Chapter 3: Analyzing Changes in Financial Position Unit 1 Test will be Tue (Sep 23) Make sure that you check the answers after you finish your homework. Ask me after checking and trying the solutions on the website.

Analyzing Changes in Financial Position A business transaction is a financial event that causes a change in financial position (change in values of asset, liability or owner’s equity) Change = Owner bought a new delivery truck. But he had to borrow $20000 from bank to buy the truck. Is this a business transaction? Yes this is a business transaction because this event causes a change in asset and liability. Assets (Truck) Increase by $20000 Liabilities (Bank loan) increase by $20000

Analyzing Changes in Financial Position Building inspector suggests some improvements to the building of your business. What are the changes in assets, liabilities or OE? None or No change so this is not a business transaction.

Steps in Analyzing A Business Transaction Identify all items that must be changed. Classify each item as an asset or liability or OE. Find out whether the items will increase or decrease. Be logical. See if the Owner’s Equity has changed: Use the fundamental accounting equation : A = L + OE

Steps in Analyzing A Business Transaction See if the Owner’s Equity has changed: If an item decrease Assets and it decreases Liabilities (same amount) then OE will be unchanged. If Assets are decreased and Liabilities unchanged, then OE must decrease in order to maintain = sign. If the transaction is good for business, OE must increase (e.g. owner invested money into the business) If the transaction is NOT good for business, OE must decrease (e.g. Owner withdrew money from the business)

Steps in Analyzing A Business Transaction We must make sure that at least two of the individual items have changed = There can never be only one change!!!! Make sure the fundamental accounting equation is still balanced!!!! (A = L + OE)  Left side of the equation must be equal to right side of the equation.

Analyzing Changes in Financial Position Equation Analysis Sheet Used for analyzing business transactions. All the assets, liabilities and equity are shown in columns and are in a balanced state.

Mark Doucet decides to open a computer programming service. TRANSACTION ANALYSIS Mark Doucet decides to open a computer programming service. BANK Softbyte

TRANSACTION ANALYSIS TRANSACTION 1 On September 1, he invests $15,000 cash in the business, which he names Softbyte. There is an increase in the asset Cash, $15,000, and an equal increase in the owner’s equity, M. Doucet, Capital, $15,000.

TRANSACTION ANALYSIS TRANSACTION 2 Softbyte purchases computer equipment for $7,000 cash. Cash is decreased by $7,000, and the asset Equipment is increased by $7,000.

TRANSACTION ANALYSIS TRANSACTION 3 Softbyte purchases computer paper and supplies expected to last several months from Chuah Supply Company for $1,600 on account. The asset Supplies is increased by $1,600, and the liability Accounts Payable is increased by the same amount.

TRANSACTION ANALYSIS TRANSACTION 6 Softbyte provides programming services of $3,500 for customers and receives cash of $1,500, with the balance payable on account. Cash is increased by $1,500; Accounts Receivable is increased by $2,000; and M. Doucet, Capital is increased by $3,500.

Classwork / Homework! If you finish them in class, then you do not have any homework. This is classwork for today: Pg 69 Review #4, 7, 8 P 69 Exercises #1 – 3 I will take up Ex #2