Principles of Accounting Chapter 1 Unit 2 Business

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

Business Transactions • A business transaction is an exchange of things of value • Something of value is given something of value is received • Ex. $500 Cash $500 worth of equipment

Transaction Analysis Sheet • A transaction analysis sheet will be used to look at transaction and their effects on the balance sheet. • Remember the balance sheet equation: A = L + OE • Accounting period – the length of time between financial statements

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

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

Changes to the Transaction Analysis Sheet • We are now going to make changes to this transaction analysis sheet to reflect the operations of this business. • On July 1 Goldman’s gym purchased new training equipment for $500 cash. • An asset (equipment) was purchased for cash.

The Effects of Changes • In order to determine how this is going to look we need to ask the following questions: 1. Which items change in value as a result of the transaction? (at least two items must change to keep the balance sheet equation balanced) 2. How much do the items change? 3. Do the items increase or decrease in value? 4. After the change is recorded, is the equation still in balance?

Example • Training Equipment and Cash will change • Training Equipment will increase by $500 since the company now owns this piece of equipment they paid $500 for. • Cash will decrease by $500 since the company paid $500 in cash to get this item.

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

Question • On July 5 Goldman’s bought office supplies for $55, on credit, from Central Supply Co. • What items on the balance sheet will change? • Do they increase or decrease?

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

Question • On July 10 Goldman’s received $3 000 cash from customers who owed money. • What items on the balance sheet will change? • Do they increase or decrease?

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

Question • July 15 Sold some unused equipment for $400 cash • What items on the balance sheet will change? • Do they increase or decrease?

Question • July 18 Paid $375 cash to central supply Co. for an account payable that has become due. • What items on the balance sheet will change? • Do they increase or decrease?

Question • July 21 Owner invested an additional $800 cash in the business. • What items on the balance sheet will change? • Do they increase or decrease?

Question • July 25 Purchased equipment from Niagara Sport Ltd. for $3 000. $2 000 was paid in cash and $1 000 will be paid in 30 days. • What items on the balance sheet will change? • Do they increase or decrease?

Answers

Preparing a New Balance Sheet • The completed transaction analysis sheet now shows the amounts that need to be recorded on the balance sheet. (make sure the right side of the equation equals the left side – A=L+OE) • Using the information provided in the transaction analysis sheet create a new balance sheet for Goldman’s Gym.

New Balance Sheet

Generally Accepted Accounting Principles • Financial information needs to be presented and prepared according to a common set of rules. • GAAP – standard accounting rules and guidelines everyone must follow. • This allows people to compare various businesses and to make decisions and to be able to take the information they are given as correct.

GAAP • The Business Entity Concept (each business be considered a separate unit or entity. Financial data of a business must be separate from the owner’s personal data) • The Cost Principle – Assets are recorded on the balance sheet at the cost of getting them.

GAAP • Purpose of Accounting – Provide financial information for decision making • Liquidity Order – the order of the short term assets on the balance sheet (how easily something can be turned into cash) • Maturity Date – when a debt needs to be paid. It’s the order of the liabilities on the balance sheet (what has to be paid first)