Chapter Two: Transaction Analysis

Chapter Two: Transaction Analysis
Financial Accounting Chapter Two: Transaction Analysis Chapter 1 introduced the financial statements. In Chapters 2 and 3, we discuss business transactions, how they are recorded, and the role they play in the accounting cycle and the preparation of financial statements. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Copyright © 2019 Pearson Education, Inc. All rights reserved.
Learning Objectives Recognize a business transaction and the various types of accounts in which it can be recorded Analyze the impact of business transactions on the accounting equation Analyze the impact of business transactions on accounts Journalize transactions and post journal entries to the ledger Construct a trial balance These are the learning objectives we will cover in Chapter 2. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Learning Objective One
Recognize a business transaction and the various types of accounts in which it can be recorded In learning objective one, you will learn to recognize a business transaction and the various types of accounts in which it can be recorded. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Recognize a business transaction and the various types of accounts in which it can be recorded
A transaction is any event that has a financial impact on the business and can be measured reliably. Provides objective information about the financial impact on an exchange Gives something Receives something Accounting records both sides of the transaction A transaction is any event that has a financial impact on the business and can be measured. Not all events necessarily qualify as transactions. An exchange must take place, meaning something is given and something is received. Accounting always records both sides of the transaction, therefore the transaction must be measurable in order for it to be recorded. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Define Account The accounting equation expresses the basic relationship of accounting. Assets = Liabilities + Stockholders’ (Owners’) Equity Recall from Chapter 1, the accounting equation is Assets = Liabilities + Stockholders’ Equity. This represents the foundation of accounting and the basic relationship of the accounts. We will now discuss what an “account” is. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Define Account An account is the record of all the changes in a particular asset, liability, or stockholders’ equity during a period. An account is the record of all the changes in a particular asset, liability, or stockholders’ equity during a period. It is the basic summary device used in accounting. Copyright © 2019 Pearson Education, Inc. All rights reserved.

List and Differentiate Between Different Types of Accounts
Assets: economic resources that provide a future benefit Cash Money including bank account balances, paper currency, coins, certificates of deposits, and checks Accounts Receivable Promise for future cash for goods or services Assets are economic resources that provide a future benefit to the business. A few common examples include: Cash: money and any medium of exchange including bank account balances, paper currency, coins, certificates of deposit, and checks Accounts Receivable: a promise for future cash that a company receives when it sells goods or services to customers Inventory: Inventory is often a company’s most important asset. It includes the goods that a company sells to its customers. Other titles for this account include merchandise and merchandise inventory. Inventory Goods the company sells to customers Copyright © 2019 Pearson Education, Inc. All rights reserved.

Assets: economic resources that provide a future benefit Prepaid Expenses Expenses paid in advance, such as insurance or rent Investments Interests purchased and held in other companies Prepaid expenses: expenses paid in advance, such as insurance or rent Investments: interests purchased and held in another company. These are assets because they have a long-term future use for the company. Property, Plant, and Equipment: This account shows the cost of land, buildings, and equipment owned by the company. This account is broken down into more individual accounts and most of these assets will be depreciated over time. Property, Plant, and Equipment Cost of the land, buildings, and equipment owned by a company Copyright © 2019 Pearson Education, Inc. All rights reserved.

Liabilities: a debt or payable Accounts Payable Promise to pay a debt Notes Payable Signed notes promising to pay a future amount Liabilities are debts. Payables always represent a liability. A few common types of liabilities include: Accounts Payable: Accounts payable is the direct opposite of Accounts Receivable. It is a company’s promise to pay a debt. Notes Payable: includes the amounts the company must pay because it signed a note promising to pay a future amount. Accrued Liabilities: liability for an expense that has not been paid yet. Interest payable and salary payable are common examples of accrued liability accounts. Accrued Liabilities Liability for an expense you have not yet paid Copyright © 2019 Pearson Education, Inc. All rights reserved.

Stockholders’ Equity: the stockholders’ claims to the assets of the company Common Stock Owners’ investment in the corporation through stock Retained Earnings Cumulative net income minus net losses and dividends over the company’s life Stockholders’ Equity: the stockholders’ claims to the assets of the company. Common Stock shows the owners’ investment in the corporation. Common stock is the most basic element of equity and all corporations have common stock. Retained earnings contain the cumulative net income minus losses and dividends accumulated over the company’s life. Dividends are optional. They are declared by the board of directors and represent a distribution of the company’s earnings to the shareholders. Dividends Distribution of the company’s earnings to its shareholders Copyright © 2019 Pearson Education, Inc. All rights reserved.

