CHAPTER 2

Analysis

Transactions

OBJECTIVES :

Accounting cycle .

Transaction .

Analyzing Transactions for Balance

sheet.

Analyzing Transactions for income

statement.

ACCOUNTING CYCLE : Transactions

(economic activities &

business condion)

Journal(record

transactions in the journal)

Ledger(Posting

transactons to ledger)

Unadjusted trail balance(Prepar

unadjusted trail balanc)

Adjustment(journalizing &

posting adjusting entries)

Adjusted Trail Balance

(Prepar adjusted trail balanc)

Financial Statement

(Prepar 4 financial statement)

Closing Entries(journalizing & posting closing

entries)

TRANSACTION

A transaction

is a business activity that affects the basic

accounting equation.

Example :

1- Sale a land.

2- Buy a car.

3 - Borrow a loan.

ANALYZING TRANSACTIONS FOR

BALANCE SHEET

LEARNING OBJECTIVE 1

Identify financial effects of common financing and

investing activities.

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BUILDING A BALANCE SHEET

Assets

The rights of creditors

The rights of the owners

Resources owned by the business

Stockholders’ Equity

Liabilities

=

+

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LEARNING OBJECTIVE 2

Apply transaction analysis to financing and investing

transactions.

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STUDY THE ACCOUNTING METHODS

1 Analyze 2 Record 3 Summarize

A systematic accounting process is used to capture and report the financial effects of a company’s transactions.

A transaction is a business activity that affects the basic accounting equation.

Duality of Effects

Every transaction has at least two effects on the basic

accounting equation.

A = L+ SE

Assets must equal liabilities plus stockholders’ equity for every accounting transaction.

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STEP 1: ANALYZE TRANSACTIONS(a) Issue Stock to Owners.

Mauricio Rosa incorporates Pizza Aroma Inc., on August 1. The company issues stock to Mauricio and his wife as evidence of their contribution of $50,000 cash,

which is deposited in the company’s bank account.

1. Pizza Aroma receives $50,000 Cash.

2. Pizza Aroma gives $50,000 Stock (Contributed Capital).

Assets = Liabilities + Stockholders' Equity(a) Cash +$50,000 Contributed

Capital + $50,000

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STEP 1: ANALYZE TRANSACTIONS(b) Investment in Equipment.

1. Pizza Aroma receives $42,000 of Equipment.

2. Pizza Aroma gives $42,000 Cash.

Assets = Liabilities + Stockholders' Equity(b) Equipment +$42,000 Cash -$42,000

Pizza Aroma pays $42,000 cash to buy restaurant booths and other equipment.

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STEP 1: ANALYZE TRANSACTIONS(c) Obtain Loan from Bank.

1. Pizza Aroma receives $20,000 Cash.

2. Pizza Aroma gives a note, payable to the bank for $20,000.

Assets = Liabilities + Stockholders' Equity(c) Cash +$20,000 = Note Payable +$20,000

Pizza Aroma borrows $20,000 from a bank depositing those funds in its bank account and signing a formal agreement to repay the loan in two years.

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STEP 1: ANALYZE TRANSACTIONS

(d) Investment in Equipment.

1. Pizza Aroma receives $18,000 in equipment (pizza ovens).

2. Pizza Aroma gives a Cash of $16,000 and Accounts Payable of $2,000.

Assets = Liabilities + Stockholders' Equity(d) Cash -$16,000 = Accounts Payable +$2,000

Equipment +$18,000

Pizza Aroma purchases $18,000 in pizza ovens and other restaurant equipment, paying $16,000 in cash and giving an informal promise to pay

$2,000 at the end of the month.

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STEP 1: ANALYZE TRANSACTIONS

(e) Order Cookware.

1. An exchange of only promises is not a transaction.

2. This does not affect the accounting equation.

Assets = Liabilities + Stockholders' EquityNo Impact = No Impact No Impact

Pizza Aroma orders $630 of pans, dishes, and other cookware. None have been received yet.

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STEP 1: ANALYZE TRANSACTIONS

(f) Pay Suppliers.

