college accounting

1
Chapter
2
Skyline College
2
Business Transactions
The accounting process starts with the
analysis of business transactions.
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• A business transaction is analyzed to see how it
  affects this equation

• In a free enterprise system, all property is
  owned by someone.

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Use these steps to analyze the effect of a
business transaction.

• 1. Describe the financial event.
• Identify the property.
• Identify who owns the property.
• Determine the amount of increase or decrease.
• 2. Make sure the equation is in balance.

5
Meet JTs Consulting Services.
JTs Consulting

• JTs Consulting Services is a firm that provides
  a wide range of accounting and consulting
  services.
• Jason Taylor is the sole proprietor of the firm.
• Tennille Brisbane is the office manager of the
  firm.
• The firm bills clients monthly for the services
  provided that month.
• Or customers can also pay in cash when the
  services are provided.

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Business Transaction

• Jason Taylor withdrew 90,000 from personal
  savingsand deposited it in a new checking
  account in the name of
• JTs Consulting Services.

Analysis
(a) The business received 90,000 of property in
the form of cash.
(a) Taylor had an 90,000 financial interest in
the business.
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The equation remains in balance.
Property
Financial Interest
Cash
Jason Taylor, Capital
(a) Invested cash
90,000
(a) Increased equity
90,000
New balances 90,000
90,000
Jason Taylor now has 90,000 equity in
JTs Consulting Services.
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Business Transaction
Purchasing Equipment for Cash

• JTs Consulting Services issued a 10,000 check
• to purchase a computer and other equipment.

• (b) The firm purchased new equipment for 10,000.
• (b) The firm paid out 10,000 in cash.

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Property
Financial Interest

Cash Equipment Jason Taylor,
Capital
Previous
balances 90,000
90,000
10,000
(b) Purchased equip.

- 10,000
(b) Paid cash

New balances 80,000
10,000 90,000
10
Accounts Payable
11
Business Transaction

• JTs Consulting Services purchased additional
• office equipment on account from Office Plus for
• 12,000.

Analysis
(c) The firm purchased new equipment that cost
12,000. (c) The firm owes 12,000 to Office
Plus.
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Property
Financial Interest
Jason Taylor, Capital
Accounts Payable
Cash Equipment
Previous balances 80,000 10,000
90,000
12,000
(c) Purchased equipment
12,000
(c) Incurred debt
New balances 80,000
22,000 12,000 90,000
Notice the new claim against the firms property
the creditors claim of 12,000.
13
Business Transaction
Purchasing Supplies

• JTs Consulting Services issued a check for
  3,000
• to Office Warehouse Inc. to purchase office
  supplies.

Analysis
(d) The firm purchased office supplies that cost
3,000. (d) The firm paid 3,000 in cash.
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Property
Financial Interest
Accounts Payable
Jason Taylor, Capital
Cash Supplies Equipment
Previous balances 80,000
22,000 12,000
90,000
(d) Purchased supplies
3,000
(d) Paid cash
-3,000
New balances 77,000
3,000 22,000
12,000 90,000
15
Business Transaction
Paying a Creditor

• In order to reduce its debt, JTs Consulting
  Services
• issued a check for 5,000 to Office Plus.

Analysis

• (e) The firm paid 5,000 in cash.
• (e) The claim of Office Plus against the firm
  decreased by 5,000.

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Property
Financial Interest
Accounts Payable
Jason Taylor, Capital
Cash Supplies Equipment
Previous balances 77,000 3,000
22,000 12,000
90,000
(e) Paid cash
-5,000
(e) Decreased debt
-5,000
New balances 72,000
3,000 22,000 7,000
90,000
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Business Transaction
Paying for Services

• JTs Consulting Services issued a check for
  7,000
• to pay for rent for the months of December and
  January.

Analysis

• (f) The firm prepaid the rent for the next two
  months in the amount of 7,000.
• (f) The firm decreased its cash balance by
  7,000.

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Property
Financial Interest
Accounts Payable
Cash Supplies Prepaid Equipment
Rent
Jason Taylor, Capital
Previous balances 72,000 3,000
22,000 7,000
90,000
(f) Paid cash
-7,000
(f) Prepaid rent
7,000
New balances 65,000
3,000 7,000 22,000
7,000 90,000
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The Fundamental Accounting Equation

• In accounting terms the firms assets must equal
  the total of its liabilities and owners equity.

• The entire accounting process is based on the
  fundamental accounting equation

• If any two parts of the equation are known, the
  third part can be determined.

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• At regular intervals a Balance Sheet is prepared
  for
• JTs Consulting Services.

A balance sheet is a formal report of a
firms financial condition on a certain date. It
reports the assets, liabilities, and owners
equity of the business.
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JTs Consulting Services Balance Sheet November
30, 2007

• Assets the amount and types of property owned
  by the business

• Liabilities the amount owed to the creditors

• Equity the owners interest

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Financial Interest
Liabilities Owners Equity
Assets
Property
Property equals Financial Interest
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Revenues
25
Expenses
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Business Transaction
Selling Services for Cash
During the month of December, JTs Consulting
Services earned a total of 26,000 in revenue
from clients. The total effect of these
transactions is analyzed below.

