Analysis Transactions

Analysis Transactions
Chapter T.Haya alajaji Chapter 2: Reporting Investing and Financing Results on the Balance Sheet

Objectives : Accounting cycle . Transaction .
Analyzing Transactions for Balance sheet. Analyzing Transactions for income statement.

Ch2 accounting cycle Transaction analysis Transaction Assets Liabilities Owner's equity Cash Basis

Unadjusted trail balance Adjusted Trail Balance
Accounting 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)

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.

Analyzing Transactions for Balance sheet

Learning Objective 1 Identify financial effects of common financing and investing activities. Learning objective 1 is to identify financial effects of common financing and investing activities. 2-7

Building a Balance Sheet
Assets Resources owned by the business = Liabilities The rights of creditors + The balance sheet is structured like the basic accounting equation: Assets = Liabilities + Stockholders’ Equity. Assets are resources presently owned by a business that generate future economic benefit; liabilities are amounts presently owned by a business to creditors; and stockholders’ equity is the amount invested and reinvested in a company by its shareholders. Stockholders’ Equity The rights of the owners 2-8

Apply transaction analysis to financing and investing
Learning Objective 2 Apply transaction analysis to financing and investing transactions. Learning objective 2 is to apply transaction analysis to financing and investing transactions. 2-9

Study the Accounting Methods
A systematic accounting process is used to capture and report the financial effects of a company’s transactions. 1 Analyze 2 Record 3 Summarize A transaction is a business activity that affects the basic accounting equation. Part I After having analyzed each transaction, a systematic accounting process is used to capture and report their financial effects. This process encompasses three basic steps: Analyze, Record, and Summarize. Part II A transaction is an exchange or an event that has a direct economic effect on the assets, liabilities, or stockholders’ equity of a business. Business activities that do not have direct or measurable financial effects on the company are not recorded in the accounting system. When analyzing transactions, two simple ideas are used. The first idea is the duality of effects and the second is the basic accounting equation. Duality of effects means that every transaction has a least two effects on the basic accounting equation. You already know the basic accounting equation. Just remember that the dollar amount for assets must always equal the total of liabilities plus stockholders’ equity for every accounting transaction. 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. 2-10

Step 1: Analyze Transactions
(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. Pizza Aroma receives $50,000 Cash. Pizza Aroma gives $50,000 Stock (Contributed Capital). Part I 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. Part II Pizza Aroma receives $50,000 cash and gives $50,000 of stock (contributed capital) in the transaction. Part III For this transaction, Cash, an asset, increases by $50,000 received from the owner. Stockholders’ equity increased by $50,000 when the stock was issued to Mauricio Rosa. 2-11

(b) Investment in Equipment. Pizza Aroma pays $42,000 cash to buy restaurant booths and other equipment. Pizza Aroma receives $42,000 of Equipment. Pizza Aroma gives $42,000 Cash. Part I Next, Pizza Aroma pays $42,000 cash to buy restaurant booths and other equipment. Part II Pizza aroma receives $42,000 of equipment for the restaurant and gives $42,000 cash. Part III For this transaction, Equipment is increased by $42,000 and the asset, Cash, is decreased by $42,000. Notice that is no impact on the Liabilities and Stockholders’ Equity section of the balance sheet. The company exchanged one asset cash for another asset equipment. 2-12

(c) Obtain Loan from Bank. 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. Pizza Aroma receives $20,000 Cash. Pizza Aroma gives a note, payable to the bank for $20,000. Part I 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. Part II Pizza Aroma will receive $20,000 cash that is deposited into its checking account at the bank. The company gives up of issues a note payable to the bank for $20,000. Part III For this transaction, Cash, an asset account, increases by $20,000 and Note Payable, a liability, increases by the same amount. The basic accounting equation is in balance because the same amount was added to the asset side of the equation and the liability side of the equation. 2-13

