Chapter 3: Analyzing Changes in Financial Position 1 Michael Tam, University Student 2 Business Transactions 3 Business Transactions Events occur daily that cause the financial position of a business change. Each of these events is called a business transaction. When an asset, liability, or equity item is recorded for accounting purposes, a business paper or source document is required to verify the dollar amount. 4 Source Documents What would be some examples of source documents? Hydro bill Telephone bill Cheque copies Store receipts Cash register summary Credit card slips 5 Source Documents They provide proof for the transaction …… proof of payment, proof of purchase, and reference. They are kept on file for future reference in order to answer questions from owners, managers, auditors, government agencies, etc. 6 GAAP – The Objectivity Principle The objectivity principle states that accounting will be recorded on the basis of objective evidence. What does that mean? Different people looking at the same evidence will arrive at the same values for the transaction. Transactions are recorded on fact, not personal opinion. 7 Exercise #1 (Page 59) Given that a transaction is a financial event that requires changing the statement of financial position, decide whether or not each of the following is a transaction for Best Consultants of Kenora, Ontario. The business pays $800 to Mercury Finance to reduce the amount owed to them. B. The owner, P. Dufour, withdraws $900 from the business for her personal use. C. A new employee is needed in the payroll department. P. Dufour interviews Stan Martin for the job. A. 8 Exercise #1 (continued) D. E. F. G. H. 9 A $700 consulting service is provided for Rita Bertoli on credit. The business pays the rent for the month, $3,500. The employee in question C above is hired to start work next Monday at $800 per week. The business purchases a new computer for cash at the price of $3,000. The computer in question G above is defective and is replaced at no cost to the business. Exercise #3 (Page 60) Examine this source document and answer the following: 10 A. Who issued the bill? B. Who received the bill? C. When was the bill issued? D. For what service was the bill issued? E. Does the bill represent good objective evidence? Why? Assignment for Section 3.1 Section 3.1 Review Questions 1, 4, 7 Section 3.1 Exercises 2, 4 11 Analyzing Changes in Financial Position Equation Analysis Sheet 12 Equation Analysis As business transactions occur, there are changes in the values of assets, liabilities, and capital. Although the Balance Sheet shows the values of these assets, liabilities, and capital on a particular date, it is not adequate to reflect changes created by individual transactions. 13 Equation Analysis Sheet Example – Opening Balance Sheet 14 Summary of Steps in Analyzing a Transaction Identify all items (assets and liabilities) that must be changed and make all necessary changes. 1. • • • 15 Carefully analyze the information given for each transaction. Classify each item affected as an asset or liability. Decide whether each item affected is to be increased or decreased. Summary of Steps in Analyzing a Transaction See if the owner’s equity has changed. 2. • • Make certain that at least two of the individual items / accounts have changed. 3. • 16 Remember the accounting equation. If assets decrease and liabilities are unchanged, the equation must be balanced by a decrease in owner’s equity. It is possible for several items to change, but there can never be only one change. Summary of Steps in Analyzing a Transaction 4. Make sure that the equation is still in balance. • 17 The fundamental accounting equation (Assets = Liabilities + Owner’s Equity) must always be in balance. Equation Analysis Sheet 1. Set up sheet with Beginning Balances as per B/S Set up Accounting Equation $53,300 “beginning balances” Set up column Headings … One per account name 18 = $20,120 + $33,180 Equation Analysis Sheet 1. Set up sheet with Beginning Balances as per B/S Accounting Equation $53,300 = $20,120 + $33,180 A = L + OE 19 Equation Analysis Sheet 2. Metropolitan Movers pays $1,200 cash to Mercury Finance. 20 Equation Analysis Sheet 2. Metropolitan Movers pays $1,200 cash to Mercury Finance. Accounting Equation 21 $52,100 = $18,920 + $33,180 Equation Analysis Sheet 3. K. Lincoln, who owes Metropolitan Movers $2,500, pays $1,100 in partial payment of debt. 22 Equation Analysis Sheet 3. K. Lincoln, who owes Metropolitan Movers $2,500, pays $1,100 in partial payment of debt. Accounting Equation 23 $52,100 = $18,920 + $33,180 Equation Analysis Sheet 4. Equipment costing $1,950 is purchased for cash. 24 Equation Analysis Sheet 4. Equipment costing $1,950 is purchased for cash. Accounting Equation 25 $52,100 = $18,920 + $33,180 Equation Analysis Sheet 5. A new pick-up truck is purchased at a cost of $18,000. Pay $10,000 cash and borrow the balance from Mercury Finance. 26 Equation Analysis Sheet 5. A new pick-up truck is purchased at a cost of $18,000. Pay $10,000 cash and borrow the balance from Mercury Finance. Accounting Equation 27 $60,100 = $26,920 + $33,180 Equation Analysis Sheet 6. Metro Movers complete a storage service for B. Cava at a price of $1,500. A bill is sent to B. Cava. 28 Equation Analysis Sheet 6. Metro Movers complete a storage service for B. Cava at a price of $1,500. A bill is sent to B. Cava. Accounting Equation 29 $61,600 = $26,920 + $34,680 Equation Analysis Sheet 7. J. Hofner, the owner, withdraws $500 for personal use. 30 Equation Analysis Sheet 7. J. Hofner, the owner, withdraws $500 for personal use. 31 Accounting Equation $61,100 = $26,920 + $34,180 Equation Analysis Sheet 8. One of the trucks requires engine work costing $75. The repair is paid in cash when the truck is picked up. 32 Equation Analysis Sheet 8. One of the trucks requires engine work costing $75. The repair is paid in cash when the truck is picked up. 33 Accounting Equation $61,025 = $26,920 + $34,105 Equation Analysis Sheet Update the Balance Sheet based on the balances at the end of the Equation Analysis Sheet 34 Assignment for Section 3.2 Section 3.2 Exercise 1, 2, 3 35 Chapter 3 Review Exercises Review Exercises 1, 3, 6 (A, B, C, D), 7 36