• Analysis
• (g) The firm received 26,000 in cash for
  services provided to clients.
• (g) Revenues increased by 26,000, which results
  in a 26,000 increase in owners equity.

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An increase in revenue is an increase in owners
equity.
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Assets
Liab. Owners Equity

Prepaid
Accounts J. Taylor,
Cash Supplies Rent
Equip. Payable Capital
Revenue Previous balances 65,000
3,000 7,000 22,000
7,000 90,000


(g) Recd. cash 26,000
(g) Increased owner's equity
26,000
New balances 91,000 3,000
7,000 22,000 7,000 90,000
26,000
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Recording Revenue Amounts
30
Accounts Receivable
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Business Transaction
Selling Services on Credit
During December JTs Consulting Services earned
9,000 of revenue from charge account clients.
The effect of these transactions in the month is
analyzed below.
Analysis (h) The firm acquired a new asset,
accounts receivable, of 9,000. (h) Revenue
increases by 9,000, which results in a 9,000
increase in owners equity.
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The fundamental accounting equation remains in
balance.

Assets
Liab. Owner's
Equity
Accts. Prepaid Accts.
J. Taylor, Cash
Rec. Supplies Rent Equip.
Pay. Capital Rev.
Previous balances 91,000 3,000
7,000 22,000 7,000 90,000
26,000
_______ ______ _____ ______
______ _____ ______
______


(h) Received new asset 9,000
(h) Increased owners equity
9,000
New bal. 91,000 9,000 3,000
7,000 22,000 7,000 90,000
35,000
132,000
132,000
33
Business Transaction
Collecting Receivables
During December JTs Consulting Services received
4,000 on account from clients who owed money for
services previously billed. The effect of these
transactions is analyzed below.
Analysis (i) The firm received 4,000 in cash.
(i) Accounts receivable decreased by 4,000.
34

Assets
Liab. Owner's Equity
Accts.
Prepaid Accts. J.
Taylor, Cash Rec.
Supplies Rent Equip.
Pay. Capital Rev. Previous
Balances 91,000 9,000 3,000
7,000 22,000 7,000 90,000
35,000 _______
______ ______ ______ ______
______ ______ ______


(i) Recd. cash 4,000
(i) Decreased accts. rec. - 4,000
New bal. 95,000 5,000 3,000
7,000 22,000 7,000 90,000
35,000
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Collecting Receivables
Why didnt revenue increase when money was
received from charge account clients?

• The revenue was already recorded when the
  original sale took place.

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Business Transaction
Paying Employees Salaries
In December JTs Consulting Services paid 7,000
in salaries for the accounting clerk and the
office manager. The effect of this transaction is
analyzed below.
Analysis (j) The firm decreased its cash
balance by 7,000. (j) The firm paid salaries
expense in the amount of 7,000, which
decreased owners equity.
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An increase in expense is a decrease in owners
equity.
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Assets
Liab. Owner's Equity
Accts.
Prepaid Accts.
J. Taylor, Cash Rec.
Supplies Rent Equip. Pay.
Capital Rev. - Exp. Previous
balances 95,000 5,000 3,000
7,000 22,000 7,000 90,000
35,000 ______ ______
______ ______ ______ ______
______ ______ _____

(j) Paid cash -7,000
(j) Decreased owners equity


- 7,000
New bal. 88,000 5,000 3,000
7,000 22,000 7,000 90,000
35,000 - 7,000
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Business Transaction
Paying Utilities Expenses
JTs Consulting Services issued a check for 500
to pay the utilities bill. The effect of this
transaction is analyzed below.
Analysis (k) The firm decreased its cash balance
by 500. (k) The firm paid utilities expense of
500, which decreased owners equity.
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Assets
Liab. Owner's Equity
Accts.
Prepaid Accts.
J. Taylor, Cash
Rec. Supplies Rent Equip.
Pay. Capital Rev. -
Exp. Previous balances 88,000 5,000
3,000 7,000 22,000 7,000
90,000 35,000 - 7,000
______ ______ _______
_______ _______ ________
_______ _______ ______


(k) Paid cash -500
(k) Decreased owners equity
-500
New bal. 87,500 5,000 3,000
7,000 22,000 7,000 90,000
35,000 -7,500
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Business Transaction
Effect of Owners Withdrawals
At the end of December, Jason Taylor withdrew
4,000 in cash for personal use. The effect of
this transaction is analyzed below.
Analysis (l) The firm decreased its cash balance
by 4,000. (l) Owners equity decreased by
4,000.
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Assets
Liab. Owners Equity
Accts.
Prepaid
Accts. J. Taylor,
Cash Rec. Supp. Rent
Equip. Pay. Capital Rev.
- Exp. Previous balances 87,500
5,000 3,000 7,000 22,000 7,000
90,000 35,000 - 7,500
______ _____ _____ ______ ______
______ ______ ______ ______


(l) Withdrew cash -4,000
(l) Decreased owner's equity
-4,000
New bal. 83,500 5,000 3,000
7,000 22,000 7,000 86,000
35,000 - 7,500
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The Income Statement
Revenues Expenses Net Income
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The income statement has a three-line heading.
The third line shows that the report covers
operations over a period of time.

