Question

Example of a transaction which decreases one asset increases another asset

Answer 1

It is a golden rule that ‘Accounting equation remains balanced all the time’. This is because of the reason that any change resulting from the business transaction also balances its equation simultaneously. Business transaction may affect either only one element (Assets, Liabilities or Capital) or two elements, out of the three elements simultaneously (i.e., Assets & Liabilities, Assets & Capital or Liabilities & Capital). In some cases, business transactions may affect all the three elements, simultaneously (i.e., Assets, Liabilities and Capital) in a single transaction.

Now, we shall move to analyze the effects of business transactions broadly in three categories viz.:

(i) Transactions affecting only one element.

(ii) Transaction affecting any two of the three elements.

(iii) Transactions affecting all the three elements.