Y5 T1 Fairman Acc. Chapter 4.ppt

1、Accounting for Management Decisions, 2012,Business Transactions Chapter 4,2,RECOGNISING BUSINESS TRANSACTIONS,Business transactions are occurrences that affect the assets, liabilities and equity items in an entity and can be reliably recorded in monetary terms. Under the entity concept, every entity

2、 must keep records of its business transactions separate from any personal transactions of the owners (i.e. they are separate accounting entities).,3,EXAMPLES OF BUSINESS TRANSACTIONS,4,BUSINESS AND PERSONAL TRANSACTIONS AND BUSINESS EVENTS,Personal transactions are transactions of the owners, partn

3、ers or shareholders that are unrelated to the operation of the business. Business events are occurrences that will probably affect the entity in some way, but are not recorded as business transactions until an exchange of goods occurs between the entity and an outside entity. Neither personal transa

4、ctions or business events are recorded as transactions.,SOURCE DOCUMENTS,For every business transaction that occurs, there must be evidence provided of that transaction. The evidence often comes from a source document. Source documents are the original document verifying a business transaction. They

5、 can include the following: -sales invoices -purchase orders -ATM receipts -credit card imprints,5,THE ACCOUNTING EQUATION,Assets = Liabilities + Owners Equity,ASSETS,Assets are resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow

6、 to the entity. Examples of assets include cash, accounts receivable, office equipment, etc.,7,LIABILITIES AND OWNERS EQUITY,Liabilities are present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying

7、economic benefits. Examples of liabilities include accounts payable and loans. Equity is the residual interest in the assets of the entity after all its liabilities have been deducted.,8,EXAMPLE PROBLEM #14 - 4,Consider the following accounts (all $): Accounts payable 17,000 Accounts receivable 5,00

8、0 Share capital 4,000 Retained earnings 2,000 Prepaid rent 3,000 What is the amount of cash on the balance sheet?,EXPANDED BALANCE SHEET EQUATION,(1) Assets = Liabilities + Owners Equity,(2) Assets = Liabilities + Paid-in Capital + Retained Earnings,(3) Assets = Liabilities + Share Capital + (Revenu

9、es Expenses),Profit,Note: As mentioned in the last chapter, there can be other reserves in owners equity; however, to keep things simple for now, we will focus on share capital and retained earnings.,KEY DEFINITIONS FROM THE EXPANDED BALANCE SHEET EQUATION,Revenues (sometimes called “income”) are th

10、e amount of assets received in exchange for the delivery of goods or services to customers. Revenues increase owners equity on the balance sheet. Expenses are measures of the assets that a company gives up or consumes in order to deliver goods or services to a customer. Expenses decrease owners equi

11、ty on the balance sheet. Profit is the excess of revenues over expenses.,12,THE CONCEPT OF DUALITY,Every business transaction has a dual effect. Business transactions are analysed by examining the dual effect of each business transaction. the impact on the accounting equation. Example: A firm borrow

12、s money from a bank to purchase a truck:,A = L + E Truck = Loan,EXAMPLE PROBLEM #15 - 4,For each of the following, state what may have occurred (all $): 1) cash up 20,000, notes payable up 14,000, contributed equity up 6,000 2) cash down 5,000, equipment up 5,000 3) inventory up 3,000, accounts paya

13、ble up 3,000 4) cash down 2,000, notes payable down 2,000 5) cash up 2,500, accounts receivable up 2,500, inventory down 3000, retained earnings up 2,000 6) cash down 7,500, retained earnings down 7,500 Finally, state the ending balance of assets, liabilities, and owners equity.,EXAMPLE PROBLEM #16

14、- 4,For each of the following, state whether A, L, and OE increase, decrease, or stay the same. a) bill client for services b) paid building rental for the month c) paid quarterly electricity bill d) purchased stationery supplies on credit e) paid staff monthly salary and wages f) received payment f

15、rom client g) paid stationery supplier h) withdrew cash for personal use i) paid personal tax with own money j) repairs to computer on account k) rendered services to customer for cash l) purchased furniture on account m) paid for computer repairs n) returned some faulty furniture,ASSET ACCOUNTS,Exp

16、lanation of some asset accounts that will appear in the balance sheet:,LIABILITY AND OWNERS EQUITY ACCOUNTS,Explanation of some liability and equity accounts that will appear in the balance sheet,TRANSACTION ANALYSIS STEPS,Determine which specific accounts the transaction affects. Determine whether

17、it increase or decreases each account balance. Determine the amount of the change in each account balance. Remember that A = L + OE!,18,TRANSACTION ANALYSIS EXAMPLE,Darren Jones deposits $35,000 in a business bank account 1) This transaction affects cash and paid-in capital. 2) This transaction incr

18、eases cash and increases paid-in capital. 3) Both accounts increase by $35,000.,EXAMPLE PROBLEM #17 - 4,The Obese Cola Company uses cash to buy $2000 worth of sugar from Cavities, Inc. in order to produce its drinks. Complete the transaction analysis steps for this event.,EXAMPLE PROBLEM #18 - 4,If

19、Obese had paid 50% cash and 50% on account, how would your answer change? What would Cavities accounting equation changes look like in this scenario assuming the sugar originally cost them $1,500?,EXAMPLE PROBLEM #19 - 4,Paula Lee invests $30,000 to begin Paula Lee eTravel. Lee purchases land, payin

20、g $20,000 in cash. She buys office supplies, agreeing to pay $500 in 30 days. She earns and collects $5,500 in service revenues. Lee performs services, and the client agrees to pay $3,000 within one month. During the month, she pays $3,300 for wages expenses incurred. Lee pays $300 to the store from which she purchased $500 worth of supplies. The business collected $1,000 from the client. Lee sold so