Stockholders’ Equity: the stockholders’ claims to the assets of the company Revenues Increase in stockholders’ equity from delivering goods or services to customers Expenses Decrease in stockholders’ equity due to the cost of operating the business Revenues represent increases in stockholders’ equity from delivering goods and services to customers. The company may have several different revenue accounts, for example Sales Revenue, Service Revenue, and Interest Revenue. Expenses represent the cost of operating a business. Expenses decrease stockholders’ equity, essentially the opposite of revenues. Each expense will have a different account. Some examples include cost of goods sold, interest expense, salary expense, and rent expense. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Learning Objective Two
Analyze the impact of business transactions on the accounting equation In learning objective two, you will learn to analyze the impact of business transactions on the accounting equation. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Show the impact of business transactions on the accounting equation
Example: Alladin Travel, Inc. To illustrate the accounting for transactions, we will consider 11 transactions and analyze each in terms of its effect on Alladin Travel. To illustrate accounting for transactions, we will consider 11 transactions for Alladin Travel, Inc. and analyze each in terms of its effect on the company. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 1 On, April 1, Starr Williams and a few friends invest $50,000 to open Alladin Travel, Inc., and the business issues common stock to the stockholders. The effect of this transaction is the receipt of cash and the issuance of common stock. Every transactions’ net amount on the left side of the accounting equation must equal the net amount on the right side. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 2 Alladin purchases land for a new location and pays cash of $40,000. This purchase increases an asset, land, and decreases another asset, cash. Keep in mind that total assets must always equal liabilities + stockholders’ equity. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 3 The business buys supplies on account, agreeing to pay $3,700 within 30 days. This transaction increases both assets and liabilities. The new asset is supplies and the new liability is the $3,700 which will be a credit to Accounts Payable. Assets still equal Liabilities + Stockholders’ Equity. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 4 Alladin earns $7,000 of service revenue by providing services for customers. The effect on the accounting equation is an increase in the asset Cash and an increase in Retained Earnings. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 5 Alladin performs services on account, which means that Alladin lets some customers pay later. Alladin earns revenues but does not receive cash immediately. This promise from the customers to pay represents an Accounts Receivable, an asset to Alladin Travel. Revenue is recorded when earned, in other words when the service is performed, regardless of when the cash is received. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 6 During the month, Alladin Travel, Inc., pays $2,700 for the following expenses: rent $1,100; employee salaries, $1,200; and utilities, $400. These expenses decrease Alladin’s Cash and Retained Earnings. List each expense separately to track the account and facilitate the preparation of the income statement later. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 7 Alladin pays $1,900 on account, which means to make a payment toward an account payable. This transaction decreases Cash, an asset, and Accounts Payable, a liability account. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 8 Starr Williams, the major stockholder of Alladin Travel, paid $30,000 out of her personal bank account to remodel her home. No Entry This is a personal event that would not effect the business. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 9 In transaction 5, Alladin performed services for customers on account. The business now collects $1,000 from a customer. Alladin collected cash on account, which means that Alladin will record an increase in Cash and a decrease in Accounts Receivable, both asset accounts. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 10 Alladin sells some land for $22,000, which is the same amount Alladin paid for the land. Cash will increase by $22,000, while Land decreases by $22,000. Total assets remain unchanged. Also, note that Alladin did not sell all of its land; it still has $18,000 worth of land. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 11 Alladin Travel, Inc., declares a dividend and pays the stockholders $2,100 cash. This transactions decreases both Cash and Retained Earnings of the business. However, dividends are NOT an expense. They are a separate stockholders’ equity account. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-1 | Transaction Analysis: Alladin Travel, Inc.
Exhibit 2-1 summarizes the 11 preceding transactions and provides a transaction analysis. Note that every transaction maintains the accounting equation: Assets = Liabilities + Stockholders’ Equity. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-2 | Financial Statements of Alladin Travel, Inc. 1 of 2
Income statement data appear as revenues and expenses under Retained Earnings. The revenues increase retained earnings; the expenses decrease retained earnings. Revenues minus expenses equals Net Income, which is used to create the next financial statement, Statement of Retained Earnings. Statement of Retained Earnings represents net income or loss) from the income statement. Dividends are subtracted to get Retained Earnings. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-2 | Financial Statements of Alladin Travel, Inc. 2 of 2
The balance sheet data are composed of the ending balances of the assets, liabilities, and stockholders’ equities shown at the bottom of the exhibit. The accounting equation shows that total assets ($57,000) equal total liabilities plus stockholders’ equity ($57,000). Retained Earnings flows from the Statement of Retained Earnings to the Balance Sheet as shown in the slide. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Learning Objective Three
Analyze the impact of business transactions on accounts In learning objective three, you will learn to analyze the impact of business transactions on accounts. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Analyze the impact of business transactions on accounts
Accounting: Double-entry system Records dual effects of each transaction At least two accounts in each transaction Every business transaction involves an exchange of at least two things: You give something. You receive something in return. Accounting is, therefore, based on a double-entry system, which records the dual effects on the entity. Each transaction affects at least two accounts. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Analyze the impact of business transactions on accounts
The T-Account Record of increases and decreases in a specific asset, liability, equity, revenue, or expense An account can be represented by the letter T, called a T-account. The vertical line in the letter T represent the division of the account into its two sides: left and right. The account title appears at the top of the T. The left side of each account is called the debit side, and the right side is called the credit side. Every business transaction involves both a debit and a credit. Debit means “left-hand side” and credit means “right-hand side.” Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-3 | Accounting Equation and the Rules of Debit and Credit
The type of account determines how we record increases and decreases. The rules of debit and credit are shown above. Increases in assets are recorded on the left (debit) side of the account. Decreases in assets are recorded on the right (credit) side. You receive cash and debit the Cash account. You pay cash and credit the Cash account. Conversely, increases in liabilities and stockholders’ equity are recorded by credits, and decreases are recorded by debits. The type of account determines how to record increases and decreases. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-4 | The Accounting Equation after Alladin Travel, Inc.’s, First Transaction The Cash account and the Common Stock account will hold these amounts. The amount remaining in an account is called its balance. This first transaction gives Cash a $50,000 debit balance and Common Stock a $50,000 credit balance. To illustrate, Alladin Travel, Inc., received $50,000 and issued (gave) stock. What is the effect on the accounts? Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-5 | The Accounting Equation after Alladin Travel, Inc.’s, First Two Transactions The second transaction is a $40,000 cash purchase of land. This transaction decreases Cash with a credit and increases Land with a debit, as shown in the above T-accounts. After this transaction, Cash has a $10,000 debit balance, Land has a debit balance of $40,000, and Common Stock has a $50,000 credit balance. Debits ($10,000 + $40,000) = Credits ($50,000) Alladin’s second transaction is a $40,000 cash purchase of land. What is the effect on the accounts? Copyright © 2019 Pearson Education, Inc. All rights reserved.

