02.Transaction Analysis

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TRANSACTION ANALYSIS
Chapter 1
Rian Ceasar P. Soliman, CPA, MBA
Far Eastern University
Department of Accountancy
Basic Accounting
Equation
Basic Accounting Equation
ASSETS =
LIABILITIES
+
OWNER’S
EQUITY
Basic Accounting Equation
ASSET
“A present economic resource
controlled by the entity as a result
of past events. An economic
resource is a right that has the
potential to produce economic
benefits.”
LIABILITY
“A present obligation of the entity to
transfer an economic resource as a
result of past events. An obligation
is a duty of responsibility that the
entity has no practical ability to
avoid”
EQUITY
Equity is the “residual interest in the
assets of the entity after deducting all of
its liabilities”.
Accrual Basis vs. Cash Basis
of Accounting
Accrual Basis
• Income & expenses are
recorded as they occur
regardless of whether cash is
received or paid.
Income – earned
when services are
rendered or goods
are delivered
Expenses – incurred
(used or consumed)
Cash Basis
• Income & expenses are
recorded when the cash is
received or paid.
Income – cash is
received
Expenses – cash is
paid
Expanded Accounting Equation
ASSETS =
LIABILITIES
INVESTMENT
-
+
WITHDRAWALS
OWNER’S
EQUITY
+
INCOME
-
EXPENSES
PROFIT OR
LOSS
Elements of Financial Statements
1. the broad classes of transactions and events are classified
according to their economic characteristics:
• Elements directly related to financial position are:
assets, liabilities and owner’s equity.
• Elements directly related to financial performance:
income and expenses.
2. Represented by accounts.
Introduction to Usual Accounts
ELEMENTS
NATURE
USUAL ACCOUNTS USED
ASSETS
Cash
• Cash
• Cash on Hand
• Cash In Bank
Receivables
•
•
•
•
•
•
Inventories
• Merchandise Inventory
Accounts Receivable or Trade Receivable
Allowance for Doubtful Accounts
Notes Receivable
Advances to Employees and Officer
Advances to Customers/Suppliers
Interest Receivable
Introduction to Usual Accounts
ELEMENTS
NATURE
USUAL ACCOUNTS USED
ASSETS
Prepayments or Prepaid Expenses
•
•
•
•
•
•
Property, Plant & Equipment (Fixed
Assets
• Land
• Building (Office Building, Store Building)
• Machinery and Equipment (Office Equipment, Store
Equipment)
• Furniture and Fixtures
• Transportation Equipment or Vehicles (Service
Vehicle, Delivery Vehicle)
• Accumulated Depreciation
Office Supplies,
Store Supplies
Prepaid Insurance
Prepaid Rent
Prepaid Advertisement
Input VAT
Introduction to Usual Accounts
ELEMENTS
NATURE
USUAL ACCOUNTS USED
ASSETS
Investments
• Investment in Trading Securities
Intangible Assets
•
•
•
•
•
Patent
Trademark
Copyright
License
Computer Software
Introduction to Usual Accounts
ELEMENTS
NATURE
USUAL ACCOUNTS USED
LIABILITIES
Payables
• Accounts Payable or Trade Payables
• Advances from Customer/Supplier
• Notes Payable
Accruals or Accrued Expenses
•
•
•
•
•
Utilities Payable
Salaries (Wages) Payable
Rent Payable
Interest Payable
Accrued Advertising
Deferred Revenues/Income
•
•
•
Unearned Revenue
Unearned Rent Income
Unearned Subscription
Taxes
• Income Tax Payable
• Output Vat
Proprietor’s Equity
• Soliman, Capital
• Soliman, Drawings
EQUITY
Introduction to Usual Accounts
Income
Revenues
• Service Revenue
• Professional Fee
• Fees Earned
• Commission Revenue
• Sales Revenue
Other Income & Gains
• Interest Income
• Dividend Income
• Royalty Income
• Gain on Sale of Fixed Assets
Expenses
Cost of Sale (or Services)
• Cost of Goods Sold/Cost of Services
Operating Expenses and Losses
• Advertising Expense
• Rent Expense
• Utilities Expense
• Salaries (Wages) Expense
• Supplies Expense
• Insurance Expense
• Professional Fees
• Interest Expense
• Transportation Expense
• Doubtful Accounts Expense
• Depreciation Expense
• Miscellaneous Expense
• Loss on Sale of Fixed Assets
Transaction
Analysis
(1) Owner invests 30,000 cash to start a company named FASTFORWARD.
↑ Cash
Assets
Cash
=
↑ Investment
Liabilities
+
30,000
30,000
Equity
C. Taylor, Capital
30,000
30,000
(2) Company purchased supplies paying 2,500 cash.
↓ Cash
Assets
=
Cash
Supplies
(2,500)
↑ Supplies
Liabilities
+
2,500
-0-
-0-
Equity
(3) Purchased equipment for 26,000 cash.
↓ Cash
Assets
=
Cash
Equipment
(26,000)
↑ Equipment
Liabilities
+
26,000
-0-
-0-
Equity
(4) Purchased supplies of 7,100 on credit.