1. Pizza Aroma gives cash to settle its debt to the supplier.

2. Pizza Aroma receives a release from its promise to pay.

Assets = Liabilities + Stockholders' Equity(f) Cash -$2,000 = Accounts Payable -$2,000

Pizza Aroma pays $2,000 to the equipment supplier from transaction (d).

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STEP 1: ANALYZE TRANSACTIONS

(g) Receive Cookware.

1. Pizza Aroma receives cookware with a cost of $630.

2. Pizza Aroma gave a promise to pay $630 on account.

Assets = Liabilities + Stockholders' Equity(g) Cookware +$630 = Accounts Payable +$630

Pizza Aroma receives $630 of the cookware ordered in (e) and promises to pay for it next month.

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STEP 2 AND 3: RECORD AND SUMMARIZE

Most companies use computerized accounting systems, which can handle a large number of transactions. These systems

follow a cycle, called the accounting cycle, which is repeated day-after-day, month-after-month, and year-after-year.

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CHAPTER 2SOLVED EXERCISES

M2-13 Identifying Transactions and Preparing Journal Entries

1- Borrowed $25,000 from the bank with a plan to use the funds to build a small workshop in August. The loan must be report in two years.

1- dr Cash (+A) 25,000cr Notes Payable (+L)

25,000

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M2-14 Identifying Transactions and Preparing Journal Entries

2- The company purchased bookshelves for $2,000 cash. The bookshelves are expected to be used for ten or more years.

2- dr Equipment (+A) 2,000cr Cash (-A) 2,000

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M2-14 Identifying Transactions and Preparing Journal Entries

3- The company paid $1,500 cash, for books purchased on account earlier in the month.

3- dr Accounts Payable (-L) 1,500cr Cash (-A) 1,500

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M2-15 Identifying Transactions and Preparing Journal Entries

4- Repaid a $5,000 bank loan. (Ignore interest).5- The company purchased an air hockey table for $2,200, paying $1,000 cash and signing short-term note for $1,200.

4- dr Notes Payable (-L) 5,000cr Cash (-A) 5,000

5- dr Equipment (+A) 2,200cr Cash (-A) 1,000cr Notes Payable (+L) 1,200

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ANALYZING TRANSACTIONS FOR

INCOME STATEMENT

CASH BASIS ACCOUNTING

Cash basis accounting records revenues when cash

is received and expenses when cash is paid.

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LEARNING OBJECTIVE 2

Explain and apply the revenue and matching

principles.

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PIZZA AROMA’S ACCOUNTING RECORDS

(a) Provided services for cash.

In September, Pizza Aroma delivered pizza to customers for $15,000 cash.

Assets = Liabilities + Stockholders' Equity(a) Cash +$15,000 Pizza

Revenue (+R) + $15,000

1 Analyze

(a) dr Cash (+A) 15,000 cr Pizza Revenue (+R, +SE) 15,000

2 Record

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PIZZA AROMA’S ACCOUNTING RECORDS

(b) Receive cash for future services.

Pizza Aroma sold three $100 gift cards at the beginning of September.

Assets = Liabilities + Stockholders' Equity(b) Cash +$300 Unearned

Revenue +$300

1 Analyze

2 Record(b) dr Cash (+A) 300 cr Unearned Revenue (+L) 300

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PIZZA AROMA’S ACCOUNTING RECORDS

(c) Provide services on credit.

Pizza Aroma delivers $500 of pizza to a college organization, billing this customer on account.

Assets = Liabilities + Stockholders' Equity(c) Accounts Pizza Receivable +$500 Revenue (+R) +$500

1 Analyze

2 Record(c) dr Accounts Receivable (+A) 500 cr Pizza Revenue (+R, +SE) 500

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PIZZA AROMA’S ACCOUNTING RECORDS

(d) Receive payment on account.

Pizza Aroma received a $300 check from the college organization, as partial payment of its account balance.

