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Analyzing Analyzing Changes in Changes in

Financial PositionFinancial Position

Chapter 3:

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Business TransactionsBusiness Transactions

• Events occur daily that cause the financial position of a business change. Each of these events is called a business transactionbusiness transaction.

• When an asset, liability, or equity item is recorded for accounting purposes, a business paper or source documentsource document is required to verify the dollar amount.

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Source DocumentsSource Documents

What would be some examples of source documents?

Hydro billTelephone billCheque copiesStore receiptsCash register summaryCredit card slips

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Source DocumentsSource Documents

• They provide proof for the transaction …… proof of payment, proof of

purchase, and reference.

• They are kept on file for future reference in order to answer questions from owners, managers, auditors, government agencies, etc.

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GAAP – The Objectivity PrincipleGAAP – The Objectivity Principle

What does that mean?Different people looking at the same

evidence will arrive at the same values for the transaction.

Transactions are recorded on fact, not personal opinion.

The objectivity principleobjectivity principle states that accounting will be recorded on the

basis of objective evidence.

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Exercise #1Exercise #1

Given that a transaction is a financial event Given that a transaction is a financial event that requires changing the statement of that requires changing the statement of financial position, decide whether or not financial position, decide whether or not each of the following is a transaction for each of the following is a transaction for Best Consultants of Kenora, Ontario.Best Consultants of Kenora, Ontario.

A.A. The business pays $800 to Mercury Finance to The business pays $800 to Mercury Finance to reduce the amount owed to them.reduce the amount owed to them.

B.B. The owner, P. Dufour, withdraws $500 from the The owner, P. Dufour, withdraws $500 from the business for her personal use.business for her personal use.

C.C. A new employee is needed in the payroll A new employee is needed in the payroll department. P. Dufour interviews Stan Martin for department. P. Dufour interviews Stan Martin for the job.the job.

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Exercise #1Exercise #1 (continued) (continued)

D.D. A $700 consulting service is provided for Rita A $700 consulting service is provided for Rita Bertoli on credit.Bertoli on credit.

E.E. The business pays the rent for the month, $500.The business pays the rent for the month, $500.

F.F. The employee in question C above is hired to The employee in question C above is hired to start work next Monday at $400 per week.start work next Monday at $400 per week.

G.G. The business purchases a new computer for cash The business purchases a new computer for cash at the price of $3,000.at the price of $3,000.

H.H. The computer in question G above is defective The computer in question G above is defective and is replaced at no cost to the business.and is replaced at no cost to the business.

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Exercise #2Exercise #2

You are working for Ace Collection Agency You are working for Ace Collection Agency of Cornwall, Ontario, owned by Ingrid Lencz. of Cornwall, Ontario, owned by Ingrid Lencz. Determine whether or not each of the Determine whether or not each of the following is a transaction:following is a transaction:

A.A. Gasoline for the company automobile was Gasoline for the company automobile was purchased for $40 cash.purchased for $40 cash.

B.B. Ingrid Lencz paid $15 out of her own pocket for Ingrid Lencz paid $15 out of her own pocket for lunch.lunch.

C.C. Ingrid’s personal car was damaged and needed a Ingrid’s personal car was damaged and needed a $500 repair job.$500 repair job.

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Exercise #2Exercise #2 (continued) (continued)

D.D. A $250 service was performed for a customer who A $250 service was performed for a customer who paid cash.paid cash.

E.E. A leased computer broke down and needed to be A leased computer broke down and needed to be replaced at no cost to the business. The man replaced at no cost to the business. The man who brought the replacement said that the new who brought the replacement said that the new machine was a $2,500 model.machine was a $2,500 model.

F.F. A customer who owed the business $1,200 made A customer who owed the business $1,200 made a partial payment of $300.a partial payment of $300.

G.G. The business bank loan was reduced by a direct The business bank loan was reduced by a direct payment to the bank of $1,000.payment to the bank of $1,000.

H.H. A burglar broke into the office and stole the A burglar broke into the office and stole the leased computer. The business has 100 per cent leased computer. The business has 100 per cent replacement insurance to cover breaking and replacement insurance to cover breaking and entering and theft.entering and theft.

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Exercise #3Exercise #3Examine this source document and answer the Examine this source document and answer the

following:following:

A. Who issued the bill?

B. Who received the bill?

C. When was the bill issued?

D. For what service was the bill issued?

E. Does the bill represent good objective evidence? Why?

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Exercise #4Exercise #4Examine this source document and answer the Examine this source document and answer the

following: following:A. Who issued the bill?B. Who received the bill?C. When was the bill issued?D. When were the goods

delivered? How?E. When is this bill due for

payment?F. Why was the bill issued?G. Was this a cash sale

transaction?H. Why does this represent

good objective evidence?

