When will a transaction affect only one side of the accounting equation?
Only one side of the accounting equation will be affected when one asset is used to acquire another asset or to replace another asset, when one liability replaces another liability, when stock is issued to replace a liability, when a cash dividend or stock dividend is declared. There are many other situations as well.
Here are some specific examples when only the left side of the accounting equation is affected. 1) A customer cannot pay an amount it owes and provides the company with a notes receivable. The company’s asset Accounts Receivable will decrease and its asset Notes Receivable will increase. 2) A company prepays its insurance. As a result its asset Cash decreases and its asset Prepaid Insurance increases. 3) A company buys equipment for cash. The asset Cash decreases and the asset Equipment increases.
Here are some transactions that will affect only the right side of the accounting equation. 1) A company refinances its short-term debt with long-term debt. Short-term liabilities will decrease and long-term liabilities will increase. 2) A corporation issues common stock to replace its convertible bonds. The result is that liabilities decrease and stockholders’ equity increases. 3) A corporation declares a cash dividend. A current liability Dividends Payable is created and the Retained Earnings (part of stockholders’ equity) will decrease. 4) A stock dividend is declared. The paid-in capital section of stockholders’ equity will increase and the retained earnings section will decrease.
Learn more about the Accounting Equation.
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super
most useful info…thank you
thanks for the help being redered to me
it help us in leraning
relevant but will be glad if more examples of “transactions that increases capital and at the same time decreases capital” is posted .
Can you please help me with information on the roles of ISAB, IFAC and the likes.
Abel,from Nigeria.
It’s nice having the learning of accounting…
It’s nice having the learning of accounting…
Kindly help me..
How does the use of cash to acquire another asset affect the accounting equation?
How about cash to settle a liability?
Thank you..
See our Explanation of the Accounting Equation on our free website AccountingCoach.com for many examples of transactions including the ones you inquired about.
Dear Coach,
How do we determine if a convertible bond should be bifurcated into its liability and equity components? And how do we account for stock-settled only convertible bonds?