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4. Homework assignment Using Connect – LS 20 Points, Quiz 20 Points, and EX. 60 Points. NO Class on 9/7 – Labor Day. 3 Prepare chapter 3 “ Analysis Business Transactions Using T Accounts. ” Happiness is having all homework up to date Atef Abuelaish4

5. CHAPTER # 02 REVIEW REVIEW Atef Abuelaish5

6. Chapter 02 Analyzing Business Transactions

7. Chapter 02 Analyzing Business Transactions 1) 1) Property and Financial Interest

8. 2-8 Steps to analyze the effect of a business transaction 1. Describe the financial event. Identify the property. Identify who owns the property. Determine the amount of increase or decrease. 2. Make sure the equation is in balance. Property (asset) = Financial Interest (creditors and owners)

9. 2-9 Business Transaction Carolyn Wells withdrew $100,000 from personal savings and deposited it in a new checking account in the name of Wells’ Consulting Services. (a) The business received $100,000 of property in the form of cash. Analysis: (a) Wells has a $100,000 financial interest in the business. 1) Record in equation form the financial effects of a business transaction

10. The owner invested cash into the business Carolyn Wells now has $100,000 equity in Wells’Consulting Services. 2-10

11. The company buys equipment for $5,000 cash 2-11

12. $106,000 = $106,000 Notice the new claim against the firm’s property – the creditor’s claim of $6,000. The company buys $6,000 of equipment on account (on credit) 2-12

13. $106,000 = $106,000 The firm purchases supplies for $1,500 cash 2-13

14. $103,500 = $103,500 The firm makes a payment of $2,500 on account 2-14

15. $103,500 = $103,500 The firm makes a payment of $8,000 rent in advance 2-15

16. QUESTION: What are assets? Assets are property owned by a business. ANSWER: 2) Define, identify, and understand the relationship between asset, liability, and owner’s equity accounts Assets, Liabilities, and Owner’s Equity 2-16

17. QUESTION: What are liabilities? Liabilities are debts or obligations of a business ANSWER: QUESTION: Owner’s equity is the term used by sole proprietorships. It is the financial interest of an owner of a business. It is also called proprietorship or net worth. ANSWER: Liabilities and Equity What is owner’s equity? 2-17

18. QUESTION: What is a Balance Sheet? A balance sheet is a formal report of the financial position of a business on a certain date. It reports the assets, liabilities, and owner’s equity of the business ANSWER: The Balance Sheet 2-18

19. Liabilities – the amount owed to the creditors Assets – the amount and types of property owned by the business Equity – the owner’s interest The Balance Sheet 2-19

20. Assets Property equals Financial Interest Liabilities + Owner’s Equity Property Financial Interest 2-20

21. Chapter 02 Analyzing Business Transactions 2) 2) The Accounting Equation and Financial Statements

22. QUESTION : What is the fundamental accounting equation? ANSWER: The fundamental accounting equation is the relationship between assets and liabilities plus owner’s equity. The Fundamental Accounting Equation 2-22

23. 2-23 In accounting terms the firm’s assets must equal the total of its liabilities and owner’s equity. This equality can be expressed in equation form as: Assets = Liabilities + Owner’s Equity The Fundamental Accounting Equation The entire accounting process of analyzing, recording and reporting business transactions is based on the fundamental accounting equation. If any two parts of the equation are known, the third part can be determined.

24. 3) Analyze the effects of business transactions on a firm’s assets, liabilities, and owner’s equity and record these effects in accounting equation form. 2-24

25. QUESTION: What is revenue? ANSWER: income A revenue is an inflow of money or other assets that results from the sales of goods or services or from the use of money or property. It is also called income. Revenues 2-25

26. QUESTION: What is an expense? ANSWER: An expense is an outflow of cash, use of other assets, or incurring of a liability. Expenses 2-26

27. The firm receives $36,000 in cash for services provided to clients 2-27

28. The company performs services on account for $11,000 2-28

29. Collection of $6,000 from customers on account 2-29

30. The firm pays $8,000 in salaries expense for the month 2-30

31. The firm pays $650 for utilities expenses 2-31

32. The firm records a withdrawal by the owner of $5,000 2-32

33. An income statement is a formal report of business operations covering a specific period of time. It is also called a profit and loss statement or a statement of income and expenses. 4) Prepare an Income Statement QUESTION: What is an income statement? ANSWER: 2-33

34. Revenue Fees Income $47,000.00 Expenses Salaries Expense $8,000.00 Utilities Expense 650.00 Total Expenses 8,650.00 Net Income $ 38,350.00 Wells’ Consulting Services Income Statement Month Ended Month Ended December 31, 2016 The income statement has a three-line heading The third line shows that the report covers operations over a period of time 2-34