(d) Investment in Equipment. 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. Pizza Aroma receives $18,000 in equipment (pizza ovens). Pizza Aroma gives a Cash of $16,000 and Accounts Payable of $2,000. Part I 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. Part II In this transaction Pizza Aroma receives $18,000 in equipment (pizza ovens). Pizza Aroma gives a Cash of $16,000 and Accounts Payable of $2,000 in payment for the equipment. Part III For this transaction, Cash, an asset account, decreases by $16,000, Equipment, also an asset, increases by $18,000, and Accounts Payable, a liability, increases by $2,000. The asset side of the basic accounting equation increases by a net amount of $2,000, and the liabilities and stockholders’ equity part of the equation increases by the same amount. The basic accounting equation stays in balance. 2-14

(e) Order Cookware. Pizza Aroma orders $630 of pans, dishes, and other cookware. None have been received yet. An exchange of only promises is not a transaction. 2. This does not affect the accounting equation. Part I Pizza Aroma orders $630 of pans, dishes, and other cookware. None have been received yet. Part II An exchange of only promises is not a transaction. This does not affect the accounting equation. Part III This event does not impact the basic accounting equation. 2-15

(f) Pay Suppliers. Pizza Aroma pays $2,000 to the equipment supplier from transaction (d). Pizza Aroma gives cash to settle its debt to the supplier. 2. Pizza Aroma receives a release from its promise to pay. Part I Pizza Aroma pays $2,000 to the equipment supplier from transaction (d). Part II Pizza Aroma gives cash to settle its debt to the supplier. The company receives a release from its promise to pay an amount to the supplier. Part III Once again the basic accounting equation is in balance because the assets side of the equation is reduced by $2,000, and the liabilities side is reduced by the same amount. 2-16

(g) Receive Cookware. Pizza Aroma receives $630 of the cookware ordered in (e) and promises to pay for it next month. Pizza Aroma receives cookware with a cost of $630. 2. Pizza Aroma gave a promise to pay $630 on account. Part I Pizza Aroma receives $630 of the cookware ordered in (e) and promises to pay for it next month. Part II Pizza Aroma receives cookware with a cost of $630, and gives a promise to pay the $630 within one month. Part III Once again the basic accounting equation is in balance because the assets side of the equation is increased by $630, and the liabilities side is increased by the same amount. 2-17

Step 2 and 3: Record and Summarize
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. 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. A three-step analyze-record-summarize process is applied to daily transactions and then to adjustments and closing processes at the end of each accounting period. Our focus in this chapter is on applying the three-step process during the period to daily activities that affect only balance sheet accounts. The analyze step involves determining the financial effects of each transaction; the record step captures these effects in an accounting record called the journal; and the summarize step accumulates these effects in accounting records called ledger accounts or T-accounts. 2-18

Chapter 2 Solved Exercises
Chapter 2 Solved Exercises: M2-13, M2-14, M2-15, M2-16, E2-4, E2-6

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) ,000 cr Notes Payable (+L) 25,000 Part I This is a continuation of the problem we started on the previous screen. 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. One of the owners sold $10,000 worth of his stock to another shareholder for $11,000 cash. Part II We begin recording transaction (d) with a debit, or increase, in the asset account Cash for $25,000. Part III We complete the recording with a credit, or increase, to the liability account Notes Payable for $25,000. Part IV Section (e) of the problem is really not a transaction between the company and an outside party. Rather it is a transaction between two individuals and does not impact the records of J. K. Builders. 2-20

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) 2,000 Part I Joel Henry founded bookmart.com at the beginning of August, which sells new and used books online. He is passionate about books but does not have a lot of accounting experience. Help Joel by preparing journal entries for the following events. If the event is not a transaction, write “no transaction.” The company purchased bookshelves for $2,000 cash. The bookshelves are expected to be used for ten or more years. Joel’s business bought $8,000 worth of books from a publisher. The company will pay the publisher within days. Part II Let’s begin by recording transaction (a). We begin with a debit, or increase, in the asset account Equipment for $2,000. Part III The entry is completed with a credit, or decrease, to the asset Cash in the amount of $2,000. Part IV For transaction (b), we begin with a debit, or increase, in the asset account Inventory for $8,000. Remember that inventory represents items purchased for resale. Part V We complete transaction (b) with a credit, or increase, in the liability account Accounts Payable for $8,000. 2-21

