Principles of Accounting Chapter 1 Unit 2 Business Transactions Ms. Melbourne.

Principles of Principles of Accounting Accounting

Chapter 1 Unit 2Chapter 1 Unit 2

Business TransactionsBusiness Transactions

Ms. MelbourneMs. Melbourne

Business TransactionsBusiness Transactions

• A business transaction is an A business transaction is an exchange of things of value exchange of things of value

• Something of value is given Something of value is given something of value is receivedsomething of value is received

• Ex. $500 Cash Ex. $500 Cash $500 worth of $500 worth of equipment equipment

Transaction Analysis Transaction Analysis SheetSheet

• A transaction analysis sheet will be A transaction analysis sheet will be used to look at transaction and their used to look at transaction and their effects on the balance sheet.effects on the balance sheet.

• Remember the balance sheet Remember the balance sheet equation: A = L + OEequation: A = L + OE

• Accounting period – the length of Accounting period – the length of time between financial statementstime between financial statements

Preparing a Transaction Preparing a Transaction Analysis SheetAnalysis Sheet

• Re-state the items found on the Re-state the items found on the balance sheet according to the balance sheet according to the balance sheet equation (A = L + OE)balance sheet equation (A = L + OE)

Transaction Analysis Transaction Analysis SheetSheet

• This is an example of how you would This is an example of how you would set up the transaction analysis sheet set up the transaction analysis sheet for Goldman’s Gym. These numbers for Goldman’s Gym. These numbers are taken right off of the balance are taken right off of the balance sheet.sheet.

Changes to the Transaction Changes to the Transaction Analysis SheetAnalysis Sheet

• We are now going to make changes to We are now going to make changes to this transaction analysis sheet to this transaction analysis sheet to reflect the operations of this reflect the operations of this business.business.

• On July 1 Goldman’s gym purchased On July 1 Goldman’s gym purchased new training equipment for $500 new training equipment for $500 cash.cash.

• An asset (equipment) was purchased An asset (equipment) was purchased for cash.for cash.

The Effects of ChangesThe Effects of Changes

• In order to determine how this is going to In order to determine how this is going to look we need to ask the following questions:look we need to ask the following questions:

1.1. Which items change in value as a result of Which items change in value as a result of the transaction? (at least two items must the transaction? (at least two items must change to keep the balance sheet equation change to keep the balance sheet equation balanced)balanced)

2.2. How much do the items change?How much do the items change?3.3. Do the items increase or decrease in value?Do the items increase or decrease in value?4.4. After the change is recorded, is the After the change is recorded, is the

equation still in balance?equation still in balance?

ExampleExample

• Training Equipment and Cash will Training Equipment and Cash will changechange

• Training Equipment will increase by Training Equipment will increase by $500 since the company now owns $500 since the company now owns this piece of equipment they paid this piece of equipment they paid $500 for. $500 for.

• Cash will decrease by $500 since the Cash will decrease by $500 since the company paid $500 in cash to get this company paid $500 in cash to get this item.item.

ChangesChanges

• Notice how these changes are shown Notice how these changes are shown on the transaction analysis sheet on the transaction analysis sheet below:below:

QuestionQuestion

• On July 5 Goldman’s bought office On July 5 Goldman’s bought office supplies for $55, on credit, from supplies for $55, on credit, from Central Supply Co.Central Supply Co.

• What items on the balance sheet will What items on the balance sheet will change?change?

• Do they increase or decrease?Do they increase or decrease?

AnswerAnswer

• Office supplies will go up $55 and Office supplies will go up $55 and Accounts Pay will go up $55Accounts Pay will go up $55

QuestionQuestion

• On July 10 Goldman’s received $3 On July 10 Goldman’s received $3 000 cash from customers who owed 000 cash from customers who owed money.money.

• What items on the balance sheet will What items on the balance sheet will change?change?

• Do they increase or decrease?Do they increase or decrease?

AnswerAnswer

• Cash will go up by $3 000 and Cash will go up by $3 000 and Accounts Receivable will go down by Accounts Receivable will go down by $3 000 since these companies or $3 000 since these companies or people do not owe you that anymore people do not owe you that anymore since they just paid you.since they just paid you.

QuestionQuestion

• July 15 Sold some unused equipment July 15 Sold some unused equipment for $400 cashfor $400 cash

• What items on the balance sheet will What items on the balance sheet will change?change?

• Do they increase or decrease?Do they increase or decrease?

QuestionQuestion

• July 18 Paid $375 cash to central July 18 Paid $375 cash to central supply Co. for an account payable supply Co. for an account payable that has become due.that has become due.

• What items on the balance sheet will What items on the balance sheet will change?change?

• Do they increase or decrease?Do they increase or decrease?

QuestionQuestion

• July 21 Owner invested an additional July 21 Owner invested an additional $800 cash in the business.$800 cash in the business.

• What items on the balance sheet will What items on the balance sheet will change?change?

• Do they increase or decrease?Do they increase or decrease?

QuestionQuestion

• July 25 Purchased equipment from July 25 Purchased equipment from Niagara Sport Ltd. for $3 000. $2 Niagara Sport Ltd. for $3 000. $2 000 was paid in cash and $1 000 will 000 was paid in cash and $1 000 will be paid in 30 days.be paid in 30 days.

• What items on the balance sheet will What items on the balance sheet will change?change?

• Do they increase or decrease?Do they increase or decrease?

AnswersAnswers

Preparing a New Balance Preparing a New Balance Sheet Sheet

• The completed transaction analysis The completed transaction analysis sheet now shows the amounts that sheet now shows the amounts that need to be recorded on the balance need to be recorded on the balance sheet. (make sure the right side of the sheet. (make sure the right side of the equation equals the left side – equation equals the left side – A=L+OE)A=L+OE)

• Using the information provided in the Using the information provided in the transaction analysis sheet create a new transaction analysis sheet create a new balance sheet for Goldman’s Gym.balance sheet for Goldman’s Gym.

New Balance SheetNew Balance Sheet

Generally Accepted Generally Accepted Accounting PrinciplesAccounting Principles

• Financial information needs to be Financial information needs to be presented and prepared according to presented and prepared according to a common set of rules. a common set of rules.

• GAAP – standard accounting rules and GAAP – standard accounting rules and guidelines everyone must follow. guidelines everyone must follow.

• This allows people to compare various This allows people to compare various businesses and to make decisions and businesses and to make decisions and to be able to take the information they to be able to take the information they are given as correct. are given as correct.

GAAPGAAP

• The Business Entity Concept (each The Business Entity Concept (each business be considered a separate business be considered a separate unit or entity. Financial data of a unit or entity. Financial data of a business must be separate from the business must be separate from the owner’s personal data)owner’s personal data)

• The Cost Principle – Assets are The Cost Principle – Assets are recorded on the balance sheet at the recorded on the balance sheet at the cost of getting them.cost of getting them.

GAAPGAAP

• Purpose of Accounting – Provide financial Purpose of Accounting – Provide financial information for decision making information for decision making

• Liquidity Order – the order of the short Liquidity Order – the order of the short term assets on the balance sheet (how term assets on the balance sheet (how easily something can be turned into cash)easily something can be turned into cash)

• Maturity Date – when a debt needs to be Maturity Date – when a debt needs to be paid. It’s the order of the liabilities on the paid. It’s the order of the liabilities on the balance sheet (what has to be paid first)balance sheet (what has to be paid first)