Accounting 120
Chapter #3 Notes
Moncton High
Mr. Binet
Business Transactions
• The daily events occurring in a business that cause a change in
the financial position are called transactions.
• Example of transactions:
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–
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The purchase of a new delivery truck
A monthly payment to the bank loan
An additional monetary investment by the owner
A payment to a creditor
• The receipt of cash from a debtor
• Examples of events which are not transactions:
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–
The hiring of a new employee
The receipt of a letter suggesting changes to the telephone services
Changes to the Financial Position
•
Let's examine the effect our transactions have on a business.
Proper analysis requires three steps:
1.
2.
3.
Review the transaction.
Classify each item affected as asset, liability or owner's equity.
Decide whether each item affected is to be increased or decreased.
Source Documents
•
•
Accountants cannot rely upon the word of employees and/or owners when
determining what financial events have occurred. Some type of proof is required when
a transaction changes the financial position of a business. A source document, verifies
the dollar amount of a transaction and provides the information needed by the
accounting department.
Examples of source documents:
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–
–
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•
Bills-telephone, hydro, etc.
Cheque copies
Store receipts
Cash register summaries
Credit card slips
Source documents provide:
– Proof of payment-cheque copy, store receipts, credit card slips
– Proof of purchase-bill
– Reference-cash register summaries
•
Source documents are systematically filed and kept for many years. This allows owners,
comptrollers and auditors to answer any questions that may arise at a later date.
Example Invoice
Examine the source
document, shown on
this screen, and try to
answer each of the
following questions:
1. Who issued the bill?
2. Who received the bill?
3. When was the bill
issued?
4. When were the goods
delivered?
5. How were the goods
delivered?
6. When is payment of
the bill due?
7. Was this a cash sale
transaction? How do
you know?
GAAP: The Objectivity Prinicple
• The objectivity principle states that accounting
will be recorded on the basis of fact.
• The source document for a transaction is almost
always the best objective evidence available.
GAAP: The Objectivity Prinicple
• Daniel Franklin has started his own part-time computer consulting
business. He studied some accounting during high school and has
included the following two assets on his beginning balance sheet:
– Computer: $1 900
– Furniture: $ 320
• Daniel owned the computer for six months prior to opening the
business but had it updated for $900. He has seen advertisements
for similar systems for $2 500. Daniel purchased a desk and a chair
at a company yard sale for $250. After a little refinishing he is
certain the value has increased to at least $320.
• Has Daniel violated any GAAP’s? If so, which GAAP? Explain why
this is a violation..
Equation Analysis Sheet
• Our next step is to discover how events affect
and change the financial position of a business.
To demonstrate, we will use the balance sheet
of Harding's Design.
Equation Analysis Sheet Continued
• To analyze the changes in financial position, we will
arrange the balance sheet onto an equation analysis
sheet. The equation analysis sheet is a learning tool. It is
not used by accountants but by those learning
accounting.The Analysis Sheet displays:
• Individual transactions
• The new financial position resulting from each
transaction
• Review the following equation analysis sheet displaying
the beginning balances of Harding's Design.
Equation Analysis Sheet Continued
• Let's examine how transactions are entered on
an equation analysis sheet and how the financial
position changes.
• Harding's Design pays $200 on the Bank Loan
Analysis:
Equation Analysis Sheet Continued
• Observe
• There must be equal change to both sides of the equation (red
line indicates division of sides) in order for the fundamental
accounting equation to balance. Bank is decreased by $200 and
the Bank Loan is decreased by $200.
• The amounts of other items remain unchanged.
• After the changes are recorded, the equation is still in balance.
Transaction 2
• S. Corbett, who owes Harding's Design $1 650, makes a partial
payment of $800.
• Analysis:
• Observe: The Bank is increased by the amount received, $800.
• The figure for S. Corbett is decreased by $800, but $850 is still
owing on the debt.
• After the changes the equation is still in balance.
Transaction 4
• A new automobile for $28 500. Harding's Design pays $12 000
cash and arranges a loan from the bank for the balance of the
purchase price.
• Analysis:
• Observe: Bank is decreased by the amount paid, $12 000.
• Automobiles is increased by the cost of the new vehicle, $28 500.
• The Bank Loan is increased by the additional amount borrowed,
$16 500.
• After the changes the equation is still in balance.
Transaction 6
• J. Harding withdraws $500 for personal use.
• Analysis:
• Observe:
• Bank is decreased by $500, the amount
withdrawn.
• Capital is decreased by $500.
• After the changes the equation is still in balance.
Transaction 7
• One of the automobiles requires repairs costing $180. The repair
is paid for in cash.
• Analysis:
• Observe:
• Cash is decreased by $180, the amount paid for the repair.
• The value of the automobile is not increased as a needed repair
does not increase its worth.
• Capital is decreased by $180. This cost of "doing business" must
be "absorbed" by the company and its owner.
• After the changes the equation is still in balance.
Changes to Owner’s Equity
• You may have difficulty determining if and when owner's equity is affected
by a transaction. Examine the list of some possible events and the resulting
change to owner's equity:
Transaction
•
Change to Owner's Equity
Owner invests additional funds in company
Increase
Owner withdraws funds from company
Decrease
Company “does business” for cash
Increase
Company “does business” on credit
Increase
Company spends money in order to carry out business (pays employee
wages, pays power bill, pays for repairs to existing equipment, etc.)
Decrease
Company sells an asset item for less that its “book value”
Decrease
Company sells an asset item for more than its “book value"
Increase
• Examine the following transaction: A truck originally purchased and recorded
for $10 000 is sold for $7 000 cash.Analysis
Item
Classification
$ Change
Cash
Asset
+ $7 000
Truck
Asset
- $10 000
Capital
Owner's Equity
- $3 000
Equation Analysis Sheet Review
•
1.
2.
3.
4.
5.
Review your knowledge of the equation analysis sheet by
asking yourself the following questions:
What is the name of the form used to analyze transactions?
How is this form related to the balance sheet?
What is a simple way of knowing if capital should
increase/decrease after a business transaction?
How do you know if the changes for a transaction recorded on
an equation analysis sheet were balanced?
Does a transaction always change both sides of a balance
sheet? How do you know?
Equation Analysis Sheet Review Answers
1.
2.
3.
4.
5.
The form used to analyze transactions is an equation analysis
sheet.
All of the assets, liabilities and the capital are listed with their
amounts and are in a balanced state.
Enter the known item, such as bank. If no other asset or liability
is involved, the “balancing” figure must occur to owner’s equity.
After each transaction is entered, new balances are calculated
and these totals balance according to the fundamental
accounting equation. If the equation balances, it can be assumed
the transaction was a balanced one.
A transaction does not always change both sides of the balance
sheet. For example, a transaction may increase one asset
(equipment) while decreasing another asset (bank).
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
Chapter 3 Assignments
 Please have the following assignments in by the
end of class today:
 Chapter 3: Assignment 1 and 2.
 U2A3, U3A2, U3A3
 Quiz tomorrow on Chapter 3: Source
Documents, GAAPs, Equation Analysis Sheet,
Chapter 3 Terms/Definitions
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