Analyzing a Transaction

Step 1:  Identify all items (assets and liabilities) that must be changed and make all necessary changes

• When thinking about the transaction, try to be logical and use common sense
• Carefully analyze the information given for any transaction
• Classify each item affected as an asset or liability
• Decide whether each item affected will increase or decrease

Step 2:  See if the equity has changed

• If an item does not directly affect one of the accounts listed in your group of accounts, than owner’s equity must be one of the accounts affected

Step 3:  Make sure that a minimum of two accounts have been affected

• It is impossible to complete a transaction without affecting a minimum of two accounts
• There can be situations when there are more than two accounts affected

Step 4:  Make sure the equation still balances

• Assets = Liabilities + Owner’s Equity
• Must be in balance after every transaction
• An equal dollar amount must occur on each side to balance the equation
• There are situations where only the assets are affected, so the result on the asset side must be 0