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Exercise #5Exercise #5

The accountant for a business received The accountant for a business received a memorandum from the owner. The a memorandum from the owner. The memorandum stated that a new office memorandum stated that a new office desk recently installed in the owner’s desk recently installed in the owner’s office was acquired at a cost of $2,500 office was acquired at a cost of $2,500 and that it was paid for in cash by the and that it was paid for in cash by the owner personally.owner personally.

A. Is the memorandum objective evidence? Why / Why not?

B. What is the best objective evidence in this case?

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Equation Analysis Sheet

Analyzing Analyzing Changes in Changes in

Financial PositionFinancial Position

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Equation AnalysisEquation Analysis

• As business transactions occur, there are changes in the values of assets, liabilities, and capital.

• Although the Balance Sheet shows the values of these assets, liabilities, and capital on a particular date, it is not adequate to reflect changes created by individual transactions.

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Example – Opening Balance SheetEquation Analysis SheetEquation Analysis Sheet

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Equation Analysis SheetEquation Analysis Sheet1. Set up sheet with Beginning Balances as per B/S

Accounting Equation $53,300 = $20,120 + $33,180

Set up column Headings …

One per account name

Set up “beginning balances”

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Equation Analysis SheetEquation Analysis Sheet1. Set up sheet with Beginning Balances as per B/S

Accounting Equation $53,300 = $20,120 + $33,180

A = L + OEA = L + OE

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Equation Analysis SheetEquation Analysis Sheet2. Metropolitan Movers pays $1,200 cash to Mercury Finance.

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Equation Analysis SheetEquation Analysis Sheet2. Metropolitan Movers pays $1,200 cash to Mercury Finance.

Accounting Equation $52,100 = $18,920 + $33,180

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Equation Analysis SheetEquation Analysis Sheet3. K. Lincoln, who owes Metropolitan Movers $2,500, pays $1,100 in partial payment of debt.

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Equation Analysis SheetEquation Analysis Sheet

Accounting Equation $52,100 = $18,920 + $33,180

3. K. Lincoln, who owes Metropolitan Movers $2,500, pays $1,100 in partial payment of debt.

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Equation Analysis SheetEquation Analysis Sheet4. Equipment costing $1,950 is purchased for cash.

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Equation Analysis SheetEquation Analysis Sheet

Accounting Equation $52,100 = $18,920 + $33,180

4. Equipment costing $1,950 is purchased for cash.

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Equation Analysis SheetEquation Analysis Sheet5. A new pick-up truck is purchased at a cost of $18,000. Pay $10,000 cash and borrow the balance from Mercury Finance.

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Equation Analysis SheetEquation Analysis Sheet

Accounting Equation $60,100 = $26,920 + $33,180

5. A new pick-up truck is purchased at a cost of $18,000. Pay $10,000 cash and borrow the balance from Mercury Finance.

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Equation Analysis SheetEquation Analysis Sheet6. Metro Movers complete a storage service for B. Cava at a price of $1,500. A bill is sent to B. Cava.

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Equation Analysis SheetEquation Analysis Sheet

Accounting Equation $61,600 = $26,920 + $34,680

6. Metro Movers complete a storage service for B. Cava at a price of $1,500. A bill is sent to B. Cava.

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Equation Analysis SheetEquation Analysis Sheet7. J. Hofner, the owner, withdraws $500 for personal use.

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Equation Analysis SheetEquation Analysis Sheet

Accounting Equation $61,100 = $26,920 + $34,180

7. J. Hofner, the owner, withdraws $500 for personal use.

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Equation Analysis SheetEquation Analysis Sheet8. One of the trucks requires engine work costing $75. The repair is paid in cash when the truck is picked up.

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Equation Analysis SheetEquation Analysis Sheet

Accounting Equation $61,025 = $26,920 + $34,105

8. One of the trucks requires engine work costing $75. The repair is paid in cash when the truck is picked up.

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Equation Analysis SheetEquation Analysis SheetUpdate the Balance Sheet based on the balances at the end of the Equation Analysis Sheet

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Summary of Steps in Summary of Steps in Analyzing a TransactionAnalyzing a Transaction1.1. Identify all items (assets and liabilities) Identify all items (assets and liabilities)

that must be changed and make all that must be changed and make all necessary changes.necessary changes.

• Carefully analyze the information given for each transaction.

• Classify each item affected as an asset or liability.

• Decide whether each item affected is to be increased or decreased.

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Summary of Steps in Summary of Steps in Analyzing a TransactionAnalyzing a Transaction2.2. See if the owner’s equity has changed.See if the owner’s equity has changed.

• Remember the accounting equation.• If assets decrease and liabilities are

unchanged, the equation must be balanced by a decrease in owner’s equity.