↑ Accounts
Payable
↑ Supplies
Assets
Supplies
7,100
7,100
=
Liabilities
Accounts Payable
+
7,100
7,100
Equity
(5) Hired an employee at a bi-weekly rate of 700.
Not
Accountable
Assets
=
Liabilities
+
Equity
(6) Provided consulting services to a customer and received 4,200 cash right away.
↑ Cash
Assets
Cash
=
Liabilities +
↑ Income
Equity
Investment ― Withdrawals + Income ― Expenses
Consulting
Revenue
4,200
4,200
4,200
4,200
(7) Paid rent of 1,000 and salaries of 700 to employees.
↓ Cash
Assets
=
Liabilities +
↑ Rent Expense,
Salaries Expense
Equity
Investment ― Withdrawals + Income ― Expenses
Cash
Rent Salaries
Expense Expense
(1,700)
(1,700)
(1,000)
(1,700)
(700)
(8) Billed consulting services rendered of 1,600 to a customer and rents its
facilities for 300.
↑ Accounts
Receivable
Assets
Accounts
Receivable
=
Liabilities +
↑ Income
Equity
Investment ― Withdrawals + Income ― Expenses
Consulting Rent
Revenue Revenue
1,600
1,900
1,900
1,900
300
(9) Collected 1,900 from customer on account.
↑ Cash
Assets
=
Liabilities +
↓ Accounts
Receivable
Equity
Investment ― Withdrawals + Income ― Expenses
Cash
Accounts
Receivable
1,900
(1,900)
-0-
-0-
(10) Company paid 900 for the supplies purchased before.
↓ Accounts
Payable
↓ Cash
Assets
=
Liabilities +
Equity
Investment ― Withdrawals + Income ― Expenses
Cash
Accounts
Payable
(900)
(900)
(900)
(900)
(11) Owner withdrawn 200 cash
↓ Cash
Assets
Cash
(200)
(200)
=
Liabilities +
↑ Withdrawals
Equity
Investment ― Withdrawals + Income ― Expenses
C. Taylor,
Drawings
(200)
(200)
Summary of Transactions
40,400
40,400
Complete Set of
Financial
Statements
Financial Statements
1. Statement of Profit or Loss (Income Statement) &
Statement of Other Comprehensive Income
2. Statement of Changes in Equity
3. Statement of Financial Position (Balance Sheet)
4. Statement of Cash Flows
5. Summary of Significant Accounting Policies and Other
Explanatory Notes (Notes to Financial Statements)
Income Statement
• Shows revenues and expenses
• Profit or loss (Net income or net loss)
• Over a period of time
Income Statement
FASTFORWARD
Income Statement
For the Month Ended December 31, 2017
Revenues
Consulting revenue
Rental revenue
Total revenues
Expenses
Rent expense
Salaries expense
Total expenses
Net Income
P5,800
300
P6,100
1,000
700
1,700
P4,400
Statement of Changes in Owner’s Equity
• Shows changes in equity from
• profit (or loss)
• owner’s investments
• owner’s withdrawals
• Over a period of time
Statement of Changes in Owner’s Equity
FASTFORWARD
Statement of Changes in Owner’s Equity
For the Month Ended December 31, 2017
C. Taylor, Capital, December 01, 2017
Add: Investments by owner
Net Income
Less: Withdrawals by owner
C. Taylor, Capital, December 31, 2017
P-0P30,000
4,400
34,400
34,400
200
P34,200
Balance Sheet
• Shows financial position
• Types and amounts of assets, liabilities and equity
• At a point in time
Balance Sheet
FASTFORWARD
Balance Sheet
As of December 31, 2017
Assets
Cash
Supplies
Equipment
Total Assets
P4,800
9,600
26,000
Liabilities
Accounts payable
Total liabilities
Owner’s Equity
_______ C. Taylor, Capital
P40,400
Total liabilities and equity
P6,200
6,200
34,200
P40,400
Statement of Cash Flows
Operating Activities
Investing Activities
Financing Activities
• Cash received from customers
• Cash paid for expenses and purchases except purchase
of long-term assets
• Other cash flows not considered investing and
financing
• Cash paid to acquire long-term assets and investments
• Cash received from selling long-term assets and
investments
• Cash received from investment of owner and
borrowings from lenders
• Cash withdrawn by owner and payment of borrowings
F
(O)
Operating cash inflows:
6,100
Operating cash outflows:
(5,100)
(I)
O
(O)
Investing cash inflows:
-0-
Investing cash outflows:
(26,000)
Financing cash inflows:
30,000
Financing cash outflows:
(200)
O
(O)
(F)
Statement of Cash Flows
FASTFORWARD
Statement of Cash Flows
For the Month Ended December 31, 2017
Cash flow from operating activities
Cash received from customers
Cash paid for expenses
Net cash provided by operating activities
Cash flow from investing activities
Purchase of equipment
Net cash used in investing activities
Cash flows from financing activities
Investments by owner
Withdrawals by owner
Net cash provided by financing activities
Net increase in cash
Cash balance, December 1, 2017
Cash balance, December 31, 2017
P6,100
(5,100)
P1,000
(26,000)
(26,000)
30,000
(200)
29,800
4,800
-0P4,800
End of Discussion
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