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Understanding Transactions

Business Accounting Bookkeeping The Ultimate Accounting Refresher Course The Accounting Equation - The Basis of Double Entry Bookkeeping
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Transcript

Hello, welcome to think numbers My name is Justin light from thing numbers. And in today's lecture we're going to be talking about understanding transactions. And what these four principles are, how you should look at every single accounting transaction to actually understand the debit side and the credit side. And by running through these four steps in every single transaction you go through, you always work out either side of the transaction. So let's go through one of the time and understand how it's made up. The first question you should be always asking when you're looking at a set of transactions is is cash being affected.

So immediately if you can work out if cash at Bank is being affected, this will determine whether the asset is going up or the asset is going down and therefore the cash one of the sides of the transactions will be cash. So if cash is inflowing cash will be going up and up. deficit, if cash or bank is going down, it will reduce it will be credited. So this will have a direct impact on the cash at Bank. The second question you should be always asking is what is the nature of this transaction? And in other words, why is the transaction occurring?

And what is the purpose of it? So, if you have a for example, you have a transaction that is a cash sale, what is the nature of this transaction? Well, you've just made a sale. So, within the wording of a sale, this is actually telling you what one of the sides of the transaction is, which is actually sell and if you think sale, you should be thinking sales revenue. So, asking these first two questions would already be able to help you to determine the either side of the transaction which forms part of the equation. The third question you should be asking is, is there a future benefit a feature set for us or negative future benefit?

So, what are future benefits future benefits are assets. And if you recall from a previous lecture, there were only a number of different For items that actually make up the asset category, for example, cash or bank, accounts receivable, inventory, prepayments, investments, property, plant equipment and intangibles. And also, is there a future a future sacrifice and a future sacrifice is a liability? So if you think through every time you see a transaction, what elements of the liability account are affected? Is there an accounts payable? So you have to pay supply?

Are there any accrued costs that you need to accrue within your liability? Are there any loans or any unearned revenues that need to be taken up? So the next item you should be looking at our negative future benefits? And if you recall, we previously talked about contract assets. And some of those items were the allowance for doubtful debts, the provision for stock obsolescence and accumulated depreciation. So, when you're going through and asking the third question, this will by asking the question of future benefits future sacrifices or negative benefits, this will help you determine at least one of the sides of the transaction.

And the final question you should be always asking is, was anything earned any costs incurred or assets consumed. So just remember that earnings drives revenue. And so if you've earned something because you've performed a service, we've delivered a product. If you've earned something, therefore, one of the sides of the transaction is revenue. And the other thing to think about if costs are incurred, or assets consumed, is actually drives an expense or a cost. So if you remember back to we talked about the period concept around cost being incurred in a certain period, and we also talked about the accrual accounting process, if costs have been incurred, therefore, they need to be recorded and one of the sides of the transactions will be an expense, which is a reduction in owner's equity, and therefore be a debit to expense.

So we'll be going through in the next lecture, a number of different transactions under the assets The liabilities and owner's equity account. And I'll be going through each of these four steps every time to help you understand thoroughly each side of the transaction and think about sort of like solving a puzzle. If you if you receive a piece of information about a transaction, and you want to work out what is the debit side of the credit side, you have to follow these four steps methodically. And you will, in time be able to work out each side of the transaction by account by eliminating and understanding different components of it. So we'll dive into the next lecture, we will be talking about all of the top transactions within each of the classes. We'll see them

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