35. Revenue Fees Income $47,000.00 Expenses Salaries Expense 8,000.00 Utilities Expense 650.00 Total Expenses 8,650.00 Net Income$ 38,350.00 Wells’ Consulting Services Income Statement Month Ended December 31, 2016 The income statement reports revenue 2-35

36. Revenue Fees Income $47,000.00 Expenses Salaries Expense 8,000.00 Utilities Expense 650.00 Total Expenses 8,650.00 Net Income$ 38,350.00 Wells’ Consulting Services Income Statement Month Ended December 31, 2016 The income statement also reports expenses 2-36

37. Revenue Fees Income $47,000.00 Expenses Salaries Expense 8,000.00 Utilities Expense 650.00 Total Expenses 8,650.00 Net Income Net Income $ 38,350.00 Wells’ Consulting Services Income Statement Month Ended December 31, 2016 The result is net income or net loss for the period 2-37

38. 37 Carolyn Wells, Capital, December 1, 2016 Net Income for December Less Withdrawals for December Increase in Capital Carolyn Wells, Capital, December 31, 2016 $38,350.00 5,000.00 $100,000.00 33,350.00 $133,350.00 Wells’ Consulting Services Statement of Owner’s Equity Month Ended Month Ended December 31, 2016 A Statement of Owner’s Equity 5) Prepare a Statement of Owner’s Equity and Balance Sheet 2-38

39. Assets Cash 111,350.00 Accounts Receivable 5,000.00 Supplies 1,500.00 Prepaid Rent 8,000.00 Equipment 11,000.00 Total Assets 136,850.00 Liabilities Accounts Payable 3,500.00 Owner’s Equity Carolyn Wells, Capital 133,350.00 Total Liabilities and Owner’s Equity 136, 850.00 Wells’ Consulting Services Balance Sheet December 31, 2016 A single line shows that the amounts above it are being added or subtracted. A double line indicates final amounts for the column or section of a report. The Balance Sheet 2-39

40. 2-40  Business managers and owners use the balance sheet and the income statement to control current operations and plan for the future. The Importance of Financial Statements  Creditors, prospective investors, governmental agencies, and others are interested in the profits of the business and in the asset and equity structure.

41. 2-41 1 st Income Statement 2 nd Statement of Owner’s equity [Retained Earnings] 3 rd Balance Sheet Financial statements are prepared in a specific order:

42. Financial statements : Net income (or loss) is transferred to the statement of owner’s equity. The ending capital balance is transferred to the balance sheet. 2-42

43. Chapter 03 Analyzing Business Transactions Using “T” Accounts

44. Chapter 03 Analyzing Business Transactions Using “T” Accounts 1) Transactions That Affect Assets, Liabilities, and Owner’s Equity

45. 3-45 The Accounting Equation ASSETS property The property a owns business owns LIABILITIES debts The debts of the business OWNER’S EQUITY financial The owner’s financial interest interest in the business = +

46. Classification of Accounts Asset Accounts owns Asset accounts show the property a business owns. Liability Accounts debts Liability accounts show the debts of the business. Owner’s Equity Accounts financial interest Owner’s equity accounts show the owner’s financial interest in the business. 3-46

47. T Accounts =+ ASSETS + + Record Increases LEFT SIDE - Record Decreases RIGHT SIDE LIABILITIES - Record Decreases LEFT SIDE + + Record Increases RIGHT SIDE OWNER’S EQUITY - Record Decreases LEFT SIDE + + Record Increases RIGHT SIDE Set up T accounts for assets, liabilities and owner’s equity 3-47

48. Effects of Business Transactions 1.Analyze the financial event. Steps to analyze the effects of the business transactions: 2.Apply the left-side-right side rules for each account affected. 3.Make the entry in T-account form. Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account. Analyze business transactions and enter them in the accounts 3-48

49. 1) Initial Investment LEFTIncreases to asset accounts are recorded on the left side of the T account. RIGHTIncreases to owner’s equity accounts are recorded on the right side of the T account. Carolyn Wells withdrew $100,000 from personal savings and deposited it in the new business checking account for Wells’ Consulting Services. Cash Carolyn Wells, Capital (a) 100,000 3-49

50. 2) Business Transaction Wells’ Consulting Services issued a $5,000 check to purchase a computer and other equipment. Analysis: (b) The asset account, Equipment, is increased by $5,000. (b) The asset account, Cash, is decreased by $5,000. Equipment (b) 5,000 Cash 3-50

51. 3) Purchase of Equipment on Account The firm bought office equipment for $6,000 on account from Office Plus. Analysis: (c) The asset account, Equipment, is increased by $6,000. (c) The liability account, Accounts Payable, is increased by $6,000. Equipment Accounts Payable (c) 6,000 3-51

