1 Accounting 100 Chapter 2 Analyzing Business Transactions

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Accounting 100

Chapter 2

Analyzing Business Transactions

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Objectives

Record in equation form the financial effects of a business transaction.

Define, identify, and understand the relationship between asset, liability, and owner’s equity account.

Analyze the effects of business transactions on a firm’s assets, liabilities, and owner’s equity.

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Business Transactions A financial event that changes the

resources of the firm. May be a purchase, a sale, a receipt, or

payment of cash. The effects of each transaction must be

studied in order to know what and where to record.

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Transaction #1

Margery Meadows deposits $50,000 in the bank as the initial investment in her new business, Meadows Accounting.– Cash is increased by $50,000– Business capital is increased by $50,000

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Transaction #2

Margery rents facilities for her new business by signing a lease for six months with monthly rent of $1,000– The rent is paid in advance for the next 6

months in the amount of $6,000– Cash is decreased by $6,000

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Transaction #3

Margery purchases a computer and other equipment for $8,000 with a check drawn on the bank.– The equipment increases by $8,000– The cash decreases by $8,000

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Current Financial Position

Cash + Prepaid Rent + Equipment =Capital+50,000 =+ 50,000

- 6,000 +6,000

44,000 6,000 = 50,000

- 8,000 + 8,000

36,000 6,000 8,000 = 50,000

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Accounting Classifications

Assets: property owned by a business Liabilities: debts or obligations of a

business Owner’s Equity: financial interest of

the owner of a business (also known as proprietorship or net worth)

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Fundamental Accounting Equation

Assets = Liabilities + Owner’s Equity

Assets - Liabilities = Owner’s Equity

Assets - Owner’s Equity = Liabilities

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Solving the Equation

Assets = Liabilities + Owner’s Equity

? = $ 5,000 + $35,000

$39,000 = ? + $35,000

$42,000 = $ 7,000 + ?

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Revenue

Revenue: inflow of money or other assets (including claims to money) that results from sales of services or goods.

Revenue increases owner’s equity. When revenues exceed expenses there

is a profit (net income).

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Expenses

Expenses: outflow of money, the use of other assets, or the incurring of a liability.

Expenses reduce owner’s equity. When expenses exceed revenues,

there is a loss (net loss).

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Transaction #4

During the month of December, Meadows Accounting Services earned a total of $15,000 in revenue from clients who paid cash.– Cash increased by $15,000– Owner’s Equity increased by $15,000

• (Fees Earned in the name of the revenue account)

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Withdrawals

Withdrawals are funds taken from a business by the owner to pay personal items (non-business related).

Withdrawals reduce owner’s equity, but are not considered a business expense.

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Financial Statements

Preparing accurate and informative financial statements is one of the accountant’s most important jobs.

Business people use the financial statements to make decisions.

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Income Statement

A formal report showing the results of the business operations for a specific period of time.

Only revenues and expenses are shown on the statement.

Revenues - expenses = net income or (loss).

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Statement of Owner’s Equity

A report showing changes that occurred in the owner’s financial interest during a specific period of time.

The amount of net income (loss) is the connecting link between the income statement & statement of owner’s equity

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Balance Sheet

A formal report of the firm’s financial position which lists the assets, liabilities, and owner’s equity on a specific date.

The link between the balance sheet and the statement of owner’s equity is the revised owner’s investment which is calculated on the Statement of Owner’s Equity.

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Chapter 2The End