Additional Stockholders’ Equity Accounts: Revenues and Expenses
Two categories of income statement accounts: Revenues  increase stockholders’ equity  result from delivering goods/services Expenses  decrease stockholders equity  cost of operating the business Stockholders’ equity is affected by two income statement accounts: revenues and expenses. Revenues increase stockholders’ equity, expenses decrease stockholders’ equity. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-6 | Expansion of the Accounting Equation
Exhibit 2-6 shows how the accounting equation may be expanded. It is important to understand all of these rules before proceeding. Stockholders’ equity includes common stock, retained earnings, dividends, and the net effect of revenues minus expenses, known as net income or net loss. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-7 | Final Form of the Rules of Debit and Credit
Exhibit 2-7 shows the final form of the rules of debit and credit for each type of account. These are important rules to know. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Learning Objective Four
Journalize transactions and post journal entries to the ledger In learning objective four, you will learn to journalize transactions and post journal entries to the ledger. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Record (journalize and post) transactions in the books
Chronological record of transactions Three steps: Specify each account affected by the transaction and classify by type Determine if each account is increased or decreased (debit or credit) Record in the journal Accountants use a chronological record of transactions called a journal, also known as the book of original entry. The journalizing process follows three steps: 1. Specify each account affected by the transaction and classify each account by type (asset, liability, stockholders’ equity, revenue, or expense). 2. Determine whether each account is increased or decreased by the transaction. Use the rules of debit and credit to increase or decrease each account. 3. Record the transaction in the journal, including a brief explanation. The debit side is entered on the left margin, and the credit side is indented to the right. This step is also known as “booking the journal entry” or “journalizing the transaction.” Copyright © 2019 Pearson Education, Inc. All rights reserved.