Assets = Liabilities + Stockholders' Equity(d) Cash +$300 Accounts Receivable -$300

1 Analyze

2 Record(d) dr Cash (+A) 300 cr Accounts Receivable (-A) 300

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PIZZA AROMA’S ACCOUNTING RECORDS

(e) Pay cash to employees.

Pizza Aroma wrote checks to employees, totaling $8,100 for wages related to hours worked in September.

Assets = Liabilities + Stockholders' Equity(e) Cash -$8,100 Wages

Expense (+E) -$8,100

1 Analyze

2 Record(e) dr Wages Expense (+E, -SE) 8,100 cr Cash (-A) 8,100

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PIZZA AROMA’S ACCOUNTING RECORDS (f) Pay cash in advance.

On September 1, Pizza Aroma paid $7,200 in advance for September, October, and November rent.

Assets = Liabilities + Stockholders' Equity(f) Cash -$7,200 Prepaid Rent +$7,200

1 Analyze

2 Record(f) dr Prepaid Rent (+A) 7,200 cr Cash (-A) 7,200

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PIZZA AROMA’S ACCOUNTING RECORDS(g) Pay cash in advance.

On September 2, Pizza Aroma wrote a check for $1,600 for pizza sauce, dough, cheese, and paper products.

Assets = Liabilities + Stockholders' Equity(g) Cash -$1,600 Supplies +$1,600

1 Analyze

2 Record(g) dr Supplies (+A) 1,600 cr Cash (-A) 1,600

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PIZZA AROMA’S ACCOUNTING RECORDS

(h) Incur cost to be paid later.

Pizza Aroma received a bill for $400 for running a newspaper ad in September. The bill will be paid in October.

Assets = Liabilities + Stockholders' Equity(h) Accounts Advertising

Payable +$400 Expense (+E) -$400

1 Analyze

2 Record(h) dr Advertising Expense (+E, -SE) 400 cr Accounts Payable (+L) 400

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PIZZA AROMA’S ACCOUNTING RECORDS

(i) Pay cash for expenses.

Pizza Aroma received and paid bills totaling $600 for September utilities services.

Assets = Liabilities + Stockholders' Equity(i) Cash -$600 Utilities

Expense (+E) -$600

1 Analyze

2 Record(i) dr Utilities Expense (+E, -SE) 600 cr Cash (-A) 600

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CHAPTER 3SOLVED EXERCISES

M3-13 Preparing Journal Entries for Business Activitiesc. Paid wages for the current month, totaling $2,000.d. Performed cleaning services on account worth $2,800.e. Some of Quick Cleaners’ equipment was repaired at a

total cost of $150. The company paid the full amount immediately.

c. dr Wages Expense (+E -SE) 2,000cr Cash (-A) 2,000

d. dr Accounts Receivable (+A) 2,800cr Services/Cleaning Revenue (+R +SE) 2,800

e. dr Repairs and Maintenance Expense (+E -SE) 150cr Cash (-A) 150

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M3-14 Preparing Journal Entries for Business ActivitiesJunktrader is an online company that specializes in matching buyers and sellers of used items. Buyers and sellers can purchase a membership with Junktrader, which provides them advance notice of potentially attractive offers. Prepare journal entries for the following transactions, which occurred during a recent month.a. Junktrader provided online advertising services for

another company for $200 on account.b. On the last day of the month, Junktrader paid $50

cash to run an ad promoting the company’s services. The ad ran that day in the local newspaper.

a. dr Accounts Receivable (+A) 200cr Advertising Revenue (+R +SE) 200

b. dr Advertising Expense (+E -SE) 50cr Cash (-A) 50

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M3-14 Preparing Journal Entries for Business Activitiesc. Received $200 cash in membership fees for the

month from new members.d. Received an electricity bill for $85, for usage this

month. The bill will be paid next month.e. Billed a customer $180 for helping them sell their

junk. The customer is expected to pay by the end of next month.c. dr Cash (+A) 200cr Membership Revenue (+R +SE) 200

d. dr Electricity Expense (+E -SE) 85cr Accounts Payable (+L) 85

e. dr Accounts Receivable (+A) 180cr Services Revenue (+R +SE) 180

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