCashTypical Stock
1. Owner invested cash+ 30,000+ 30,000

Let’s check the accountancy equation: Assets $30,000 = Liabilities $0 + Equity $30,000

2. Purchased equipment for cash

Metro passist $ 5,500 cash for equipment (two computers).

Transactivity analysis:

The new corporation purchased brand-new asset (equipment) for $5,500 and passist cash.We desire to increase the asset Equipment and decrease the asset Cash because we phelp cash.
Assets Equity
TransactionCashEquipmentTypical Stock
1. Owner invested cash+ 30,000+ 30,000
2. Purchased tools for cash– 5,500+5,500
Balance:24,5005,50030,000

Let’s examine the audit equation: Assets $30,000 (Cash $24,500 + Equipment $5,500) = Liabilities $0 + Equity $30,000

3. Purchased truck for cash

Metro paid $ 8,500 cash for a truck.

Transactivity analysis:

The new corporation purchased new asset (truck) for $8,500 and also paid cash.We desire to boost the asset Truck and also decrease the ascollection cash for $8,500.
Assets Equity
TransactionCashEquipmentTruckCommon Stock
1. Owner invested cash+ 30,000+ 30,000
2. Purchased devices for cash– 5,500+5,500
3. Purchased truck for cash-8,500+ 8,500
Balance:16,0005,500 8,50030,000

Let’s check the accounting equation: Assets $30,000 (Cash $16,000 + Equipment $5,500 + Truck $8,500) = Liabilities $0 + Equity $30,000

4. Purchased offers on account.

Metro purchased offers on account from Office Lux for $500.

Transactivity analysis:

The brand-new corporation purchased new asset (supplies) for $500 yet will pay for them later on.We want to boost the ascollection Supplies and also increase what we owe via the licapability Accounts Payable.
Assets =   Liabilities +Equity
TransactionCashSuppliesEquipmentTruckAccounts PayableUsual Stock
1. Owner invested cash+ 30,000+ 30,000
2. Purchased equipment for cash– 5,500+5,500
3. Purchased truck for cash-8,500+ 8,500
4. Purchased offers on account.+ 500 + 500
Balance:16,0005005,5008,50050030,000

Let’s inspect the bookkeeping equation: Assets $30,500 (Cash $16,000+ Supplies $500 + Equipment $5,500 + Truck $8,500) = Liabilities $500 + Equity $30,000

5. Making a payment to creditor.

Metro issued a check to Office Lux for $300 previously purchased gives on account.

Transactivity analysis:

The corporation passist $300 in cash and also reduced what they owe to Office Lux.We desire to decrease the licapability Accounts Payable and also decrease the ascollection cash because we are not buying new provides but paying for a previous purchase.
Assets =   Liabilities +Equity
TransactionCashSuppliesEquipmentTruckAccounts PayableTypical Stock
1. Owner invested cash+ 30,000+ 30,000
2. Purchased devices for cash– 5,500+5,500
3. Purchased truck for cash-8,500+ 8,500
4. Purchased offers on account.+ 500+ 500
5. Making a payment to creditor.-300-300
Balance:15,7005005,5008,50020030,000

Let’s check the accounting equation: Assets $30,200 (Cash $15,700 + Supplies $500 + Equipment $5,500 + Truck $8,500) = Liabilities $200 + Equity $30,000

6. Making a payment in advancement.

Metro issued a inspect to Rent Commerce, Inc. for $1,800 to pay for office rent in advance for the months of February and also March.

Transactivity analysis (to save room we will look at the effects of each of the remaining transactions only):

The corporation prepassist the rent for next two months making an advanced payment of $1,800 cash.We will certainly increase an ascollection account referred to as Prepaid Rent (because we are paying in development of utilizing the rent) and decrease the asset cash.
Assets
TransactionCashPrephelp Rent
Previous Balance$ 15,700
6. Making a payment in advancement.-1,800 + 1,800
Balance:13,9001,800

The just account balances that adjusted from transactivity 5 are Cash and also Prephelp Rent. All various other account balances remain unreadjusted. The brand-new accountancy equation would certainly be: Assets $30,200 (Cash $13,900 + Supplies $500 + Prepassist Rent $1,800 + Equipment $5,500 + Truck $8,500) = Liabilities $200 + Equity $30,000

7. Selling solutions for cash.

Throughout the month of February, Metro Corporation earned a complete of $50,000 in revenue from clients who passist cash.

