Accounting is the official language of business. One of accountings major function is to keep track of business assets and its sources. As a result of it most transactions are tracked as it relates to its effect on assets. There are 4 ways assets are affected when a transactions occurs.

1. Asset source transactions: simply put, where did the increase in asset come from? As we mentioned earlier, assets could come from equity or debt financing. Equity and debt financing are also called claims on the assets. This is because the owners of the debt or equity financing tool have claims on the business assets. So in a sole proprietorship, where the owner has 100% investment of equity in the business, there will also be 100% claims to business assets. But if liability is used to finance 50% of the assets, then the debtor will have 50% claims on the liability. Example of asset source transactions are:
2. Asset exchange transactions: as the name implies, one asset is exchanged for another. For example, using cash to buy inventory. The total assets remains the same after the transaction takes place.
3. Asset use transaction: this is using an asset like cash to either pay down liabilities or pay for new expense required by the business. For instance when a business uses its cash to pay its employees, it is decreasing its cash (an asset) and also reducing the retained earnings (equity).
4. No change in assets also known as claims exchange: this is when a liability is exchanged for an equity. Will be discussed in more details later.