Introduction:
In accounting, capital refers to the owner's equity in a business, which represents the difference between a company's assets and liabilities. Capital can be increased or decreased through various transactions. In this response, we will discuss a transaction that both increases and decreases capital.

Transaction:
One transaction that can both increase and decrease capital is the distribution of dividends by a company to its shareholders. Dividends are a portion of a company's profits that are distributed to its shareholders as a return on their investment. Dividends can be paid in the form of cash or additional shares of stock.

Increase in Capital:
When a company declares and distributes dividends to its shareholders, it increases the capital in the form of retained earnings. Retained earnings are the accumulated profits of a company that have not been distributed as dividends. By distributing dividends, a company reduces its retained earnings, thereby increasing its capital.

Decrease in Capital:
On the other hand, when dividends are distributed to shareholders, the company's total capital decreases. This is because the distribution of dividends reduces the company's assets (cash) and simultaneously reduces shareholder's equity (capital). The reduction in capital occurs because the company is transferring a portion of its profits to the shareholders.

Impact on Financial Statements:
The distribution of dividends has the following impact on the financial statements:

1. Income Statement: The distribution of dividends does not affect the company's revenue or expenses. However, it reduces the company's net income, as the profits allocated for dividends are deducted from the net income.

2. Statement of Retained Earnings: The distribution of dividends reduces the amount of retained earnings reported on the statement. The remaining balance of retained earnings after the dividend distribution is the new retained earnings balance.

3. Balance Sheet: The distribution of dividends reduces the cash balance on the asset side of the balance sheet, as cash is used to pay the dividends. Additionally, the distribution decreases the shareholder's equity (capital) on the liabilities and equity side of the balance sheet.

Conclusion:
The distribution of dividends is an example of a transaction that both increases and decreases capital. It increases capital by reducing retained earnings, which represents the accumulated profits of the company. Simultaneously, it decreases capital by reducing the company's cash balance and shareholder's equity. It is essential for companies to carefully consider their financial position and legal obligations before distributing dividends to ensure the stability and growth of the business.

Cash transaction