Intro to Accounting 120 Chapter #3 Notes
Unit # 3 - Transactions
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.
Unit # 3 - Transactions
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.
Mr. Binet / Moncton High School
20/01/2010
page 1
Transaction 1
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:
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 3
Purchased a new computer costing $2 980. Paid cash.
Analysis:
Observe:



Bank is decreased by the amount paid, $2 890.
Equipment is increased by the cost of the new computer, $2 890.
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 5
Harding's Design charges S. Lyons $2 200 for the completion of a design service. A bill is sent to Lyons to
indicate the amount that Lyons owes.
Analysis:
Observe:




Lyons owes $2 200 more to Harding's Design.
No other asset or liability is affected.
J. Harding's capital is increased by $2 200.
After the changes the equation is still in balance.
When a company "does business," capital increases.
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
Owner invests additional funds in company
Owner withdraws funds from company
Company “does business” for cash
Company “does business” on credit
Company spends money in order to carry out business
(pays employee wages, pays power bill, pays for repairs to
existing equipment, etc.)
Company sells an asset item for less that its “book value”
Company sells an asset item for more than its “book value"
Change to Owner's Equity
Increase
Decrease
Increase
Increase
Decrease
Decrease
Increase
Examine the following transaction: A truck originally purchased and recorded for $10 000 is sold for $7 000
cash.
Analysis
Item Classification
Cash
Asset
Truck Asset
Capital Owner's Equity
Reviewing Analysis
$ Change
+ $7 000
- $10 000
- $3 000
Let's review the steps for analyzing any transaction.
Step 1 Identify all items involved in the transaction
Step 2 Verify that at least two individual items have changed.
It is possible for many items to change, but there can never be only one item affected.
Step 3 Verify that the fundamental accounting equation is still in balance.
Equation Analysis Sheet Review
Review your knowledge of the equation analysis sheet by asking yourself the following questions:
1.
2.
3.
4.
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?
5. Does a transaction always change both sides of a balance sheet? How do you know?
Electronic Equation Analysis Sheet
Excel is an ideal environment for creating an equation analysis sheet. The following pages will demonstrate
how to use Excel to prepare an equation analysis sheet for Davidson Window Cleaners. It is recommended
that Excel be opened while you are reading and taking notes. As you read about the features, use the program
to practice the skill.
Examine the Balance Sheet for Davidson Window Cleaners
You should print a copy of this page to use as a reference when preparing the electronic analysis sheet in
Excel. In order for you to print a copy of this analysis sheet, hold your mouse over the image until four icons
appear on the image's top left-hand corner. Click the printer icon to print a copy.