Chapter 3: Analyzing Changes in Financial Position
A business transaction is an event that occurs that changes the financial position of a business. These may happen on a daily basis within a business.
Example 1. A business buys office supplies. This means their “asset”, office supplies, increases in value while the amount of money decreases in value
Example 2. A business owes money to a company for buying stock. If your business pays off the balance of the account, your asset, money in the bank, decreases in value while your liability, money owed to the company, disappears and is no longer a liability.
A source document is a record of the business transaction. An example would be an invoice from buying a product or service or a phone bill. These are kept as proof for the accountant that the transactions did occur.
Other examples from pg 50:
The Objectivity Principle states …..
Sometimes transactions occur, meaning that the status of different accounts change. A balance sheet does not show change because it only shows what a business looks like at any given instant. To show change we can us an Equation Analysis Sheet. The Equation Analysis Sheet also uses the Fundamental Accounting Equations.
In order for the Equation analysis Sheet to work, at least two accounts must change together at any given time. This keeps both sides of the fundamental accounting equation equal. At the end of all of your transactions, you can update your business by creating a new balance sheet.
The steps that you can follow to make sure that you have followed proper procedure are:
- Identify all assets and liabilities that must be changed and make these changes
- See if the owner’s equity has changed
· When does the owner’s equity NOT change?
- Make sure that changes have been made to two or more accounts
- Make sure that the fundamental accounting equation is still in balance
Assignment: pg 50 Exercises 1-3
Pg 59 Exercises 1-2
Using the balance sheet on pg 53, we can fill in the information about all of the accounts for Metropolitan Movers.
Assets / Liabilities / Owner’s EquityCash / A/R / Equipment / Trucks / A/P / Loan Payment / J. Hofner, Capital
B. Cava / K. Lincoln / Central Supply / Mercury Finance
Beginning Balances
Transaction 1
New Balances
Transaction 2
New Balances
Transaction 3
New Balances
Transaction 4
New Balances
Transaction 5
New Balances
Transaction 6
New Balances
Transaction 7
New Balances
Transaction 1 Metropolitan Movers pays $1200 cash to Mercury Finance
Transaction 2 K. Lincoln, who owes metropolitan Movers $2500, pays $100 in partial payment of the debt
Transaction 3 Equipment costing $1950 is purchased for cash
Transaction 4 A new pick-up truck is purchased at a cost of $18 000. Metropolitan Movers pays $10 000 cash and arranges a loan from Mercury Finance to cover the balance of the purchase price
Transaction 5 Metropolitan Movers completes a storage service for B. Cava at a price of $1500. A bill is sent to Cava to indicate the additional amount that Cava owes.
Transaction 6 J. Hofner, the owner, withdraws 4500 for personal use
Transaction 7 One of the trucks requires an engine adjustment costing $75. The repair is paid for in cash when the truck is picked up.
Assignment: pg 50 Exercises 1-3
Pg 59 Exercises 1-2