Transaction analysis in accounting is primarily based on which two principles?

• A. Every transaction affects at least two accounts
• B. Expenses are recorded only when paid
• C. The accounting equation must remain in balance
• D. Revenue is recognized only when cash is received

Answer: (C)

Verified step by step guidance

1. Understand the concept of transaction analysis: Transaction analysis is the process of identifying the effects of a financial transaction on the accounting equation and the accounts involved.
2. Recall the two fundamental principles of transaction analysis: (1) Every transaction affects at least two accounts, and (2) The accounting equation (Assets = Liabilities + Equity) must remain in balance.
3. Analyze the first principle: Every transaction involves a dual effect on accounts, which is the basis of the double-entry accounting system. For example, if cash is received, one account (Cash) increases, and another account (Revenue or Accounts Receivable) is affected.
4. Analyze the second principle: The accounting equation must remain in balance after every transaction. This means that any increase or decrease in one part of the equation must be offset by a corresponding change in another part to maintain equality.
5. Clarify the incorrect statements: Expenses are recorded when incurred (not only when paid), and revenue is recognized when earned (not only when cash is received), following the accrual basis of accounting.