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C HAPTER 2 Analysis Transactions. O BJECTIVES : Accounting cycle. Transaction. Analyzing Transactions for Balance sheet. Analyzing Transactions for income.

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Presentation on theme: "C HAPTER 2 Analysis Transactions. O BJECTIVES : Accounting cycle. Transaction. Analyzing Transactions for Balance sheet. Analyzing Transactions for income."— Presentation transcript:

1 C HAPTER 2 Analysis Transactions

2 O BJECTIVES : Accounting cycle. Transaction. Analyzing Transactions for Balance sheet. Analyzing Transactions for income statement.

3 A CCOUNTING CYCLE : Transactions (economic activities & business condion) Journal (record transactions in the journal) Ledger (Posting transactons to ledger) Unadjusted trail balance (Prepar unadjusted trail balanc) Adjustment (journalizing & posting adjusting entries) Adjusted Trail Balance (Prepar adjusted trail balanc) Financial Statement (Prepar 4 financial statement) Closing Entries (journalizing & posting closing entries)

4 TRANSACTION A transaction is a business activity that affects the basic accounting equation. Example : 1- Sale a land. 2- Buy a car. 3 - Borrow a loan.

5 A NALYZING T RANSACTIONS FOR B ALANCE SHEET

6 L EARNING O BJECTIVE 1 Identify financial effects of common financing and investing activities. 2-6

7 B UILDING A B ALANCE S HEET Assets The rights of creditors The rights of the owners Resources owned by the business Stockholders’ Equity Liabilities = + 2-7

8 L EARNING O BJECTIVE 2 Apply transaction analysis to financing and investing transactions. 2-8

9 S TUDY THE A CCOUNTING M ETHODS 1 Analyze 2 Record 3 Summarize A systematic accounting process is used to capture and report the financial effects of a company’s transactions. A transaction is a business activity that affects the basic accounting equation. Duality of Effects Every transaction has at least two effects on the basic accounting equation. A = L+ SE Assets must equal liabilities plus stockholders’ equity for every accounting transaction. 2-9

10 S TEP 1: A NALYZE T RANSACTIONS (a) Issue Stock to Owners. Mauricio Rosa incorporates Pizza Aroma Inc., on August 1. The company issues stock to Mauricio and his wife as evidence of their contribution of $50,000 cash, which is deposited in the company’s bank account. 1.Pizza Aroma receives $50,000 Cash. 2.Pizza Aroma gives $50,000 Stock (Contributed Capital ). 2-10

11 S TEP 1: A NALYZE T RANSACTIONS (b) Investment in Equipment. 1.Pizza Aroma receives $42,000 of Equipment. 2.Pizza Aroma gives $42,000 Cash. Pizza Aroma pays $42,000 cash to buy restaurant booths and other equipment. 2-11

12 S TEP 1: A NALYZE T RANSACTIONS (c) Obtain Loan from Bank. 1.Pizza Aroma receives $20,000 Cash. 2.Pizza Aroma gives a note, payable to the bank for $20,000. Pizza Aroma borrows $20,000 from a bank depositing those funds in its bank account and signing a formal agreement to repay the loan in two years. 2-12

13 S TEP 1: A NALYZE T RANSACTIONS (d) Investment in Equipment. 1.Pizza Aroma receives $18,000 in equipment (pizza ovens). 2.Pizza Aroma gives a Cash of $16,000 and Accounts Payable of $2,000. Pizza Aroma purchases $18,000 in pizza ovens and other restaurant equipment, paying $16,000 in cash and giving an informal promise to pay $2,000 at the end of the month. 2-13

14 S TEP 1: A NALYZE T RANSACTIONS (e) Order Cookware. 1.An exchange of only promises is not a transaction. 2. This does not affect the accounting equation. Pizza Aroma orders $630 of pans, dishes, and other cookware. None have been received yet. 2-14

15 S TEP 1: A NALYZE T RANSACTIONS (f) Pay Suppliers. 1.Pizza Aroma gives cash to settle its debt to the supplier. 2. Pizza Aroma receives a release from its promise to pay. Pizza Aroma pays $2,000 to the equipment supplier from transaction (d). 2-15

16 S TEP 1: A NALYZE T RANSACTIONS (g) Receive Cookware. 1.Pizza Aroma receives cookware with a cost of $ Pizza Aroma gave a promise to pay $630 on account. Pizza Aroma receives $630 of the cookware ordered in (e) and promises to pay for it next month. 2-16

17 S TEP 2 AND 3: R ECORD AND S UMMARIZE Most companies use computerized accounting systems, which can handle a large number of transactions. These systems follow a cycle, called the accounting cycle, which is repeated day-after-day, month-after-month, and year-after-year. 2-17

18 C HAPTER 2 S OLVED E XERCISES

19 M2-13 Identifying Transactions and Preparing Journal Entries 1- Borrowed $25,000 from the bank with a plan to use the funds to build a small workshop in August. The loan must be report in two years. 1- dr Cash (+A)25,000 cr Notes Payable (+L)25,