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) 1,500 Part I This is a continuation of the problem we started on the previous slide. Joel’s friend Sam lent $4,000 to the business. Sam had Joel write a note promising that bookmart.com would repay the $4,000 in four months. Because they are good friends, Sam is not going to charge Joel interest. The company paid $1,500 cash, for books purchased on account earlier in the month. Bookmart.com repaid the $4,000 loan established in c. Part II For transaction (c) we begin with a debit, or increase, to the asset account Cash for $4,000. Part III We complete the entry with a credit, or increase in the liability account Notes Payable for $4,000. Part IV For transaction (d) we begin with a debit, or decrease in the liability account Accounts Payable for $1,500. Part V Transaction (d) is completed with a credit, or decrease in the asset account Cash for $1,500. Part VI Finally, on transaction (e), we begin with a debit, or decrease, to the liability account Accounts Payable for $4,000. Part VII The entry is completed with a credit, or decrease, in the asset account Cash for $4,000. 2-22

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 $1,200. 4- dr Notes Payable (-L) 5,000 cr Cash (-A) 5,000 Part I This is a continuation of the Blue Light Arcade problem with added parts (d) and (e). Prepare journal entries for the following events relating to the year ended December 31. If the event is not a transaction, write “no transaction.” Repaid a $5,000 bank loan (Ignore interest.) The company purchased an air hockey table for $4,400, paying $1,000 cash and signing short-term note for $1,200. Part II Transaction (d) begins with a debit, or decrease, in the liability account Notes Payable for $5,000. Part III The entry is completed with a credit, or decrease, in the asset account Cash for $5,000. Part IV Event (e) begins with a debit, or increase, to the asset account Equipment for $2,200. Part V Next, we credit, or decrease, the asset account Cash for $1,000. Part VI We complete the entry with a credit, or increase, in the liability account Notes Payable for $1,200. 5- dr Equipment (+A) 2,200 cr Cash (-A) 1,000 cr Notes Payable (+L) 1,200 2-23

Analyzing Transactions for Income statement

Cash Basis Accounting Cash basis accounting records revenues when cash is received and expenses when cash is paid. Like most people, you probably look at the balance in your bank account to gauge your financial performance. If the overall balance increased this month, you likely take that as a sign that you’ve done a good job of managing your finances. If it has gone down, that is a clue that you need to tame yourself a little more next month. Because the cash inflows and outflows occur close in time to the activities that cause those cash flows, using your bank balance tends to give a decent measure of financial performance. This is a cash basis of accounting. The cash basis of accounting records revenues when cash is received and expenses when cash is paid. However, the cash basis of accounting doesn’t measure financial performance very well when transactions are conducted using credit rather than cash. The problem is that credit often introduces a significant delay between the time an activity occurs and the time it impacts the bank account balance. So, what accounting method is preferred? 3-25

Explain and apply the revenue and matching principles.
Learning Objective 2 Explain and apply the revenue and matching principles. Learning objective 2 is to explain and apply the revenue and matching principles. 3-26

Pizza Aroma’s Accounting Records
(a) Provided services for cash. In September, Pizza Aroma delivered pizza to customers for $15,000 cash. 1 Analyze Part I In September, Pizza Aroma delivered pizza to customers for $15,000 cash. Part II Analyze the transaction. In this case Cash, an asset, increased by $15,000, and Pizza Revenue, a subcategory of Stockholders’ Equity, increased by the same amount. Part III The general journal entry is to debit, or increase, the asset Cash for $15,000, and credit, or increase, Pizza Revenue for the same amount. Part IV We summarize the transaction by posting the amount to the general ledger accounts. The Cash account will increase by $15,000, and the Pizza Revenue account will also increase by $15,000. 2 Record 3-27

