1 Accounting 100 Chapter 2 Analyzing Business Transactions

2 Objectives l Record in equation form the financial effects of a business transaction. l Define, identify, and understand the relationship between asset, liability, and owner’s equity account. l Analyze the effects of business transactions on a firm’s assets, liabilities, and owner’s equity.

3 Business Transactions l A financial event that changes the resources of the firm. l May be a purchase, a sale, a receipt, or payment of cash. l The effects of each transaction must be studied in order to know what and where to record.

4 Transaction #1 l Margery Meadows deposits $50,000 in the bank as the initial investment in her new business, Meadows Accounting. –Cash is increased by $50,000 –Business capital is increased by $50,000

5 Transaction #2 l Margery rents facilities for her new business by signing a lease for six months with monthly rent of $1,000 –The rent is paid in advance for the next 6 months in the amount of $6,000 –Cash is decreased by $6,000

6 Transaction #3 l Margery purchases a computer and other equipment for $8,000 with a check drawn on the bank. –The equipment increases by $8,000 –The cash decreases by $8,000

7 Current Financial Position Cash + Prepaid Rent + Equipment =Capital +50,000 =+ 50, ,000+6,000 44,000 6,000 = 50, ,000+ 8,000 36,000 6,000 8,000 = 50,000

8 Accounting Classifications l Assets: property owned by a business l Liabilities: debts or obligations of a business l Owner’s Equity: financial interest of the owner of a business (also known as proprietorship or net worth)

9 Fundamental Accounting Equation l Assets = Liabilities + Owner’s Equity l Assets - Liabilities = Owner’s Equity l Assets - Owner’s Equity = Liabilities

10 Solving the Equation Assets = Liabilities + Owner’s Equity ?= $ 5,000+$35,000 $39,000= ?+$35,000 $42,000= $ 7,000+?

11 Revenue l Revenue: inflow of money or other assets (including claims to money) that results from sales of services or goods. l Revenue increases owner’s equity. l When revenues exceed expenses there is a profit (net income).

12 Expenses l Expenses: outflow of money, the use of other assets, or the incurring of a liability. l Expenses reduce owner’s equity. l When expenses exceed revenues, there is a loss (net loss).

13 Transaction #4 l During the month of December, Meadows Accounting Services earned a total of $15,000 in revenue from clients who paid cash. –Cash increased by $15,000 –Owner’s Equity increased by $15,000 (Fees Earned in the name of the revenue account)

14 Withdrawals l Withdrawals are funds taken from a business by the owner to pay personal items (non-business related). l Withdrawals reduce owner’s equity, but are not considered a business expense.

15 Financial Statements l Preparing accurate and informative financial statements is one of the accountant’s most important jobs. l Business people use the financial statements to make decisions.

16 Income Statement l A formal report showing the results of the business operations for a specific period of time. l Only revenues and expenses are shown on the statement. l Revenues - expenses = net income or (loss).

17 Statement of Owner’s Equity l A report showing changes that occurred in the owner’s financial interest during a specific period of time. l The amount of net income (loss) is the connecting link between the income statement & statement of owner’s equity

18 Balance Sheet l A formal report of the firm’s financial position which lists the assets, liabilities, and owner’s equity on a specific date. l The link between the balance sheet and the statement of owner’s equity is the revised owner’s investment which is calculated on the Statement of Owner’s Equity.

19 Chapter 2 The End