20 M2-14 Identifying Transactions and Preparing Journal Entries 2- The company purchased bookshelves for $2,000 cash. The bookshelves are expected to be used for ten or more years. 2- dr Equipment (+A)2,000 cr Cash (-A)2,

21 M2-14 Identifying Transactions and Preparing Journal Entries 3- The company paid $1,500 cash, for books purchased on account earlier in the month. 3- dr Accounts Payable (-L)1,500 cr Cash (-A)1,

22 M2-15 Identifying Transactions and Preparing Journal Entries 4- Repaid a $5,000 bank loan. (Ignore interest). 5- The company purchased an air hockey table for $2,200, paying $1,000 cash and signing short-term note for $1, dr Notes Payable (-L)5,000 cr Cash (-A)5,000 5-dr Equipment (+A) 2,200 cr Cash (-A) 1,000 cr Notes Payable (+L) 1,

23 A NALYZING T RANSACTIONS FOR I NCOME STATEMENT

24 C ASH B ASIS A CCOUNTING Cash basis accounting records revenues when cash is received and expenses when cash is paid. 3-24

25 L EARNING O BJECTIVE 2 Explain and apply the revenue and matching principles. 3-25

26 P IZZA A ROMA ’ S A CCOUNTING R ECORDS (a) Provided services for cash. In September, Pizza Aroma delivered pizza to customers for $15,000 cash. 1 Analyze 2 Record 3-26

27 P IZZA A ROMA ’ S A CCOUNTING R ECORDS (b) Receive cash for future services. Pizza Aroma sold three $100 gift cards at the beginning of September. 1 Analyze 2 Record 3-27

28 P IZZA A ROMA ’ S A CCOUNTING R ECORDS (c) Provide services on credit. Pizza Aroma delivers $500 of pizza to a college organization, billing this customer on account. 1 Analyze 2 Record 3-28

29 P IZZA A ROMA ’ S A CCOUNTING R ECORDS (d) Receive payment on account. Pizza Aroma received a $300 check from the college organization, as partial payment of its account balance. 1 Analyze 2 Record 3-29

30 P IZZA A ROMA ’ S A CCOUNTING R ECORDS (e) Pay cash to employees. Pizza Aroma wrote checks to employees, totaling $8,100 for wages related to hours worked in September. 1 Analyze 2 Record 3-30

31 P IZZA A ROMA ’ S A CCOUNTING R ECORDS (f) Pay cash in advance. On September 1, Pizza Aroma paid $7,200 in advance for September, October, and November rent. 1 Analyze 2 Record 3-31

32 P IZZA A ROMA ’ S A CCOUNTING R ECORDS (g) Pay cash in advance. On September 2, Pizza Aroma wrote a check for $1,600 for pizza sauce, dough, cheese, and paper products. 1 Analyze 2 Record 3-32

33 P IZZA A ROMA ’ S A CCOUNTING R ECORDS (h) Incur cost to be paid later. Pizza Aroma received a bill for $400 for running a newspaper ad in September. The bill will be paid in October. 1 Analyze 2 Record 3-33

34 P IZZA A ROMA ’ S A CCOUNTING R ECORDS (i) Pay cash for expenses. Pizza Aroma received and paid bills totaling $600 for September utilities services. 1 Analyze 2 Record 3-34

35 C HAPTER 3 S OLVED E XERCISES

36 M3-13 Preparing Journal Entries for Business Activities c.Paid wages for the current month, totaling $2,000. d.Performed cleaning services on account worth $2,800. e.Some of Quick Cleaners’ equipment was repaired at a total cost of $150. The company paid the full amount immediately. c. dr Wages Expense (+E -SE) 2,000 cr Cash (-A) 2,000 d. dr Accounts Receivable (+A) 2,800 cr Services/Cleaning Revenue (+R +SE) 2,800 e.dr Repairs and Maintenance Expense (+E -SE) 150 cr Cash (-A)

37 M3-14 Preparing Journal Entries for Business Activities Junktrader is an online company that specializes in matching buyers and sellers of used items. Buyers and sellers can purchase a membership with Junktrader, which provides them advance notice of potentially attractive offers. Prepare journal entries for the following transactions, which occurred during a recent month. a.Junktrader provided online advertising services for another company for $200 on account. b.On the last day of the month, Junktrader paid $50 cash to run an ad promoting the company’s services. The ad ran that day in the local newspaper. a.dr Accounts Receivable (+A) 200 cr Advertising Revenue (+R +SE) 200 b.dr Advertising Expense (+E -SE) 50 cr Cash (-A)

38 M3-14 Preparing Journal Entries for Business Activities c.Received $200 cash in membership fees for the month from new members. d.Received an electricity bill for $85, for usage this month. The bill will be paid next month. e.Billed a customer $180 for helping them sell their junk. The customer is expected to pay by the end of next month. c.dr Cash (+A) 200 cr Membership Revenue (+R +SE) 200 d. dr Electricity Expense (+E -SE) 85 cr Accounts Payable (+L) 85 e.dr Accounts Receivable (+A) 180 cr Services Revenue (+R +SE)


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