JTs Consulting Services Income Statement Month
Ended December 31, 2007


Revenue Fees Income 35,000
Expenses Salaries Expense
7,000 Utilities Expense 500
Total Expenses lt7,500gt
Net Income 27,500
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The income statement reports revenue.

JTs Consulting Services Income Statement Month
Ended December 31, 2007


Revenue Fees Income 35,000
Expenses Salaries Expense 7,000
Utilities Expense 500 Total
Expenses lt7,500gt
Net Income 27,500
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The income statement also reports expenses.

JTs Consulting Services Income Statement Month
Ended December 31, 2007


Revenue Fees Income 35,000
Expenses Salaries Expense 7,000
Utilities Expense 500 Total
Expenses lt7,500gt
Net Income 27,500
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The result is net income or net loss for the
period.

JTs Consulting Services Income Statement Month
Ended December 31, 2007


Revenue Fees Income 35,000
Expenses Salaries Expense 7,000
Utilities Expense 500 Total
Expenses lt7,500gt
Net Income 27,500
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The Statement of Owners Equity
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The statement of owners equityhas a three-line
heading.
Jason Taylor, Capital, December 1, 2007
Net Income for December Less Withdrawals for
December Increase in Capital Jason Taylor,
Capital, December 31, 2007
JTs Consulting Services Statement of Owners
Equity Month Ended December 31, 2007
90,000 23,500 113,500
27,500 lt4,000gt
37
50
The statement of owners equity shows the
capital at the beginning of the period.
Jason Taylor, Capital, December 1, 2007
Net Income for December Less Withdrawals for
December Increase in Capital Jason Taylor,
Capital, December 31, 2007
JTs Consulting Services Statement of Owners
Equity Month Ended December 31, 2007
90,000 23,500 113,500
27,500 lt4,000gt
37
51
Net income or net loss for the period is
included.
Jason Taylor, Capital, December 1, 2007
Net Income for December Less Withdrawals for
December Increase in Capital Jason Taylor,
Capital, December 31, 2007
JTs Consulting Services Statement of Owners
Equity Month Ended December 31, 2007
90,000 23,500 113,500
27,500 lt4,000gt
37
52
The withdrawals and additional investments for
the period are shown.
Jason Taylor, Capital, December 1, 2007
Net Income for December Less Withdrawals for
December Increase in Capital Jason Taylor,
Capital, December 31, 2007
JTs Consulting Services Statement of Owners
Equity Month Ended December 31, 2007
90,000 23,500 113,500
27,500 lt4,000gt
37
53
The increase or decrease in capital for the
period is reported.
Jason Taylor, Capital, December 1, 2007
Net Income for December Less Withdrawals for
December Increase in Capital Jason Taylor,
Capital, December 31, 2007
JTs Consulting Services Statement of Owners
Equity Month Ended December 31, 2007
90,000 23,500 113,500
27,500 lt4,000gt
37
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The result is the capital balance at the end of
the period.
Jason Taylor, Capital, December 1, 2007
Net Income for December Less Withdrawals for
December Increase in Capital Jason Taylor,
Capital, December 31, 2007
JTs Consulting Services Statement of Owners
Equity Month Ended December 31, 2007
90,000 23,500 113,500
27,500 lt4,000gt
37
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Additional Investments

• Note that Jason Taylor did not make any
  additional investments in December.
• Additional investments such as cash or equipment
  would appear in a new line in the statement of
  owners equity.
• An investment made in a form other than cash is
  recorded at its fair market value.

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The balance sheet has a three-line heading.
JTs Consulting Services Balance Sheet December
31, 2007

• A single line shows that the amounts above it
  are being added or subtracted. A double line
  indicates final amounts for the column or
  section of a report.

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JTs Consulting Services Income Statement Month
Ended December 31, 2007
JTs Consulting Services Statement of Owners
Equity Month Ended December 31, 2007
JTs Consulting Services Balance Sheet December
31, 2007
Notice any difference in the date line??
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The Importance of Financial Statements

• Business managers and owners use the balance
  sheet and the income statement to control current
  operations and plan for the future.

• Creditors, prospective investors, governmental
  agencies, and others are interested in the
  profits of the business and in the asset and
  equity structure.

59
Financial statements are prepared in a specific
order

• 1st Income Statement
• 2nd Statement of Owners equity
• 3rd Balance Sheet

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JTs Consulting
Services Income Statement Month Ended December
31, 2007
Revenue Fees Income 35,000 Expenses
Salaries Expense 7,000 Utilities Expense
500 Total
Expenses lt7,500gt Net Income
27,500
37
61
JTs Consulting Services Statement of Owners
Equity Month Ended December 31, 2007 Jason
Taylor, Capital, December 1, 2007 Net Income
for December Less Withdrawals for December
Increase in Capital Jason Taylor, Capital,
December 31, 2007
22,400 3,000