Transaction analysis:

The corporation obtained $50,000 in cash for services offered to clients.We want to rise the ascollection Cash and increase the revenue account Service Revenue.
Assets Revenues
TransactionCashService Revenue
Previous Balance$ 13,900
7. Selling solutions for cash .+ 50,000+ 50,000
Balance:$ 63,900$ 50,000

Wait a minute…the accounting equation is ASSETS = LIABILITIES + EQUITY and also it does not have actually revenue or expenses…wright here do they fit in? Revenue – Expenses amounts to net income. Net Income is added to Equity at the end of the duration. Assets $80,200 (Cash $63,900 + Supplies $500 + Prepassist Rent $1,800 + Equipment $5,500 + Truck $8,500)= Liabilities $200)+ Equity $80,000 (Common Stock $30,000 + Net Income $50,000). Note: This does not expect revenue and also prices are equity accounts!

8. Selling services on crmodify.

Metro Corporation earned a complete of $10,000 in company revenue from clients that will certainly pay in 30 days.

Transaction analysis:

Metro percreated work-related and also will certainly receive the money in the future.We record this as an increase to the asset account Accounts Receivable and also a boost to organization revenue.
Assets Revenues
TransactionAccounts ReceivableService Revenue
Previous Balance$ 50,000
8. Selling solutions on credit.+ 10,000+ 10,000
Balance:$ 10,000$ 60,000

Remember, all various other account balances reprimary the very same. The just alters are the enhancement of Accounts Receivable and a boost in Revenue. Assets $90,200 (Cash $63,900 + Accounts Receivable $10,000 + Supplies $500 + Prepaid Rent $1,800 + Equipment $5,500 + Truck $8,500)= Liabilities $200 + Equity $90,000 (Usual Stock $30,000 + Net Income $60,000).

9. Collecting accounts receivable.

Metro Corporation accumulated a complete of $5,000 on account from clients who owned money for services formerly billed.

Transaction analysis:

Metro obtained $5,000 from customers for occupational we have currently billed (not any new work).We want to rise the asset Cash and decrease (what we will get later on from customers) the ascollection Accounts Receivable.
Assets  
TransactionCashAccounts Receivable
Previous Balance $ 63,900$ 10,000
9. Collecting accounts receivable.+ 5,000– 5,000
Balance:$ 68,900$ 5,000

Assets $90,200 (Cash $68,900 + Accounts Receivable $5,000 + Supplies $500 + Prephelp Rent $1,800 + Equipment $5,500 + Truck $8,500)= Liabilities $200 + Equity $90,000 (Usual Stock $30,000 + Net Income $60,000).

10. Paying office salaries.

Metro Corporation passist a complete of $900 for office salaries.

Transactivity analysis:

The corporation paid $900 to its employees.We will certainly boost the expense account Wages Expense and decrease the ascollection account Cash.
Assets Expenses
TransactionCashSalary Expense
Previous Balance$ 68,900
10. Paying Office Salaries.– 900 + 900
Balance:$ 68,000$ 900

Remember, net revenue is calculated as Revenue – Expenses and is added to Equity. The brand-new audit equation would show: Assets $89,300 (Cash $68,000 + Accounts Receivable $5,000 + Supplies $500 + Prepaid Rent $1,800 + Equipment $5,500 + Truck $8,500)= Liabilities $200 + Equity $89,100 (Typical Stock $30,000 + Net Income $59,100 from revenue of $60,000 – costs $900).

11. Paying energy bill.

Metro Corporation paid a total of $1,200 for energy bill.

Transactivity analysis:

The corporation phelp $1,200 in cash for utilities.We will certainly increase the cost account Utility Expense and decrease the asset Cash.

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Assets Expense
TransactionCashUtilities Expense
Previous Balance$ 68,000
11. Paying Utility Bill– 1,200+ 1,200
Balance:$ 66,800$ 1,200

Click Transactivity analysis to check out the complete chart through all transactions. The final accounting equation would be: Assets $88,100 (Cash $66,800 + Accounts Receivable $5,000 + Supplies $500 + Prephelp Rent $1,800 + Equipment $5,500 + Truck $8,500) = Liabilities $200 + Equity $87, 900 (Common Stock $30,000 + Net Income $57,900 from revenue of $60,000 – salary expense $900 – energy cost $1,200).

Answer the complying with inquiries around the audit equation. Remember to rate your confidence to examine your answer: Maybe? Probably. Definitely!