How transactions affect the equation
Objective: Determine the effect of common transactions on assets, liabilities, and equity.
Recommended first: What bookkeeping is and why it balances
Before writing any entry, a bookkeeper asks: which parts of the equation change, and in which direction? Most transactions fall into a few patterns.
Common patterns
| Transaction | Assets | Liabilities | Equity |
|---|---|---|---|
| Owner invests cash | + | + | |
| Buy equipment for cash | + and − | ||
| Buy supplies on credit | + | + | |
| Earn revenue (cash or on account) | + | + | |
| Pay an expense | − | − | |
| Pay a supplier | − | − | |
| Owner withdraws cash | − | − |
Revenue increases equity because it adds to what the owner has earned. Expenses decrease equity because they use up resources to earn that revenue. Owner withdrawals also reduce equity, but they are not expenses — they are the owner taking value out.
A reliable habit is to describe each transaction in plain words before touching any account: 'we received cash and now owe the bank' or 'we used up rent for this month'. That sentence usually names both sides of the change. Equipment bought for cash is the classic case where totals do not move at all, because one asset simply replaces another.
Check your work
- Did you identify at least two changes, or an asset swap?
- Is revenue only recorded for work actually done?
- Did you keep owner withdrawals out of expenses?
A consultant invoices a client $1,200 for finished work. Accounts Receivable (an asset) rises $1,200 and equity rises $1,200 through Service Revenue. No cash has moved yet.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | $1,200.00 | |
| Service Revenue | $1,200.00 |
Common mistakes
✗ Thinking collecting from a customer creates revenue.
✓ Revenue was recorded when the invoice was earned. Collection swaps receivable for cash.
✗ Recording an owner withdrawal as an expense.
✓ Use Owner Drawings, which reduces equity without touching the income statement.
Guided practice
Use hints freely here.
Item 1 of 2
Earn revenue for cash
FixRight Appliance Repair fixes a dishwasher and the customer pays $130.00 on the spot.
Independent practice
Try these without hints. Completing the lesson needs at least one independent item solved without revealing the answer.
Item 1 of 8
Earn revenue on account
Harbor Point Consulting finishes a project and sends the client an invoice for $2,100.00, payable in 30 days.
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Key terms
- Revenue
- Amounts earned from providing goods or services.
- Expense
- A cost used up in earning revenue.
- Owner drawings
- Withdrawals by the owner for personal use.
- Accounts receivable
- Amounts customers owe for goods or services provided.
References and provenance
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting (accessed 2026-10-29)
Original lesson written for Bookkeeping Exercises (AI-assisted drafting). Calculations are verified by the platform's automated accounting tests. Not yet reviewed by a credentialed accountant. Updated 2026-10-29.