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Exchanges of assets for assets have what effect on equity?
A financial transaction of a business is recorded in the books under the double entry system. Double entry system states that each financial transaction affects at least two accounts. Due to this feature of the double entry system, the accounting equation always remains balanced.
The General accounting equation is Equity + Liabilities = Assets.
Every financial transaction impacts two accounts in the category of equity, liabilities, or assets. Financial transactions may affect two accounts in the same category as well. Examples are:
loan repaid by taking another loan,
cash paid to purchase assets,
The asset is purchased in exchange for stocks.
One account is debited and the other account is credited in a financial transaction. If a financial transaction is in the same category i.e. assets, one asset is increased and the other asset is decreased. This will not impact any other category. So, Exchanges of assets for assets have no impact on equity.
However, there is an exception to this rule, if there is any gain or loss on the asset disposed, the equity will be affected by the transaction. The gain on the disposal of asset will increase the equity and loss on the disposal of asset will decrease the equity.
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