Moncton HighMoncton HighMr. BinetMr. Binet

Accounting 120Accounting 120Chapter #3 NotesChapter #3 Notes

Business TransactionsBusiness Transactions• The daily events occurring in a business that cause a change in The daily events occurring in a business that cause a change in

the financial position are called the financial position are called transactionstransactions..• Example of transactions:Example of transactions:

– The purchase of a new delivery truck The purchase of a new delivery truck – A monthly payment to the bank loan A monthly payment to the bank loan – An additional monetary investment by the owner An additional monetary investment by the owner – A payment to a creditor A payment to a creditor

• The receipt of cash from a debtor The receipt of cash from a debtor • Examples of events which are not transactions:Examples of events which are not transactions:

– The hiring of a new employee The hiring of a new employee – The receipt of a letter suggesting changes to the telephone servicesThe receipt of a letter suggesting changes to the telephone services

Changes to the Financial PositionChanges to the Financial Position• Let's examine the effect our transactions have on a business. Let's examine the effect our transactions have on a business.

Proper analysis requires three steps:Proper analysis requires three steps:1.1. Review the transaction. Review the transaction. 2.2. Classify each item affected as asset, liability or owner's equity. Classify each item affected as asset, liability or owner's equity. 3.3. Decide whether each item affected is to be increased or decreased.Decide whether each item affected is to be increased or decreased.

Source DocumentsSource Documents• Accountants cannot rely upon the word of employees and/or owners when 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 determining what financial events have occurred. Some type of proof is required when a transaction changes the financial position of a business. A a transaction changes the financial position of a business. A source documentsource document, verifies , verifies the dollar amount of a transaction and provides the information needed by the the dollar amount of a transaction and provides the information needed by the accounting department.accounting department.

• Examples of source documents:Examples of source documents:– Bills-telephone, hydro, etc. Bills-telephone, hydro, etc. – Cheque copies Cheque copies – Store receipts Store receipts – Cash register summaries Cash register summaries – Credit card slips Credit card slips

• Source documents provide:Source documents provide:– Proof of payment-cheque copy, store receipts, credit card slips Proof of payment-cheque copy, store receipts, credit card slips – Proof of purchase-bill Proof of purchase-bill – Reference-cash register summaries Reference-cash register summaries

• Source documents are systematically filed and kept for many years. This allows owners, 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.comptrollers and auditors to answer any questions that may arise at a later date.

Example InvoiceExample InvoiceExamine the source

document, shown on this screen, and try to answer each of the following questions:

1. Who issued the bill? 2. Who received the bill? 3. When was the bill

issued? 4. When were the goods

delivered? 5. How were the goods

delivered? 6. When is payment of

the bill due? 7. Was this a cash sale

transaction? How do you know?

GAAP: The Objectivity PrinicpleGAAP: The Objectivity Prinicple

• The objectivity principle states that accounting The objectivity principle states that accounting will be recorded on the basis of fact. will be recorded on the basis of fact.

• The source document for a transaction is almost The source document for a transaction is almost always the best objective evidence available.always the best objective evidence available.

GAAP: The Objectivity PrinicpleGAAP: The Objectivity Prinicple• Daniel Franklin has started his own part-time computer consulting Daniel Franklin has started his own part-time computer consulting

business. He studied some accounting during high school and has business. He studied some accounting during high school and has included the following two assets on his beginning balance sheet:included the following two assets on his beginning balance sheet:– Computer: $1 900Computer: $1 900– Furniture: $ 320Furniture: $ 320

• Daniel owned the computer for six months prior to opening the Daniel owned the computer for six months prior to opening the business but had it updated for $900. He has seen advertisements business but had it updated for $900. He has seen advertisements for similar systems for $2 500. Daniel purchased a desk and a chair 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 at a company yard sale for $250. After a little refinishing he is certain the value has increased to at least $320.certain the value has increased to at least $320.

• Has Daniel violated any GAAP’s? If so, which GAAP? Explain why Has Daniel violated any GAAP’s? If so, which GAAP? Explain why this is a violation..this is a violation..

Equation Analysis SheetEquation Analysis Sheet

• Our next step is to discover how events affect Our next step is to discover how events affect and change the financial position of a business. and change the financial position of a business. To demonstrate, we will use the balance sheet To demonstrate, we will use the balance sheet of Harding's Design.of Harding's Design.

Equation Analysis Sheet ContinuedEquation 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.

Equation Analysis Sheet ContinuedEquation 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:

Equation Analysis Sheet ContinuedEquation 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.

Transaction 2Transaction 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.

Transaction 4Transaction 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.

Transaction 6Transaction 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.

Transaction 7Transaction 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.

Changes to Owner’s EquityChanges 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

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

Equation Analysis Sheet ReviewEquation Analysis Sheet Review

• Review your knowledge of the equation analysis sheet by asking yourself the following questions:

1. What is the name of the form used to analyze transactions? 2. How is this form related to the balance sheet? 3. What is a simple way of knowing if capital should

increase/decrease after a business transaction? 4. How do you know if the changes for a transaction recorded on

an equation analysis sheet were balanced? 5. Does a transaction always change both sides of a balance

sheet? How do you know?

Equation Analysis Sheet Review AnswersEquation 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 owner’s 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).

Chapter 3, Assignment #2Chapter 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

Chapter 3 AssignmentsChapter 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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