Analyzing Changes in

Financial Position

Equation Analysis Sheets

• Two ways to look at the increase in capital.

• 1. Metro Movers is a service business. When they do the move for B. Cava, he legally owes $1500. This is a gain for Metro Movers. Therefore, the Owner’s Equity (capital) is increased (J. Hofner).

• 2. The owner gets to claim whatever is left after liabilities are paid. Assets went up, liabilities did not, so the Owner’s capital goes up.

Equation Analysis Sheets

• J. Hofner, the owner of Metropolitan Movers, withdraws $500 for personal use.

Equation Analysis Sheets

• One of the company’s trucks requires an engine adjustment costing $375. The repair is paid for in cash when the truck is picked up.

• What do we have to think about?

Updating the Balance Sheet

• So we have a balance sheet that is now out of date.

• We need to update our balance sheet to show all the changes that we just made.

Updating the Balance Sheet.

• Step 1: IDENTIFY ALL ASSET AND LIABILITY ITEMS THAT NEED TO BE CHANGED AND MAKE ALL NECESSARY CHANGES

-You want to make sure that you properly classify the information.

• Step 2: SEE IF THE OWNER’S EQUITY HAS CHANGED.

-Remember the equation. If assets decrease and liabilities also decrease, what happens to equity?-If assets decrease and liabilities are unchanged, what happens now?

Updating the Balance Sheet

• Step 3: MAKE CERTAIN THAT AT LEAST TWO OF THE INDIVIDUAL ITEMS HAVE CHANGED

-It is possible for several items to change, but not only one.

• Step 4: MAKE SURE THE EQUATION IS STILL IN BALANCE.

-Assets must always equal liabilities and equity

Develop good work habits!

• You need to be accurate!

• Who would be happy with an 80% on a test?

• If you are 80% right in accounting procedures, that means you are 20% wrong.

• Memory is not good enough to remember all of the transactions you could be dealing with. You need common sense, clear thinking, and a good understanding of accounting theory.

Let’s review

• 1. Why is the Equation Analysis Sheet necessary?

• 2. What is transferred from the balance sheet to the equation analysis sheet?

• 3. How do you know if the changes for a transaction recorded on an equation analysis sheet are balanced?

• 4. Does a transaction always change both sides of the accounting equation?

• 5. How could the description of the engine repair transaction be changed so that only the right side changes?

Let’s review

• 6. What four steps should be used to analyze the changes caused by a transaction?

• 7. What is a good clue as to whether the capital increased or decreased.

• 8. Assets increase by $10,000 with no corresponding change in liabilities. What change is there in capital?

• 9. What do good accountants rely on apart from their memory?

• 10. Why must accounting be done accurately?

One exercise all together

• Here is the financial position for Sheila’s Interior Decorating, owned by Sheila Kostiuk.

• Stationery and supplies are purchased from Home Supply on credit for $175. They will be paid within 30 days.

• A new desk for the office is purchased for $450 cash.

• E. Kerluck, a debtor, pays his debt in full.

• A used car costing $6500 is purchased from Pine Motors. A down payment of $500 is made. It is agreed that the remainder of the purchase price will be paid within three months.

• Home Supply, a creditor, is paid $700.

• The owner, S. Kostiuk, withdraws $200 from the business for her own use.

Homework

• Do exercise #2 and 3 on pages 70 and 71. We will discuss them tomorrow.