3.1PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. ACCOUNTING Financial and Organisational Decision Making Chapter 3 Classification and analysis of transactions Slides written and designed by Tony Van Eekelen

Chapter 3: Classification and analysis of transactions 3.2PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Learning Objectives In this chapter you will be introduced to –transaction analysis, in terms of the effects of transactions on the accounting equation –net profit/loss and profit and loss statement –the accounting equation and simple balance sheet –the difference between assets and expenses

Chapter 3: Classification and analysis of transactions 3.3PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Learning Objectives –which portion of costs incurred by an entity constitutes expenses and which are assets –the difference between the cash flow statement and other financial statements

Chapter 3: Classification and analysis of transactions 3.4PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Classification precedes summarisation Good communication is to compress the events into a summary that gives a clear picture of the overall events To summaries the events reliably a form of classification is needed In accounting the aim is to summarise financial transactions, thus the $ amount and financial statement classification is a starting point

Chapter 3: Classification and analysis of transactions 3.5PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Classification in accounting reports Transaction can be classified in the basic financial statements - transaction analysis From the balance sheet AssetsEquities = AssetsLiabilities Owner’s Equities =+

Chapter 3: Classification and analysis of transactions 3.6PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Assets Assets are resources owned or controlled for the purpose of providing benefits to that entity –generally physical objects –any future benefit to the entity eg cash, motor vehicle, building –may not be in physical form eg rent paid in advance, prepaid wages, rights to intellectual property –ownership is not necessary but must have control

Chapter 3: Classification and analysis of transactions 3.7PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Assets In balance sheet the order of the assets is based upon liquidity cash at bank accounts receivable prepayment inventory motor vehicles plant and machinery buildings

Chapter 3: Classification and analysis of transactions 3.8PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Liabilities Liabilities represents future obligations or sacrifices and are usually settled using cash –Represents the debts of the entity to non-owners Non-owners (outside parties) include suppliers, banks, other companies, employees, taxation office –Generally repaid in cash –Order in balance sheet based upon earliest due payment Wages payable, accounts payable, unearned revenue, mortgage

Chapter 3: Classification and analysis of transactions 3.9PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Owners’ equity Owners’ equity represents the owners’ claim or net worth in the assets of the entity Includes –capital –withdrawals –revenue –expenses

Chapter 3: Classification and analysis of transactions 3.10PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Transaction analysis Record the transactions into an accounting equation table Note: after each transaction the accounting equation must remain in balance

Chapter 3: Classification and analysis of transactions 3.11PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Example 1 Owner contributes $10,000 Assets = Liabilities+ Owners’ equity +$10,000+$10,000

Chapter 3: Classification and analysis of transactions 3.12PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Example 2 Purchased petrol of $50 cash Assets = Liabilities+ Owners’ equity-$50

Chapter 3: Classification and analysis of transactions 3.13PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Example 3 Billed customers for services, $4000 Assets = Liabilities+ Owners’ equity+$4,000

Chapter 3: Classification and analysis of transactions 3.14PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Example 4 Owner withdraws $300 cash Assets = Liabilities+ Owners’ equity-$300

Chapter 3: Classification and analysis of transactions 3.15PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Example 5 Received $2500 from customer above Assets = Liabilities+ Owners’ equity +$2,500 -$2,500

Chapter 3: Classification and analysis of transactions 3.16PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Example 6 Purchased $7000 car paid $1000 and borrow the rest Assets = Liabilities+ Owners’ equity +$7,000+$6,000 -$1,000

Chapter 3: Classification and analysis of transactions 3.17PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Net affect Assets = Liabilities+ Owners’ equity 1+$10,000+$10,000 2-$50-$50 3+$4,000+$4,000 4-$300-$300 5+$2,500 -$2,500 6+$7,000+$6,000 -$1,000 $19,650 =$6,000 +$13,650

Chapter 3: Classification and analysis of transactions 3.18PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Financial Statements Profit and Loss Statement for the week ending 6th XX Fees Revenue$4,000 Less expenses –petrol $50 Net Profit$3,950

Chapter 3: Classification and analysis of transactions 3.19PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Financial Statements Assets Cash at bank$11,150 Accounts receivable $1,500 Car $7,000 $19,650 Liabilities Loan $6,000 Owners’ equity Capital$10,000 Drawings -$300 +Profit $3,950 $13,650 $19,650 Balance Sheet as at 6th XX

Chapter 3: Classification and analysis of transactions 3.20PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Relationship between financial statements AssetsLiabilities Owner’s Equities =+ Revenue Owner’s Contributions Expenses Owner’s Withdrawals + -

Chapter 3: Classification and analysis of transactions 3.21PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Cash flows Another statement which is useful for decision making is the cash flows statement It shows the cash effects of business transactions for the period This is important as cash is the backbone of the business