Chapter 3:
Analyzing
Changes in
Financial Position
1
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.
2
Source Documents
What would be some examples of
source documents?
Hydro bill
Telephone bill
Cheque copies
Store receipts
Cash register summary
Credit card slips
3
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.
4
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.
5
Exercise #1 (Page 50)
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.
A. The business pays $800 to Mercury Finance to
reduce the amount owed to them.
B. The owner, P. Dufour, withdraws $500 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.
6
Exercise #1 (continued)
D. A $700 consulting service is provided for Rita
Bertoli on credit.
E. The business pays the rent for the month, $500.
F. The employee in question C above is hired to
start work next Monday at $400 per week.
G. The business purchases a new computer for cash
at the price of $3,000.
H. The computer in question G above is defective
and is replaced at no cost to the business.
7
Exercise #2 (Page 51)
You are working for Ace Collection Agency
of Cornwall, Ontario, owned by Ingrid Lencz.
Determine whether or not each of the
following is a transaction:
A. Gasoline for the company automobile was
purchased for $40 cash.
B. Ingrid Lencz paid $15 out of her own pocket for
lunch.
C. Ingrid’s personal car was damaged and needed a
$500 repair job.
8
Exercise #2 (continued)
D. A $250 service was performed for a customer who
paid cash.
E. A leased computer broke down and needed to be
replaced at no cost to the business. The man
who brought the replacement said that the new
machine was a $2,500 model.
F. A customer who owed the business $1,200 made
a partial payment of $300.
G. The business bank loan was reduced by a direct
payment to the bank of $1,000.
H. A burglar broke into the office and stole the
leased computer. The business has 100 per cent
replacement insurance to cover breaking and
entering and theft.
9
Exercise #3 (Page 51)
Examine this source document and answer the
following:
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?
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Why?
Exercise #4 (Page 52)
Examine this source document and answer the
following:
A.
B.
C.
D.
E.
F.
G.
H.
Who issued the bill?
Who received the bill?
When was the bill issued?
When were the goods
delivered? How?
When is this bill due for
payment?
Why was the bill issued?
Was this a cash sale
transaction?
Why does this represent
good objective evidence?
11
Exercise #5 (Page 53)
The accountant for a business received
a memorandum from the owner. The
memorandum stated that a new office
desk recently installed in the owner’s
office was acquired at a cost of $2,500
and that it was paid for in cash by the
owner personally.
A. Is the memorandum objective evidence?
Why / Why not?
B. What is the best objective evidence in this
case?
12
Analyzing
Changes in
Financial Position
Equation Analysis Sheet
13
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.
14
Equation Analysis Sheet
Example – Opening Balance Sheet
15
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
=
$20,120
+
$33,180
Headings …
One per
account name
16
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
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Equation Analysis Sheet
2. Metropolitan Movers pays $1,200 cash to Mercury Finance.
18
Equation Analysis Sheet
2. Metropolitan Movers pays $1,200 cash to Mercury Finance.
Accounting Equation
$52,100
=
$18,920
+
$33,180
19
Equation Analysis Sheet
3. K. Lincoln, who owes Metropolitan Movers $2,500, pays
$1,100 in partial payment of debt.
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Equation Analysis Sheet
3. K. Lincoln, who owes Metropolitan Movers $2,500, pays
$1,100 in partial payment of debt.
Accounting Equation
$52,100
=
$18,920
+
$33,180
21
Equation Analysis Sheet
4. Equipment costing $1,950 is purchased for cash.
22
Equation Analysis Sheet
4. Equipment costing $1,950 is purchased for cash.
Accounting Equation
$52,100
=
$18,920
+
$33,180
23
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.
24
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
$60,100
=
$26,920
+
$33,180
25
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.
26
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
$61,600
=
$26,920
+
$34,680
27
Equation Analysis Sheet
7. J. Hofner, the owner, withdraws $500 for personal use.
28
Equation Analysis Sheet
7. J. Hofner, the owner, withdraws $500 for personal use.
Accounting Equation
$61,100
=
$26,920
+
$34,180
29
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.
30
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.
