Basic Accounting Transactions Copyright © 2004 by Gaylen Bunker All right reserved This material may not be reproduced without permission of Gaylen Bunker

BusinessAllstars.com2 Finding investors who are willing to invest in the company increases cash and creates an investor’s claim on the assets. Investors expect the company to be successful and pay a return on their investment. Widget Company This is an “ASSET SOURCE”.

BusinessAllstars.com3 The company orders products to sell (inventory) by issuing a purchase order (IOU to Vendors) Vendors are the ones who sell wholesale to us. Widget Company This is an “ASSET SOURCE”.

BusinessAllstars.com4 Paying workers for the work they perform is an expense to the business. This reduces cash and reduces the investor’s claim on the assets. Widget Company This is an “ASSET USE”.

BusinessAllstars.com5 The company receive bills or INVOICES for the use of a building and must pay rent. Widget Company This is an “ASSET USE”.

BusinessAllstars.com6 Widget Company This is an “ASSET EXCHANGE”. When the company purchases equipment it can issue an IOU or pay directly, as in this case.

BusinessAllstars.com7 When products are sold customers, they may sign an IOU instead of paying cash. As a result of this, four things happen: (1) The IOU becomes a company asset, (2) Revenue is earned, (3) Inventory is reduced, and (4) Cost of the goods sold are subtracted from revenue. Widget Company This is an “ASSET SOURCE”.

BusinessAllstars.com8 Thirty days after the inventory was received, the company pays cash to the wholesaler to cancel their IOU. The wholesalers usually send an INVOICE or bill for payment. Widget Company This is an “ASSET EXCHANGE”.

BusinessAllstars.com9 The machine has significant wear and tear after much use, reducing its value to the company. This needs to be reflected through depreciation expense subtracted from revenue for the period. Widget Company This is an “ASSET USE”.

BusinessAllstars.com10 Several days after the sale, the customers pay on their account and the company cancels their IOU. Widget Company This is an “ASSET EXCHANGE”.

BusinessAllstars.com11 At the end of the year the company figures out how much profit it made. It uses a conservative depreciation expense to show the investors a good Net Income for the year. Widget Company The government allows companies to report a more aggressive depreciation expense on the income tax return, reducing the taxes it actually pays. E.B.I.T. stands for Earnings Before Interest and Taxes

BusinessAllstars.com12 As a result of operating the business, a profit is made and a portion of the profit is paid to the investors as a DIVIDEND. Widget Company This is an “ASSET USE”.