Chapter 3
Analyzing Changes
in Financial Position
Business Transactions
 On any given day, many
events occur that cause the
financial position of a
business to change.
 Each of these events is called
a business transaction.
 For example, suppose the
business buys a new truck for
which it pays $20,000 cash.
This event is a transaction
because it causes the financial
position of the business to
change.
Equation Analysis Sheet
 Your next step in the study of accounting
is to learn how various business
transactions affect and change the financial
position.
 Example Figure 3.1 & Figure 3.2 on Page 53
 Balance Sheet vs. Equation Analysis Sheet
 Assets = Liabilities + Owner’s Equity
 $53,300 = $20,120 + $33,180
 Try Transactions 1 to 7 from Page 54 to 59
Steps in Analyzing a Transaction
 1. Identify all items (assets & liabilities) that must be
changed and make all necessary changes
 2. See if the owner’s equity has changed
 3. Make certain that at least two of the individual
items have changed
 4. Make sure that the equation is still in balance
 Remember the accounting equation: Assets =
liabilities + owner’s equity
Assignment
 In groups of 2, or individually, type up (in one file) and email the following completed sections to me:
 Section 3.1 Review Questions (#1-3) – Page 51
 Section 3.2 Review Questions (#1-5) – Page 60
 Section 3.3 Review Questions (#1-5) – Page 63
 Section 3.4 Review Questions (#1-7) – Page 65
 Section 3.4 Exercises (#1-3) – Page 65-67
Section 3.1 Review Questions – Page 51
1. What is a business transaction?
•
A business transaction in a financial event that causes a
change in the financial position.
2. Give an example of a transaction, other than the
ones above.
•
A new office desk is purchased and paid for in cash.
3. Give an example of an event in a business, other
than the one above, that is not a transaction.
•
The owner examines some new computer equipment
being demonstrated by a salesperson.
Section 3.2 Review Questions – Page 60
1. Name the form used in this chapter for analyzing
transactions.
 The equation analysis sheet is used for analyzing
transactions in this chapter.
2. Explain how this form is related to the balance
sheet.
 All of the assets, liabilities, and the equity are shown in
columns and are in a balanced state.
3. Explain the mathematical way of telling if capital
has increased after a business transaction.
 After a transaction, recalculate the total assets, the total
liabilities, and the equity. If the new equity figure is
greater than the previous equity figure, the capital has
increased.
Section 3.2 Review Questions – Page 60
4.
How do you know if the changes for a transaction recorded
on an equation analysis sheet are balanced?

5.
After each transaction is recorded on the equation analysis sheet, new
column totals can be calculated and these totals balanced according to
the fundamental accounting equation. The totals balance, it can be
assumed that the transaction was a balanced one.
Does a transaction always change both sides of the balance
sheet? How do you know?

A transaction does not always change both sides of the balance sheet.
For example, a transaction might increase one asset and decrease
another by the same amount. In this case, the liability side of the
balance sheet would be totally unchanged. The balance sheet still
balances after the sample transaction.
Section 3.4 Review Questions – Page 65
1.
Give the reasons why business papers are created within a
business.




2.
When in the business do business papers originate?




3.
For proof of purchase
For proof of payment
For reference
For a permanent record
The purchasing department
The sales department
The receiving department and
The accounting department
What must happen to any business paper for which an
accounting entry is necessary?

A copy of every business paper that requires an accounting entry
must be forwarded to the accounting department.
Section 3.4 Review Questions – Page 65
4.
For accounting purposes, what are these business papers
called?

5.
State and explain the objectivity principle. Give an example.

6.
The objectivity principle states that accounting records will be based
on objective evidence. Source documents represent this objective
evidence.
Give some examples of source documents.




7.
Source documents.
Hydro bills
Cheque copies
Cash register summaries
Credit card statements
What happens to source documents after the accounting
entries have been completed?

Placed in permanent files
Section Exercises
Try the following Exercises in Groups:
Question 1 on Page 60 & 61
Question 2 on Page 61
Question 3 on Page 62
Source Documents
 A Source Document is a business paper, for example
a bill. It is the original record of a transaction and it
provides the information needed when accounting for
the transaction
 For example: Hydro Bills, telephone bills, Cheque
copies, credit card statements, cash register
summaries.
 All source documents must be kept on file for
reference purposes and as proof of transactions
Section Exercise - Question 1, Page 65
1.
Who issued the bill?

2.
Who received the bill?

3.

Smokey Valley Ski Club
When was the bill issued?

4.
Campbell & Associates
5. In your opinion, what
accounting changes will be
made by the receiver?
July 22, 19-0
6. For what service was the bill
issued?

Does the bill say when
payment is due?

No, the bill does not say
when payment is due.
When the bill is paid, the receiver
will decrease Bank $1,712 and
decrease Capital $1,712.
Campbell and Associates audited
the records of Smokey Valley Ski
Club and also prepared financial
statements for them.
7. Does the bill represent good
objective evidence? Why?

Yes, because it originates from a
source independent of the
business.
Chapter 3, Assignment #2
 Complete the following tasks in groups and submit
one Word and one Excel file (named Chapter 3,
Assignment 2).
 Read Chapter Highlights – Page 73
 Exercise 1 on Page 73
 Exercise 2 on Page 74
 Exercise 6 on Page 74
 In Excel: Challenge Exercise #6, page 74-75
Exercise 2 – Page 66
1.
2.
3.
4.
5.
6.
7.
8.
9.
The Davey Company issued the bill
Smokey Valley Ski Club received the bill
The bill was issued December 5, 19-0
The goods were delivered December 5, 19-0 by CPX
The bill is due for payment in 30 days from December 5,
19-0, which would be January 4, 19-1
The source document was issued as evidence of the
transaction to be used in the accounting records of both the
purchaser and the vendor
The accounting changes for the purchaser will increase
Supplies by $170.20 and increase Accounts Payable – The
Davey Company by $170.20
No, this was not a cash sale transaction
The bill comes from an independent source
Exercise 3 – Page 67
1. The source document is a cheque
2. Smokey Valley Ski Club issued a cheque
3. Mid-West Ski Lifts and Equipment received the
cheque
4. The source document is likely paying for ski lifts
and/or other equipment
5. B and C are both possible. B is more likely
because this type of equipment would normally be
first purchased on credit and paid for later.
Exercise 1 – Page 73
1. F. Vanweers paid a debt of $250
2. On credit, $150 worth of supplies were purchased
from Norpaints
3. B. Provost, the owner, put $300 cash into his
business
4. The business performed a service for C. Sulley,
who has 30 days to make payment
5. The debt to B.M. Co. was paid in full
Exercise 2 – Page 74
1. The business performed a service for L. Swan for
$1800, of which $500 was paid in cash and $1300
is still owing
2. The auto was sold to High Finance for $6500,
paying off the debt of $5000 and leaving B. Lee
with $1500 cash and a $500 loss on the sale of the
auto
3. A $20000 auto was bought with $1000 cash and a
$19000 Bank Loan
4. The owner withdrew $150 from his personal
account
5. Supplies worth $50 have been destroyed