Chapter 1, Problem 16Q

To determine

Business Transactions:

A business transaction can be defined as any economic activity pertinent to a business organization. A business usually performs a number of transactions, however, according to the rule of accounting, only the financial transactions of a business are recorded in the books of accounts. Business transactions refer to all those transactions, which can be expressed in monetary terms. It is essential for companies that such business financial transactions are identified in the first step of the accounting process.

Basic Accounting Equation:

The mathematical equation which shows the relationship among the different categories of a balance sheet, such as assets, liabilities, and stockholders’ equity of a company, is referred to as the “basic accounting equation.” It is represented as below:

$\text{Assets}=\text{Liabilities}+\text{Stockholders' equity}$

This relationship between assets, liabilities, and stockholders’ equity is termed as the basic accounting equation, where assets equal the sum of liabilities and stockholders’ equity. In the right hand side of the equation, liabilities always come before stockholders’ equity, since they are paid first when a business is liquidated. The accounting equation is applicable to all types of entities, irrespective of their size and nature of business.

To ascertain: The effect of business transactions on the basic accounting equation.