Every transaction has two effects
≈ 35 minNothing happens on one side only
A transaction is an exchange. The business gives something and receives something, or it takes on a claim in return for a resource. Because it is always an exchange, it always touches the business in two places. Recording both places is what double entry means.
The habit to build now, before any journal appears, is this three-step read:
- Say what the business received and what it gave up, in plain words.
- Name the two elements involved: asset, liability or owner's equity.
- Say whether each one went up or down, and by how much.
The patterns that keep appearing
There are only a handful of combinations, and most transactions in Grade 10 are one of these.
| Transaction | First effect | Second effect |
|---|---|---|
| Owner pays capital into the bank account | Asset up | Owner's equity up |
| Equipment bought and paid for immediately | Asset up | Another asset down |
| Trading stock bought on credit | Asset up | Liability up |
| Creditor paid | Asset down | Liability down |
| Services rendered for cash (income earned) | Asset up | Owner's equity up |
| Rent, wages or telephone paid (expense incurred) | Asset down | Owner's equity down |
| Owner takes cash for private use (drawings) | Asset down | Owner's equity down |
Income increases owner's equity because the business is better off and the owner's claim grows with it. Expenses reduce owner's equity for the same reason in reverse. This is the link between the equation and profit, and it is worth holding onto.
Following a business through a month
Worked example. Lerato's Laundry in Polokwane starts July with Bank R25 000, Equipment R18 000, a loan of R10 000 and capital of R33 000. Check the opening position: assets R43 000 = owner's equity R33 000 + liabilities R10 000.
| # | Transaction | Effects | Assets | Owner's equity | Liabilities |
|---|---|---|---|---|---|
| 1 | Washing fees of R3 400 received in cash | Bank up R3 400; income raises equity R3 400 | 46 400 | 36 400 | 10 000 |
| 2 | Detergent of R1 250 bought and paid for, used at once | Bank down R1 250; expense lowers equity R1 250 | 45 150 | 35 150 | 10 000 |
| 3 | R2 000 repaid on the loan | Bank down R2 000; loan down R2 000 | 43 150 | 35 150 | 8 000 |
| 4 | A second machine bought for R6 000 cash | Equipment up R6 000; Bank down R6 000 | 43 150 | 35 150 | 8 000 |
Read the last row across: assets R43 150 = owner's equity R35 150 + liabilities R8 000. The equation held after every single line, not only at the end.
Bank at the end of the month is 25 000 + 3 400 - 1 250 - 2 000 - 6 000 = R19 150, and equipment is R24 000. Together that is the R43 150 in the table.
Core checkpoint: describe the transaction in plain words first, then name the two elements, then write the amounts. If you can only find one effect, you have not finished reading the transaction.
Lerato's Laundry repays R2 000 of its loan from the business bank account. What are the two effects on the accounting equation?
Lerato's Laundry starts with assets of R43 000. It then receives fees of R3 400, pays R1 250 for detergent, repays R2 000 of its loan and buys a machine for R6 000 cash. What are the total assets at the end, in rand?