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Accounting transactions are used to keep track of a company's assets, liabilities, and stockholders' equity. Most companies record accounting transactions in a general ledger that reflects debits and credits. Financial documents, such as the balance sheet, income statement, and statement of cash flows rely on the transactions recorded in the general ledger. The basic types of transactions that might occur will affect a company's cash, accounts receivable and accounts payable.
When accounting transactions are made, debit entries either increase assets or decrease liabilities. Credits made to general ledger accounts decrease assets or increase liabilities. In terms of stockholders' equity, debits decrease common stock and retained earnings, while credits increase them. Revenues are increased by credit entries and expenses are increased by debits.
At all times, assets must equal liabilities plus stockholders' equity. Therefore, any accounting transactions that are made should have an equal and opposite effect on both sides of the equation. For example, when a company issues common stock, two separate entries should occur. The first would be an increase in cash for the payment value received and the second would be an increase in common stock to reflect the new monetary amount of outstanding shares.
Likewise, when a company receives payment for services that have not yet been rendered, two accounting transactions will be made. One will be made to increase cash. Another will increase the amount of unearned revenue. This account classification is considered to be a liability since the company still needs to perform the services.
Expense payments tend to result in two transactions that decrease both assets and stockholders' equity. For example, when a company pays rent, it will make one transaction to decrease cash for the amount of the expense. A corresponding entry will be made to decrease stockholders' equity by the same amount.
Typical transactions against accounts payable might involve the purchase of office supplies on credit. This will result in one entry to increase supplies by the monetary amount that was purchased. Since supplies are considered to be an asset, liabilities will also need to be increased. Given this scenario, accounts payable would be increased by the same amount.
In the event that a company performs services and sends a bill for payment, accounts receivable would be increased instead of cash. This is due to the fact that the payment has not yet been received, but an asset account still needs to be debited. The corresponding entry would be an increase in stockholders' equity under service revenue.
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