(b) Receive cash for future services. Pizza Aroma sold three $100 gift cards at the beginning of September. 1 Analyze Part I Pizza Aroma sold three $100 gift cards at the beginning of September. Part II Analyze the transaction. In this case Cash, an asset, increased by $300, and Unearned Revenue, a liability, increased by the same amount. Part III The general journal entry is to debit, or increase, the asset Cash for $300, and credit, or increase, Unearned Revenue, a liability, for the same amount. Part IV We summarize the transaction by posting the amount to the general ledger accounts. The Cash accounting will increase by $300, and the Unearned Revenue account will also increase by the same amount. 2 Record 3-28

(c) Provide services on credit. Pizza Aroma delivers $500 of pizza to a college organization, billing this customer on account. 1 Analyze Part I Pizza Aroma delivers $500 of pizza to a college organization, billing this customer on account. Part II Analyze the transaction. In this case Accounts Receivable, an asset, increased by $500, and Pizza Revenue, a subcategory of stockholders’ equity, increased by the same amount. Part III The general journal entry is to debit, or increase, the asset Accounts Receivable for $500, and credit, or increase, Pizza Revenue for the same amount. Part IV We summarize the transaction by posting the amount to the general ledger accounts. The Accounts Receivable account will increase by $500, and the Pizza Revenue account will increase by the same amount. 2 Record 3-29

(d) Receive payment on account. Pizza Aroma received a $300 check from the college organization, as partial payment of its account balance. 1 Analyze Part I Pizza Aroma received a $300 check from the college organization, as partial payment of its account balance. Part II Analyze the transaction. In this case Cash, an asset, increased by $300, and Accounts Receivable, an asset, decreased by the same amount. Part III The general journal entry is to debit, or increase, the asset Cash for $300, and credit, or decrease, Accounts Receivable, an asset, for the same amount. Part IV We summarize the transaction by posting the amount to the general ledger accounts. The Cash accounting will increase by $300, and the Accounts Receivable account will decrease by the same amount. 2 Record 3-30

(e) Pay cash to employees. Pizza Aroma wrote checks to employees, totaling $8,100 for wages related to hours worked in September. 1 Analyze Part I Pizza Aroma wrote checks to employees, totaling $8,100 for wages related to hours worked in September. Part II Analyze the transaction. In this case Cash, an asset, decreased by $8,100, and Wages Expense, a subcategory of stockholders’ equity, increased by $8,100, which causes stockholders’ equity to decrease. Part III The general journal entry is to debit, or increase, Wages Expense for $8,100, and credit, or decrease, Cash, an asset, for the same amount. Part IV We summarize the transaction by posting the amount to the general ledger accounts. The Cash accounting will decrease by $8,100, and the Wages Expense account will increase by the same amount. 2 Record 3-31

(f) Pay cash in advance. On September 1, Pizza Aroma paid $7,200 in advance for September, October, and November rent. 1 Analyze Part I On September 1, Pizza Aroma paid $7,200 in advance for September, October, and November rent. Part II Analyze the transaction. In this case Cash, an asset, decreased by $7,200, and Prepaid Rent, an asset, increased by the same amount. Part III The general journal entry is to debit, or increase, the asset Prepaid Rent for $7,200, and credit, or decrease, Cash, an asset, for the same amount. Part IV We summarize the transaction by posting the amount to the general ledger accounts. The Cash account will decrease by $7,200, and the Prepaid Rent account will increase by the same amount. Prepayments for insurance and other time-based services would be analyzed and recorded in a similar manner. 2 Record 3-32

(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 Part I On September 2, Pizza Aroma wrote a check for $1,600 for pizza sauce, dough, cheese, and paper products. Part II Analyze the transaction. In this case Cash, an asset, decreased by $1,600, and Supplies, an asset, increased by the same amount. Part III The general journal entry is to debit, or increase, the asset Supplies for $1,600, and credit, or decrease, Cash, an asset, for the same amount. Part IV We summarize the transaction by posting the amount to the general ledger accounts. The Cash account will decrease by $1,600, and the Supplies account will increase by the same amount. 3-33

