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Lesson · Principles of Accounting

The two-sided effect using the accounting equation

The question asks for the effect of a transaction, and you are not sure which figures to name.

The accounting equation says assets = liabilities + capital. A transaction is correctly recorded when it keeps this equation balanced, which means it must change at least two items.

This lesson is part of tracing a transaction through the whole accounting cycle.

How do you describe the effect of a transaction?

Use one sentence with two changes: “Item A goes up or down by RM___ and item B goes up or down by RM___.” If the two changes are on opposite sides of the equation, both sides move together. If they are on the same side, one goes up while the other goes down.

Worked example: five transactions in a row

A trader starts with RM5 000 cash as capital. Amounts are in RM.

Step Transaction Cash Equipment Stock Creditors Capital
Start Owner invests 5 000 5 000
1 Buys equipment for cash, 2 000 3 000 2 000 5 000
2 Buys stock on credit, 1 500 3 000 2 000 1 500 1 500 5 000
3 Pays creditors, 1 000 2 000 2 000 1 500 500 5 000
4 Sells stock (bought at 600) for 900 cash 2 900 2 000 900 500 5 300
5 Drawings in cash, 200 2 700 2 000 900 500 5 100

Check after step 5. Assets = 2 700 + 2 000 + 900 = 5 600. Liabilities plus capital = 500 + 5 100 = 5 600. The equation balances.

Step 4 changes three items: cash up 900, stock down 600, and capital up 300. The capital rise is the profit on the sale, which is sales 900 minus the goods given up at 600.

What each step shows

  • Step 1 swaps one asset for another. Total assets do not change.
  • Step 2 raises assets and liabilities together.
  • Step 3 lowers assets and liabilities together.
  • Step 4 is the only one that raises capital.
  • Step 5 lowers assets and capital together.

The mistake that costs marks

The common slip is to raise capital by the full sale, 900, instead of the profit of 300. The 600 of stock that left the shop is a real reduction of an asset.

Step 4 Wrong Right
Cash +900 +900
Stock unchanged −600
Capital +900 +300
Equation after step 4 6 400 = 6 400 5 800 = 5 800

The wrong version still balances: assets are 2 900 + 2 000 + 1 500 = 6 400 and liabilities plus capital are 500 + 5 900 = 6 400. Yet stock and capital are both overstated by 600. A balanced equation is necessary, but it does not prove each figure is right.

Check yourself

The trader buys office furniture for RM800 on credit. State the effect on the equation.

Answer

Furniture (an asset) rises by 800 and creditors (a liability) rise by 800. Assets and liabilities plus capital both rise by 800. Capital does not change, because no profit or owner’s money is involved.

What to study next

Go to tracing a returned item without reversing unrelated entries, or test yourself on the integrated practice.

If you want a teacher to hear you state each effect, see online one-to-one Accounting tuition.

Common questions

What is the accounting equation?

Assets equal liabilities plus capital. Every transaction changes at least two items so that both sides stay equal.

Does every transaction change two items?

Yes. Some swap one asset for another, leaving the totals unchanged. Others raise or lower both sides together. The equation stays balanced either way.

Where does profit appear in the equation?

Profit increases capital. A loss decreases it. Drawings also decrease capital, but they are not a loss.

If effect questions leave you unsure which figures to name, a one-to-one Accounting lesson lets a teacher ask you to state the two changes aloud for each transaction until it becomes automatic.

  • Online one-to-one lessons for your child with an experienced teacher.
  • Your first class is a one-hour trial, from RM50. The fee is agreed before you book.
  • Happy with the teacher? Continue with lessons of about 1.5 hours. If not, ask for another teacher.