Transactions allow the firm to interact with outsiders. Transactions are how business happens. They are economic events. The firm produces or consumes resources. Or the firm changes the nature of its economic relationship with its creditors and investors.
The accounting identity needs to hold before and after the transaction. A transaction has a dual effect on the accounting identity because the new resources need to be claimed by creditors or investors. If the firm pays its obligations, fewer resources are available to creditors. If the firm is profitable, the owners benefit.
Transactions affect the firm through accounts. Accounts are classified as assets, liabilities, and equity. Account balances are aggregates of the firm's transactions. They summarize the economic activity of the firm.
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