Analyzing Changes in
Financial Position
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.
Equation Analysis Sheets
• J. Hofner, the owner of Metropolitan Movers, withdraws $500 for personal
use.
Equation Analysis Sheets
• One of the company’s trucks requires an engine adjustment costing $375.
The repair is paid for in cash when the truck is picked up.
• What do we have to think about?
Updating the Balance Sheet
• So we have a balance sheet that is now out of date.
• We need to update our balance sheet to show all the changes that we just
made.
Updating the Balance Sheet.
• Step 1: IDENTIFY ALL ASSET AND LIABILITY ITEMS THAT NEED TO
BE CHANGED AND MAKE ALL NECESSARY CHANGES
-You want to make sure that you properly classify the information.
• Step 2: SEE IF THE OWNER’S EQUITY HAS CHANGED.
-Remember the equation. If assets decrease and liabilities also decrease, what
happens to equity?
-If assets decrease and liabilities are unchanged, what happens now?
Updating the Balance Sheet
• Step 3: MAKE CERTAIN THAT AT LEAST TWO OF THE
INDIVIDUAL ITEMS HAVE CHANGED
-It is possible for several items to change, but not only one.
• Step 4: MAKE SURE THE EQUATION IS STILL IN BALANCE.
-Assets must always equal liabilities and equity
Develop good work habits!
• You need to be accurate!
• Who would be happy with an 80% on a test?
• If you are 80% right in accounting procedures, that means you are 20%
wrong.
• Memory is not good enough to remember all of the transactions you could
be dealing with. You need common sense, clear thinking, and a good
understanding of accounting theory.
Let’s review
• 1. Why is the Equation Analysis Sheet necessary?
• 2. What is transferred from the balance sheet to the equation analysis sheet?
• 3. How do you know if the changes for a transaction recorded on an
equation analysis sheet are balanced?
• 4. Does a transaction always change both sides of the accounting equation?
• 5. How could the description of the engine repair transaction be changed so
that only the right side changes?
Let’s review
• 6. What four steps should be used to analyze the changes caused by a
transaction?
• 7. What is a good clue as to whether the capital increased or decreased.
• 8. Assets increase by $10,000 with no corresponding change in liabilities.
What change is there in capital?
• 9. What do good accountants rely on apart from their memory?
• 10. Why must accounting be done accurately?
One exercise all together
• Here is the financial position for Sheila’s Interior Decorating, owned by
Sheila Kostiuk.
• Stationery and supplies are purchased from Home Supply on credit for $175. They will be paid
within 30 days.
• A new desk for the office is purchased for $450 cash.
• E. Kerluck, a debtor, pays his debt in full.
• A used car costing $6500 is purchased from Pine Motors. A down payment of $500 is made. It
is agreed that the remainder of the purchase price will be paid within three months.
• Home Supply, a creditor, is paid $700.
• The owner, S. Kostiuk, withdraws $200 from the business for her own use.
Homework
• Do exercise #2 and 3 on pages 70 and 71. We will discuss them tomorrow.