Analyzing Changes in
Financial Position
Bad news guys…
• Balance sheets…
Business Transactions
• Anything that causes the financial position of the business to change is called
a business transaction.
• When Stephen goes to buy a bottle of coke and a bag of chips from the gas
station, what happens?
Business Transactions
• If a company buys a car worth $25,000, what happens?
• If we owe $8000 to the city for taxes, and we pay $1000 off tomorrow, what
happens?
• If we bring in a company to inspect the building and they recommend replacing
the windows, changing the light bulbs, and getting new doors, is this a
transaction?
Source Documents
• ANY time an asset, a liability, or equity item is recorded for accounting purposes, we
need some sort of proof/evidence that we did not just make up the number. This is
called a source document.
• This is an original record of the transaction, and it gives the information needed for
the accounting clerk to process properly.
• Cell phone bills, internet bills, electricity bills, copies of cheques, store receipts,
credit card slips, cash register summaries.
• These all have to be filed. They may need to be looked at later by owners, managers,
or auditors.
Source Documents
• What you need to know for now is the following:
• 1. Accounting entries are made from business papers known as source
documents.
• 2. Source documents are kept on file for reference purposes and are proof
of transactions.
Ready for another Accounting Standard?
• The Objectivity principle.
• Basically, accounting needs to be recorded using clear, verifiable evidence.
• If 15 different people look at the same evidence…they should all arrive at
the same piece of evidence.
• Transactions should be recorded on fact, not opinion.
Objectivity Principle
• Receipts from the source are the absolute best source of information.
• There is no room for false interpretation.
Let’s go over some things.
•
•
•
•
•
1. What is a business transaction?
2. What are some examples of transactions?
3. Give an example of an event in a business that is not a transaction?
4. What is a source document?
5. What happens to source documents after the accounting entries have been
completed?
• 6. What is the objectivity principle?
Equation Analysis Sheets
• So…how do transactions impact balance sheets?
• Let’s look at one from September 29th.
Equation Analysis Sheets
• We need a new way
of recording changes
to the balance sheet.
• We will be using
Equation Analysis
Sheets.
Equation Analysis Sheets
Equation Analysis Sheets
• What if Metropolitan Movers makes a payment on its loan?
Equation Analysis Sheets
• What if one of the Accounts Receivable pays some of their debts to
Metropolitan Movers?
Equation Analysis Sheets
• What if Metropolitan Movers purchases $1950 worth of equipment?
Equation Analysis Sheets
• Metro Movers buys a truck for $18,000. They pay $10,000 of it in cash, and
get an $8000 loan for the rest.
Equation Analysis Sheets
• Metro Movers performs a service for B. Cava worth $1500. They send a bill
to him saying he owes that much.
Equation Analysis Sheets
• Two ways to look at the increase in capital.
• 1. Metro Movers is a service business. When they do the move for B. Cava,
he legally owes $1500. This is a gain for Metro Movers. Therefore, the
Owner’s Equity (capital) is increased (J. Hofner).
• 2. The owner gets to claim whatever is left after liabilities are paid. Assets
went up, liabilities did not, so the Owner’s capital goes up.
Homework: