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Businesses engage in exchange of various goods and services.Payment may be immediate or at a later date depending on the policy of the business.The main type of business transactions are cash and credit.

There are two types of business transactions; cash and credit.

Cash transactions

This is when the payment for goods and services is done immediately after exchange. Payment can be done through cash, cheque, credit cards, postal order, money orders, and mobile phone money transfer services.

Effects of business transactions on the balance sheet

• It may increase an asset or a liability.
• It may decrease an asset and also a liability.
• It may increase one asset and decrease another asset.
• It may increase one liability and decrease another liability.

The following is a balance sheet followed by transactions to illustrate the concept of effects of business transactions on the balance sheet.

The following transactions took place.

Took loan worth Kshs.50,000 and deposited in the bank.
The effect is: bank loan increases by Kshs.50,000.
Cash at bank increases by Kshs. 50,000.
Paid creditors Kshs. 2,000 in cash.
The effect is: cash decreases by Kshs. 2,000.
Creditors decrease by Kshs. 2,000.
Bought goods worth Kshs. 3,000 by cheque
The effect is: stock increases by Kshs. 3,000.
Cash at bank decreases by Kshs. 3,000.
Borrowed bank loan worth Kshs. 20,000 to off-set part of the co-operative loan
The effect is: bank loan increases by Kshs. 20,000.
Co-operative loan increases by Kshs. 20,000.

These effects can be summarized as follows:

Bank loan => 40,000 + 50,000[a] + 20,000[d] = 110,000

Bank => 20,000 + 50,000[a] - 3,000[c] = 67,000

Creditors => 30,000 - 2,000[b] =28,000

Cash => 10,000 - 2,000[b] = 8,000

Stock => 30,000 + 3,000[c] = 33,000

Co-operative loan => 30,000 - 20,000[d] = 10,000

Wambua Traders balance sheet will be as follows after the transactions.

This refers to any addition of money or property into the business. This increases capital.

Profit

Profit realized by the business increases capital.

Drawings

This refers to money, goods or services withdrawn from the business for personal use.This reduce capital.

Losses

Losses results when the cost of goods or services is higher than their sales leading to decease in capital.

Summary of changes in capital.

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