Moncton High Mr. Binet

1. Accounting 120Chapter #3 Notes Moncton High Mr. Binet

2. Business Transactions • The daily events occurring in a business that cause a change in the financial position are called transactions. • Example of transactions: • The purchase of a new delivery truck • A monthly payment to the bank loan • An additional monetary investment by the owner • A payment to a creditor • The receipt of cash from a debtor • Examples of events which are not transactions: • The hiring of a new employee • The receipt of a letter suggesting changes to the telephone services

3. Changes to the Financial Position • Let's examine the effect our transactions have on a business. Proper analysis requires three steps: • Review the transaction. • Classify each item affected as asset, liability or owner's equity. • Decide whether each item affected is to be increased or decreased.

4. Source Documents • Accountants cannot rely upon the word of employees and/or owners when determining what financial events have occurred. Some type of proof is required when a transaction changes the financial position of a business. A source document,  verifies the dollar amount of a transaction and provides the information needed by the accounting department. • Examples of source documents: • Bills-telephone, hydro, etc. • Cheque copies • Store receipts • Cash register summaries • Credit card slips • Source documents provide: • Proof of payment-cheque copy, store receipts, credit card slips • Proof of purchase-bill • Reference-cash register summaries • Source documents are systematically filed and kept for many years. This allows owners, comptrollers and auditors to answer any questions that may arise at a later date.

5. Example Invoice • Examine the source document, shown on this screen, and try to answer each of the following questions: • Who issued the bill? • Who received the bill? • When was the bill issued? • When were the goods delivered? • How were the goods delivered? • When is payment of the bill due? • Was this a cash sale transaction? How do you know?

6. GAAP: The Objectivity Prinicple • The objectivity principle states that accounting will be recorded on the basis of fact.   • The source document for a transaction is almost always the best objective evidence available.

7. GAAP: The Objectivity Prinicple • Daniel Franklin has started his own part-time computer consulting business. He studied some accounting during high school and has included the following two assets on his beginning balance sheet: • Computer: $1 900 • Furniture: $ 320 • Daniel owned the computer for six months prior to opening the business but had it updated for $900. He has seen advertisements for similar systems for $2 500. Daniel purchased a desk and a chair at a company yard sale for $250. After a little refinishing he is certain the value has increased to at least $320. • Has Daniel violated any GAAP’s? If so, which GAAP? Explain why this is a violation..

8. 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.

9. 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.

10. Equation Analysis Sheet Continued 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:

11. Equation Analysis Sheet Continued 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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: Examine the following transaction: A truck originally purchased and recorded for $10 000 is sold for $7 000 cash.Analysis

17. Equation Analysis Sheet Review Review your knowledge of the equation analysis sheet by asking yourself the following questions: 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? Does a transaction always change both sides of a balance sheet? How do you know?

18. Equation Analysis Sheet Review Answers The form used to analyze transactions is an equation analysis sheet. All of the assets, liabilities and the capital are listed with their amounts and are in a balanced state. Enter the known item, such as bank. If no other asset or liability is involved, the “balancing” figure must occur to owner’s equity. After each transaction is entered, new balances are calculated and these totals balance according to the fundamental accounting equation. If the equation balances, it can be assumed the transaction was a balanced one. A transaction does not always change both sides of the balance sheet. For example, a transaction may increase one asset (equipment) while decreasing another asset (bank).

19. Chapter 3, Assignment #2 • Complete the following tasks in groups and submit one Word and one Excel file (named Chapter 3, Assignment 2). • Read Chapter Highlights – Page 73 • Exercise 1 on Page 73 • Exercise 2 on Page 74 • Exercise 6 on Page 74 • In Excel: Challenge Exercise #6, page 74-75

20. Chapter 3 Assignments • Please have the following assignments in by the end of class today: • Chapter 3: Assignment 1 and 2. • U2A3, U3A2, U3A3 • Quiz tomorrow on Chapter 3: Source Documents, GAAPs, Equation Analysis Sheet, Chapter 3 Terms/Definitions • Logon and Ensure ClassMarker.com is working for you