Record (journalize and post) transactions in the books
Steps to journalize the first transaction of Alladin Travel, Inc. Step 1 Business receives $50,000 cash and issues stock Step 2 Both Cash and Common Stock increase Step 3 Journalize the transaction: Let’s use the steps to journalize Alladin Travel’s first transaction on April 1. Step 1 The business receives cash and issues stock. Cash and Common Stock are affected. Cash is an asset, and Common Stock is equity. Step 2 Both Cash and Common Stock increase. Debit Cash to record an increase in this asset. Credit Common Stock to record an increase in this equity account. Step 3 Journalize the transaction as shown above. To journalize, first pinpoint the effects (if any) on Cash, as these effects are normally the easiest to identify. Then identify the effects on other accounts. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-8 | The Ledger (Asset, Liability, and Stockholders’ Equity Accounts) The ledger is a grouping of all the T-accounts, with their balances. Exhibit 2-8 shows how asset, liability, and stockholders’ equity accounts are grouped in the ledger. Revenue and expense accounts also appear in the general ledger, which may contain hundreds or even thousands of accounts. Entering a transaction into the journal does not get the data into the ledger. Data must be copied to the ledger through a process called posting. The next slide illustrates posting to the ledger. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-9 | Journal Entry and Posting to the Accounts
Exhibit 2-9 shows how Alladin Travel, Inc.’s stock issuance transaction is posted to the accounts. Debits always remain debits and credits remain credits. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-10 | Flow of Accounting Data
Exhibit 2-10 summarizes the flow of accounting data from when the transaction occurs to the posting to the ledger. Next, we will look at the same 11 Alladin’s transactions we illustrated earlier. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 1 Received $50,000 cash and issued stock to the owners
Alladin Travel, Inc., received $50,000 cash from investors and in turn issued common stock to them. Here we see the journal entry, accounting equation, and ledger accounts. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 2 Paid $40,000 cash for land
The business paid $40,000 cash for land. The purchase decreased cash; therefore, credit Cash. The purchase increased the asset land; to record this increase, debit Land. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 3 Purchased supplies for $3,700 on account
The business purchased supplies for $3,700 on accounts payable. The purchase increased Supplies, an asset, and Accounts Payable, a liability. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 4 Performed services and received cash of $7,000
The business performed services for clients and in return received cash of $7,000. The transaction increased cash and service revenue. To record the revenue, credit Service Revenue. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 5 Performed services for a customer on account, $3,000
Alladin performed services for other customers on account. These customers did not pay immediately, so Alladin billed them for $3,000. The transaction increased accounts receivable; therefore, debit Accounts Receivable. Service revenue also increased, so credit the Service Revenue account. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 6 Paid cash expenses: rent, $1,100; employee salary, $1,200; utilities, $400 The business paid $2,700 for the following expenses: rent, $1,100; salaries, $1,200; and utilities, $400. Credit Cash for the sum of the expense amounts. The expenses increased, so debit each expense account separately. A1 Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 7 Paid $1,900 on the payable created in transaction 3
The business paid $1,900 on the account payable created in transaction 3. Credit Cash for the payment. The payment decreased a liability, so debit Accounts Payable. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 8 Stockholder of Alladin remodeled her home with personal funds No Entry Starr Williams, the major stockholder of Alladin Travel, Inc., remodeled her personal residence. This is not a transaction of the business, so the business does not record the transaction. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 9 Received $1,000 on account
The business collected $1,000 cash on account from the client in transaction 5. Cash increased, so debit Cash. The asset accounts receivable decreased; therefore, credit Accounts Receivable. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 10 Sold land for cash at the land’s cost of $22,000
The business sold land for its cost of $22,000, receiving cash for it. The asset cash increased; debit Cash. The asset land decreased; credit Land. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Transaction 11 Declared and paid a dividend of $2,100 to stockholders
Alladin Travel declared and paid its stockholders cash dividends of $2,100. Credit Cash for the payment. The transaction also decreased stockholders’ equity and requires a debit to an equity account. Therefore, debit Dividends Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-11 | Alladin Travel, Inc.’s, Ledger Accounts after Posting
Exhibit 2-11 shows the accounts after all transactions have been posted to the ledger. Group the accounts under assets, liabilities, and stockholders’ equity. Each account has a balance, denoted as Bal, which is the difference between the account’s total debits and its total credits. For example, the Accounts Payable’s balance of $1,800 is the difference between the credit ($3,700) and the debit ($1,900). Cash has a debit balance of $33,300. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Construct and use a trial balance
Lists all accounts with their balances Assets listed first, then liabilities and stockholders’ equity Shows that debits equal credits Usually prepared at the end of the period Facilitates preparation of the financial statements A trial balance lists all accounts with their balances—assets first, and then liabilities and stockholders’ equity (including revenue and expense accounts). The trial balance summarizes all the account balances for the financial statements and proves that the total of accounts with debit balances equals the total of accounts with credit balances. A trial balance may be taken at any time, but the most common time is at the end of the period. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-12 | Trial Balance
Exhibit 2-12 is Alladin Travel, Inc.’s trial balance after all transactions have been posted for April 2018. Exhibit 2-12 | Trial Balance Copyright © 2019 Pearson Education, Inc. All rights reserved.