(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 Part I Pizza Aroma received a bill for $400 for running a newspaper ad in September. The bill will be paid in October. Part II Analyze the transaction. In this case Accounts Payable, a liability, increased by $400, and Advertising Expense, a subcategory of stockholders’ equity, increased by $400, which causes stockholders’ equity to decrease. Part III The general journal entry is to debit, or increase, Advertising Expense for $400, and credit, or increase, Accounts Payable, a liability, for the same amount. Part IV We summarize the transaction by posting the amount to the general ledger accounts. The Accounts Payable account will increase by $400, and the Advertising Expense account will increase by the same amount. 3-34

(i) Pay cash for expenses. Pizza Aroma received and paid bills totaling $600 for September utilities services. 1 Analyze Part I Pizza Aroma received and paid bills totaling $600 for September utilities services. Part II Analyze the transaction. In this case Cash, an asset, decreased by $600, and Utilities Expense, a subcategory of stockholders’ equity, increased by $600, which causes stockholders’ equity to decrease. Part III The general journal entry is to debit, or increase, Utilities Expense for $600, and credit, or decrease, Cash, an asset, for the same amount. Part IV We summarize the transaction by posting the amount to the general ledger accounts. The Cash account will decrease by $600, and the Utilities Expense account will increase by the same amount. 2 Record 3-35

Chapter 3 Solved Exercises
Chapter 3 Solved Exercises: M3-3, M3-4, M3-5, M3-13, M3-14

M3-13 Preparing Journal Entries for Business Activities
Paid wages for the current month, totaling $2,000. Performed cleaning services on account worth $2,800. 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) ,000 cr Cash (-A) ,000 d. dr Accounts Receivable (+A) ,800 cr Services/Cleaning Revenue (+R +SE) ,800 dr Repairs and Maintenance Expense (+E -SE) cr Cash (-A) Part I Paid wages for the current month, totaling $2,000. Part II Debit Wages Expense and credit Cash for $2,000. Performed cleaning services on account worth $2,800. Part III Debit Accounts Receivable and credit Services/Cleaning Revenue for $2,800. Some of Quick Cleaners’ equipment was repaired at a total cost of $150. The company paid the full amount immediately. Part IV Debit Repairs and Maintenance Expense and credit Cash for $150. 3-37

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. Junktrader provided online advertising services for another company for $200 on account. 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. Part I 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. Junktrader provided online advertising services for another company for $200 on account. Part II Debit Accounts Receivable and credit Advertising (or Service) Revenue for $200. 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. Part III Debit Advertising Expense and credit Cash for $50. dr Accounts Receivable (+A) cr Advertising Revenue (+R +SE) dr Advertising Expense (+E -SE) cr Cash (-A) 3-38

Received $200 cash in membership fees for the month from new members. Received an electricity bill for $85, for usage this month. The bill will be paid next month. Billed a customer $180 for helping them sell their junk. The customer is expected to pay by the end of next month. dr Cash (+A) cr Membership Revenue (+R +SE) d. dr Electricity Expense (+E -SE) cr Accounts Payable (+L) dr Accounts Receivable (+A) cr Services Revenue (+R +SE) Part I Received $200 cash in membership fees for the month from new members. Part II Debit Cash and credit Membership (or Fees) Revenue for $200. Received an electricity bill for $85, for usage this month. The bill will be paid next month. Part III Debit Utilities (or Electricity) Expense and credit Accounts (or Utilities) Payable for $85. Billed a customer $180 for helping them sell their junk. The customer is expected to pay by the end of next month. Part IV Debit Accounts Receivable and credit Services (or Sales) Revenue for $180. 3-39

Analysis Transactions

Similar presentations

Presentation on theme: "Analysis Transactions"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Analysis Transactions

Similar presentations

Presentation on theme: "Analysis Transactions"— Presentation transcript:

Similar presentations

About project

Feedback