Accounting Equation
$61,025
=
$26,920
+
31
$34,105
Equation Analysis Sheet
Update the Balance Sheet based on the balances at the end
of the Equation Analysis Sheet
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Summary of Steps in
Analyzing a Transaction
1. Identify all items (assets and liabilities)
that must be changed and make all
necessary changes.
•
•
•
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.
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Summary of Steps in
Analyzing a Transaction
2. See if the owner’s equity has changed.
•
•
Remember the accounting equation.
If assets decrease and liabilities are
unchanged, the equation must be balanced by
a decrease in owner’s equity.
3. Make certain that at least two of the
individual items / accounts have
changed.
•
It is possible for several items to change, but
there can never be only one change.
34
Summary of Steps in
Analyzing a Transaction
4. Make sure that the equation is still
in balance.
• The fundamental accounting equation
(Assets = Liabilities + Owner’s Equity)
must always be in balance.
35
Exercise #1 (Page 59)
Using a spreadsheet program, set up a Equation
Analysis Sheet (as per below) and record the
following transactions. Calculate the new totals after
each entry to make sure the equation balances.
1.
2.
3.
4.
5.
6.
7.
Stationary and supplies are purchased from Ace Supply on credit for $75.
They will be paid for within 30 days.
A new desk for the office is purchased for $450 cash.
D. Murray, a debtor, pays her debt in full.
A $100 service is performed for a customer who pays in cash.
A used truck costing $6,500 is purchased from Pine Motors. A down
payment of $500 is made. It is agreed the balance will be paid within three
months.
Ace Supply, a creditor, is paid $75.
The owner, Sheila Kostiuk, withdraws $100 from the business for her own
36
use.
Exercise #2 (Page 60)
The balance sheet of Triangle Real Estate of
Tweed, Ontario, at the close of business on
September 30, 2007, is as follows:
37
Exercise #2 (continued)
A.
B.
C.
Prepare an equation analysis sheet, using a spreadsheet
program, and record the figures from the balance sheet
provided
Analyze the transactions of October 1, listed below, and
record the necessary changes on the equation analysis
sheet. After each transaction, ensure that the equation is
still in balance.
After completing transaction 5, prepare a new balance
sheet.
October 1st Transactions:
1.
Triangle Real Estate receives $100 cash from N. Swartz in partial payment
of the amount owed by him.
2.
Acme Supply is paid $200 cash in partial payment of the debt owed to
them.
3.
Supplies costing $95 are purchased for cash from the Standish Company.
4.
Triangle Real Estate sells a home for A.J. Buhler. For this service, Triangle
Real Estate receives a commission of $4,700 cash.
5.
A new desk (Office Furniture) is purchased from Ideal Furniture for $950
38
cash.
Exercise #3 (Page 61)
Alliance Appliance Service in Renforth, Ontario, owned by
Wayne Dalli, has the following assets and liabilities at the
close of business on October 20, 2007.
Assets
Liabilities
Cash
A/R – N. Chang
A/R – P. O’Neil
Equipment
Delivery Truck
Land
Building
$ 1,395
100
527
8,316
19,750
40,000
80,000
Bank Loan
$ 1,395
Mortgage Payable 52,700
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Exercise #3 (continued)
A.
B.
C.
Prepare an equation analysis sheet, using a spreadsheet
program, and record the above items. Do not forget to
calculate and include the capital figure.
Analyze the transactions of October 21, listed below, and
record the necessary changes on the equation analysis
sheet. After each transaction, ensure that the equation is
still in balance.
After completing transaction 5, prepare a balance sheet.
October 21st Transactions:
1.
The owner, in need of money for his personal use, draws $500 cash out of
the business.
2.
P. O’Neil pays her debt of $527.
3.
A repair service is performed for a customer. The customer pays the full
amount of the bill, $90, in cash.
4.
A new electrical tester is purchased for $410 and paid for in cash.
5.
The regular monthly mortgage payment of $900 in cash is made.
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Homework
Review Exercises
• Exercise 1 (pg. 70)
• Exercise 2 (pg. 71)
Class Work
Review Exercises
• Exercise 3 – 6 (pg. 71)
Assignment
Challenge Exercise
• Exercise 7 (pg. 72)
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