Moncton High

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Accounting 120Chapter 3 Notes

• Moncton High
• Mr. Binet

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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

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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.

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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.

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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?

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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.

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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 GAAPs? If so, which
  GAAP? Explain why this is a violation..

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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Changes to Owners 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

Transaction Change to Owner's Equity
Owner invests additional funds in company Increase
Owner withdraws funds from company Decrease
Company does business for cash Increase
Company does business on credit Increase
Company spends money in order to carry out business (pays employee wages, pays power bill, pays for repairs to existing equipment, etc.) Decrease
Company sells an asset item for less that its book value Decrease
Company sells an asset item for more than its book value" Increase
Item Classification Change
Cash Asset 7 000
Truck Asset - 10 000
Capital Owner's Equity - 3 000
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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?

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Equation Analysis Sheet Review Answers

1. The form used to analyze transactions is an
   equation analysis sheet.
2. All of the assets, liabilities and the capital
   are listed with their amounts and are in a
   balanced state.
3. Enter the known item, such as bank. If no other
   asset or liability is involved, the balancing
   figure must occur to owners equity.
4. 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.
5. 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).

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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

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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
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