Analyzing Accounts Suppose Alladin’s began May with cash of $1,000. During May, Alladin’s received cash of $8,000 and ended the month with a cash balance of $3,000. You can compute total cash payments by analyzing Alladin’s Cash account: You can often tell what a company did by analyzing its accounts. This is a powerful tool for a manager who knows accounting. For example, if you know the beginning and ending balances of Cash, and if you know total cash receipts, you can compute your total cash payments during the period. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Analyzing Accounts You can compute either sales on account or cash collections on account by analyzing the Accounts Receivable account (using assumed amounts): You can compute either sales on account or cash collections on account by analyzing the Accounts Receivable account. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Analyzing Accounts You can determine how much you paid on account by analyzing Accounts Payable (using assumed amounts): You can determine how much you paid on account by analyzing Accounts Payable. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Correcting Accounting Errors
First compute the difference between debits and credits in the trial balance. Search for missing accounts Divide the out-of-balance amount by 2 Divide the out-of-balance amount by 9 Slide Transposition You can detect the reason behind many out-of-balance conditions by computing the difference between total debits and total credits in the trial balance. Then perform one or more of the following actions: Search the records for a missing account. Trace each account back and forth from the journal to the ledger. A $200 transaction may have been recorded incorrectly in the journal or posted incorrectly to the ledger. Search the journal for a $200 transaction. Divide the out-of-balance amount by 2. A debit treated as a credit, or vice versa, doubles the amount of error. Divide the out-of-balance amount by 9. If the result is an integer (no decimals), the error may be a: slide (e.g., writing $400 as $40). The accounts would be out of balance by $360 ($400 − $40 = $360). Dividing $360 by 9 yields $40. Transposition (e.g., writing $2,100 as $1,200). The accounts would be out of balance by $900 ($2,100 − $1,200 = $900). Dividing $900 by 9 yields $100. Trace all amounts on the trial balance back to the T-accounts. Dividends (balance of $2,100) is the misstated account. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-13 | Chart of Accounts—Alladin Travel, Inc.
As you know, the ledger contains the accounts grouped under these headings: Balance sheet accounts: Assets, Liabilities, and Stockholders’ Equity Income statement accounts: Revenues and Expenses Organizations use a chart of accounts to list all their accounts and account numbers. Account numbers usually have two or more digits. Asset account numbers may begin with 1, liabilities with 2, stockholders’ equity with 3, revenues with 4, and expenses with 5. The second, third, and higher digits in an account number indicate the position of the individual account within the category. For example, Cash may be account number 101, which is the first asset account. Accounts Payable may be number 201, the first liability. All accounts are numbered by using this system. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Exhibit 2-14 | Normal Balances of the Accounts
An account’s normal balance falls on the side of the account—debit or credit—where increases are recorded. The normal balance of assets is on the debit side, so assets are debit-balance accounts. Conversely, liabilities and stockholders’ equity usually have a credit balance, so these are credit-balance accounts. Exhibit 2-14 illustrates the normal balances of all the assets, liabilities, and stockholders’ equities, including revenues and expenses. As explained earlier, stockholders’ equity usually contains several accounts. Dividends and expenses carry debit balances because they represent decreases in stockholders’ equity. In total, the equity accounts show a normal credit balance. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Decision Guidelines The managers who operate a business, along with its owners, need to be able to determine whether the venture is profitable. To do this, they need to understand when transactions occur and how and where they should be recorded. Doing so will help ensure the business’s financial statements are accurate and provide a good picture of its operational results and financial position. The decision guidelines will help. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Printed in the United States of America.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2019 Pearson Education, Inc. All rights reserved.

Chapter Two: Transaction Analysis

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