52. 4) Purchase of Supplies for Cash Wells’ Consulting Services issued a check for $1,500 to Office Delux Inc. to purchase office supplies. Analysis: (d) The asset account, Supplies, is increased by $1,500. (d) The asset account, Cash, is decreased by $1,500. Supplies (d) 1,500 Cash 3-52

53. 5) Payment of a Liability Wells’ Consulting Services issued a check in the amount of $2,500 to Office Plus. Analysis: (e) The asset account, Cash, is decreased by $2,500. (e) The liability account, Accounts Payable, is decreased by $2,500. Accounts Payable (e) 2,500 Cash 3-53

54. 6) Prepayment of Rent Wells’ Consulting Services issued a check for $8,000 to pay rent for the months of December and January. Analysis: (f) The asset account, Prepaid Rent, is increased by $8,000. (f) The asset account, Cash, is decreased by $8,000. Prepaid Rent (f) 8,000 Cash 3-54

55. Determine the balance of an account An account balance is the difference between the amounts recorded on the two sides of an account. A footing is a small pencil figure written at the base of an amount column showing the sum of the entries in the column. 3-55

56. balance. the total of those entries is the account balance. one side, an account contains entries on only one side, ce. that amount is the balance. one amount an account shows only one amount, left side. the balance is recorded on the left side. left side is larger the total on the left side is larger, right side. the balance is recorded on the right side. right side is larger the total on the right side is larger than the total on the left side,  Recording Account Balances IF THEN 3-56

57. Computing the Account Balance Cash (a)100,000(b) 5,000 (d) 1,500 (e) 2,500 (f) 8,000 ----------- 17,000 Footing Bal. 83,000 (100,000 – 17,000) 3-57

58. Account balances for Carter Consulting Services ASSETS = LIABILITIES + OWNER’S EQUITY Cash Accounts Payable Carolyn Wells, Capital (a) 100,000 (b) 5,000 ( e) 2,500 (c) 6,000 (b) 100,000 (d) 1,500 Bal. 3,500 (e) 2,500 (f) 8,000 Bal. 83,000 17,000 Supplies SUMMARY OF ACCOUNT BALANCES (d) 1,500 ASSETS = LIABILITIES + OWNER’S EQUITY Prepaid Rent 83,000 3,500 100,000 1,500 (f) 8,000 8,000 11,000 Equipment 103,500 = 3,500 + 100,000 (b) 5,000 (c) 6,000 Bal. 11,000 Summary of Account Balances 3-58

59. Chapter 03 Analyzing Business Transactions Using “T” Accounts 2) Transactions That Affect Revenue, Expenses, and Withdrawals

60. Owner’s Equity Decrease Side Increase Side Revenue Decrease Side Increase Side Revenues increase owner’s equity. Increases in owner’s equity appear on the right side of the T account. Therefore, increases in revenue appear on the right side of revenue T accounts. T-Account for Revenue 3-60

61. The right side of the revenue account shows increases and the left side shows decreases. Revenue Decrease Side Increase Side Decreases in revenue accounts are rare but might occur because of corrections or transfers. 3-61

62. Cash Bal. 83,000 (g) 36,000 Fees Income (g) 36,000 $36,000 is entered on the left (increase) side of the asset account Cash. $36,000 is entered on the right side of the Fees Income account. Set up T accounts for revenues and expenses 7) Recording Revenue from Services Sold for Cash 3-62

63. 8) Recording Revenue from Services Sold on Credit In December, Wells’ Consulting Services earned $11,000 from various charge account clients. Analysis: (h) The asset account, Accounts Receivable, is increased by $11,000. (h) The revenue account, Fees Income, is increased by $11,000. Accounts Receivable (h) 11,000 Fees Income (h) 11,000 3-63

64. Analysis: (i)The asset account, Cash, is increased by $6,000. (i) The asset account, Accounts Receivable, is decreased by $6,000. 9) Receipt of Payments on Account Charge account clients paid $6,000, reducing the amount owed to Wells’ Consulting Services. Cash Accounts Receivable (i) 6,000 3-64

65. Expenses decrease owner’s equity. Owner’s Equity Decrease Side Increase Side Revenue Decrease Side Increase Side Expense Increase Side Decrease Side Decreases in owner’s equity appear on the left side of the T accounts. Expenses 3-65

66. 10) Payment of Salaries In December, Wells’ Consulting Services paid $8,000 in salaries. Analysis: (j) The asset account, Cash, is decreased by $8,000. (j) The expense account, Salaries Expense, is increased by $8,000. Salaries Expense Cash (j) 8,000 3-66

67. 11) Payment of Utilities Wells’ Consulting Services issued a check for $650 to pay the utilities bill. Analysis: (k) The asset account, Cash, is decreased by $650. (k) The expense account, Utilities Expense, is increased by $650. Utilities Expense (k)650 Cash 3-67