3.3. Make certain that Make certain that at leastat least two of the two of the individual items / accounts have individual items / accounts have changed.changed.

• It is possible for several items to change, but there can never be only one change.

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Summary of Steps in Summary of Steps in Analyzing a TransactionAnalyzing a Transaction4.4. Make sure that the equation is still Make sure that the equation is still

in balance.in balance.• The fundamental accounting equation

(Assets = Liabilities + Owner’s Equity)(Assets = Liabilities + Owner’s Equity) must always be in balance.

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Using a spreadsheet program, set up a Equation Using a spreadsheet program, set up a Equation Analysis Sheet (as per below) and record the Analysis Sheet (as per below) and record the following transactions. Calculate the new totals after following transactions. Calculate the new totals after each entry to make sure the equation balances.each entry to make sure the equation balances.

Exercise #1Exercise #1

1. Stationary and supplies are purchased from Ace Supply on credit for $75. They will be paid for within 30 days.

2. A new desk for the office is purchased for $450 cash.3. D. Murray, a debtor, pays her debt in full.4. A $100 service is performed for a customer who pays in cash.5. A used truck costing $6,500 is purchased from Pine Motors. A down

payment of $500 is made. It is agreed the balance will be paid within three months.

6. Ace Supply, a creditor, is paid $75.7. The owner, Sheila Kostiuk, withdraws $100 from the business for her own

use.

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The balance sheet of Triangle Real Estate of The balance sheet of Triangle Real Estate of Tweed, Ontario, at the close of business on Tweed, Ontario, at the close of business on September 30, 2007, is as follows:September 30, 2007, is as follows:

Exercise #2Exercise #2

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A.A. Prepare an equation analysis sheet, using a spreadsheet Prepare an equation analysis sheet, using a spreadsheet program, and record the figures from the balance sheet program, and record the figures from the balance sheet providedprovided

B.B. Analyze the transactions of October 1, listed below, and Analyze the transactions of October 1, listed below, and record the necessary changes on the equation analysis record the necessary changes on the equation analysis sheet. After each transaction, ensure that the equation is sheet. After each transaction, ensure that the equation is still in balance.still in balance.

C.C. After completing transaction 5, prepare a new balance After completing transaction 5, prepare a new balance sheet.sheet.

Exercise #2Exercise #2 (continued) (continued)

October 1st Transactions:1. Triangle Real Estate receives $100 cash from N. Swartz in partial payment

of the amount owed by him.2. Acme Supply is paid $200 cash in partial payment of the debt owed to

them.3. Supplies costing $95 are purchased for cash from the Standish Company.4. Triangle Real Estate sells a home for A.J. Buhler. For this service, Triangle

Real Estate receives a commission of $4,700 cash.5. A new desk (Office Furniture) is purchased from Ideal Furniture for $950

cash.

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Alliance Appliance Service in Renforth, Ontario, owned by Alliance Appliance Service in Renforth, Ontario, owned by Wayne Dalli, has the following assets and liabilities at the Wayne Dalli, has the following assets and liabilities at the close of business on October 20, 2007.close of business on October 20, 2007.

Exercise #3Exercise #3

Assets

Cash $ 1,395A/R – N. Chang 100A/R – P. O’Neil 527Equipment 8,316Delivery Truck 19,750Land 40,000Building 80,000

Liabilities

Bank Loan $ 1,395Mortgage Payable 52,700

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A.A. Prepare an equation analysis sheet, using a spreadsheet Prepare an equation analysis sheet, using a spreadsheet program, and record the above items. Do not forget to program, and record the above items. Do not forget to calculate and include the capital figure.calculate and include the capital figure.

B.B. Analyze the transactions of October 21, listed below, and Analyze the transactions of October 21, listed below, and record the necessary changes on the equation analysis record the necessary changes on the equation analysis sheet. After each transaction, ensure that the equation is sheet. After each transaction, ensure that the equation is still in balance.still in balance.

C.C. After completing transaction 5, prepare a balance sheet.After completing transaction 5, prepare a balance sheet.

Exercise #3Exercise #3 (continued) (continued)

October 21st Transactions:1. The owner, in need of money for his personal use, draws $500 cash out of

the business.2. P. O’Neil pays her debt of $527.3. A repair service is performed for a customer. The customer pays the full

amount of the bill, $90, in cash.4. A new electrical tester is purchased for $410 and paid for in cash.5. The regular monthly mortgage payment of $900 in cash is made.

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HomeworkHomeworkReview ExercisesReview Exercises• Exercise 1 (pg. 70)• Exercise 2 (pg. 71)

Class WorkClass WorkReview ExercisesReview Exercises• Exercise 3 – 6 (pg. 71)

Challenge Exercise • Exercise 7 (pg. 72)

AssignmentAssignment