Basic equations for cash and related transaction effects

Basic equation 

Assets=Liabilities + Shareholders’ equity

Splitting assets into cash and non-cash assets:

      Cash + Non-cash assets = Liabilities + Shareholder’s equity

From this relationship, the change in cash between beginning and the end of the period is:

         Δ Cash = Δ Liabilities + Δ Shareholders’ equity – Δ Non-cash assets

Therefore, any change in liabilities, shareholders’ equity or non-cash assets will result in the change in cash.

Transaction effects

CATEGORY	TRANSACTION	CASH EFFECT	OTHER ACCOUNT AFFECTED
Operating	Collect accounts receivable	+cash	-Accounts receivable (A)
	Pay accounts payable	-cash	-Accounts payable (L)
	Prepay expense	-cash	+ Prepaid expense (A)
	Pay interest	-cash	-Retained earnings (SE)
	Sale for cash	+cash	+Retained earnings (SE)
Investing	Purchase equipment for cash	-cash	+ Equipment (A)
	Sell investment securities for cash	+cash	-Investments (A)
Financing	Pay back debt to bank	-cash	-Notes payable—Bank (L)
	Issue shares for cash	+cash	-Contributed capital(SE)