68. Drawing decreases owner’s equity. Owner’s Equity Decrease Side Increase Side Revenue Decrease Side Increase Side Expense Increase Side Decrease Side Owner Drawing Increase SideDecrease Side Decreases in owner’s equity appear on the left side of the T accounts. Owner’s Withdrawals 3-68

69. Carolyn Wells wrote a check to withdraw $5,000 cash for personal use. Analysis: (l) The asset account, Cash, is decreased by $5,000. (l) The owner’s equity account, Carolyn Wells, Drawing, is increased by $5,000. 12) The Owner Withdraws Funds Carolyn Wells, Drawing (l) 5,000 Cash 3-69

70. The Rules of Debit and Credit A debit is an entry on the left side of an account. A credit is an entry on the right side of an account. A double-entry system is an accounting system that involves recording the effects of each transaction as debits and credits in separate accounts. Every transaction in a Double entry accounting system has at least one debit and one credit. The total of the debits and credits recorded in the separate accounts must be EQUAL. 3-70

71. Any Account Left SideRight Side DEBITSIDE CREDITSIDE left side debit side Accountants refer to the left side of an account as the debit side instead of saying the left side. right side credit side The right side of the account is called the credit side. 3-71

72. Rules for Debits and Credits 3-72

73. Prepare a trial balance from T accounts 1.Use the proper heading to include who, what, and when information. 2.List the accounts in chart of account order or in the same order as they appear in the financial statement. 3.Enter the ending balance of each account in the appropriate Debit or Credit column. 4.Total the Debit column. 5.Total the Credit column. 6.Compare the column totals. They should be equal. 3-73

74. The Trial Balance 3-74

75.  Adding trial balance columns incorrectly  Recording only half a transaction – for example, recording a debit but not recording a credit, or vice versa  Recording both halves of a transaction as debits or credits rather than recording one debit and one credit  Recording the incorrect amount for a transaction  Recording a debit for one amount and a credit for a different amount  Mathematical errors in calculating account balances  Forgetting to carry over an account balance to the Trial Balance Some common errors in a trial balance are: Errors 3-75

76. Prepare an income statement, a statement of owner’s equity, and a balance sheet  After the trial balance is prepared, the financial statements are prepared.  Net income from the income statement is used on the statement of owner’s equity.  The ending balance of the Carolyn Wells, Capital account, computed on the statement of owner’s equity, is used on the balance sheet. 3-76

77. Wells’ CONSULTING SERVICES Balance Sheet December 31, 2016 ASSETS LIABILITIES Cash 111,350.00 Accounts Payable 3,500.00 Accounts Receivable 5,000.00 Supplies 1,500.00 Prepaid Rent 8,000.00 OWNER’S EQUITY Equipment 11,000.00 Carolyn Wells, Capital 133,350.00 Total Assets 136,850.00 Total Liabilities and Owner’s Equity 136,850.00 Wells’ CONSULTING SERVICES Statement Of Owner’s Equity Month Ended December 31, 2016 Carolyn Wells, Capital, Dec. 1, 2016 100,000.00 Net Income for December 38,350.00 Less Withdrawals for December 5,000.00 Increase in Capital 33,350.00 Carolyn Wells, Capital, Dec. 31, 2016 133,350.00 Wells’ CONSULTING SERVICES Income Statement Month Ended December 31, 2016 Revenue Fees Income 47,000.00 Expenses Salaries Expense8,000.00 Utilities Expense 650.00 Total Expenses 8,650.00 Net Income 38,350.00 3-77

78. Develop a chart of accounts  Each account has a number and a name.  The Balance Sheet accounts are listed first, followed by the Statement of Owner’s Equity accounts, ending with the income statement accounts.  The account number is assigned based on the type of account.  Each account should have a number assigned to its title (name)  Balance Sheet accounts are listed before income statement accounts. 3-78

79. 3-79

80. A Permanent account is an account that is kept open from one accounting period to the next. A Temporary account is an account whose balance is transferred to another account at the end of an accounting period. A temporary account is “zeroed out” at the end of the accounting period. Permanent and Temporary Accounts 3-80

81. Homework assignment Using Connect – LS 20 Points, Quiz 20 Points, and EX. 60 Points. 1, 2, and 3 for revisions in class. Prepare chapter 1, 2, and 3 for revisions in class. Due date tor all Chapters’ 1, 2, and 3 is 9/15 at 11:59 PM. Due date tor all Chapters’ 1, 2, and 3 is 9/15 at 11:59 PM. Happiness is having all homework up to date Atef Abuelaish81

82. Thank you, and see you, Wednesday at the same time