1. Analyzing Changes in Financial Position3 1

2. Agenda
Chapter 3 Learning goals Vocabulary 3.1 Business Transactions 3.2 Equation Analysis Sheet

3. Learning Goals
Understand what a business transaction is and be able to recognize one
Understand what a source document is and be able: give examples and collect information from it to make a transaction
Understand the objectivity principle and how it related to source documents
Understand what is an equation analysis sheet and be able to use one to record business transaction
Understand what accounts business transactions affect
Make a new balance sheet using equation analysis sheet

4. Vocabulary
Business transaction Equation analysis sheet Objectivity principle Source document

5. 3.1 Business Transactions
Business transaction: financial event that causes a change in financial position
Ex: a business buys a truck for which it pays $ cash. This event is a transaction because it causes the financial position of the business to change.
Assets: Truck increase by $ and Cash decrease by $
A city plumbing inspector inspects the building and leaves a letter suggesting some improvements. Is this a business transaction?

6. Source Documents
Whenever a business records an assets, liability or equity item a business paper or document is required to verify the dollar amount. This is called Source document
It is the original record of the transaction and it provided accounting personnel with the information they need to process the transaction properly

7. Source Documents Examples: Hydro bill Telephone bill Cheque copies
Store receipts
Cash register
Credit card slip

8. Source Documents What you must remember:
Accounting entries are made from business papers known as source documents
Source documents are kept on file for reference purposes and are proof of transaction

9. Accounting Standards- The Objectivity Principle
Objectivity principle: requires that a business’s accounting be recorded on the basis of CLEAR; VARIFIABLE EVIDENCE.
Meaning that different people looking at the same evidence will arrive at the same values for the transaction.
Record FACTS no personal opinion or feelings

10. Apply your knowledge
Page 59 Review Questions 1-7 and exercises 1-5

11. Equation Analysis Sheet
Now we will begin to look at how business transaction affect and change the financial position
Change in Financial Position
Business transaction

12. Figure 3.1: Metropolitan Movers Balance Sheet
Figure Chapter 3
Figure 3.1: Metropolitan Movers Balance Sheet 12

13. Equation Analysis Sheet
What business transaction occur, where do you record them?
Balance sheet?
NO! the balance sheet is not a suitable type of record on which to record these changes.
Therefore, we transfer assets, liabilities and capital from the balance sheet into what we will call an equation analysis sheet
Equation analysis sheet: is a tool for displaying individual transactions and the new financial position resulting from each transaction

14. Figure Chapter 3

15. Transactions for Metropolitan Movers
PowerPoint 3–2 (part 1) Chapter 3
Transactions for Metropolitan Movers
Transaction 1
Metropolitan Movers pays $1200 cash to reduce the
Bank Loan.
Transaction 2
K. Lincoln, who owes Metropolitan Movers $2500, pays $1100 in partial payment of the debt.
Transaction 3
Equipment costing $1950 is purchased for cash.
Transaction 4
A pick-up truck is purchased at a cost of $ Metropolitan Movers pays $ cash and arranges a loan from its bank to cover the balance of the purchase price. 15

16. Transactions for Metropolitan Movers
PowerPoint 3–2 (part 2) Chapter 3
Transactions for Metropolitan Movers
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 is owed.
Transaction 6
J. Hofner, the owner, withdraws $500 for personal use.
Transaction 7
One of the trucks requires an engine adjustment costing $375. The repair is paid for in cash when the truck is picked up. 16

17. Figure 3.9: Completed Equation Analysis Sheet for Metropolitan Movers
PowerPoint 3– Chapter 3
Figure 3.9: Completed Equation Analysis Sheet for Metropolitan Movers 17

18. Figure 3.10 Updating the Balance Sheet

19. Summary of Steps in analyzing a Transaction
Step 1: identify all assets and liability items that must be changed and make all necessary changes. Step 2: See if the owner’s equity has changed ( if assets changed and liabilities did not change than owner’s equity must change) Step 3: Make certain that at least two of the individual items have changed Steps 4: make sure that the equation is still in balance (A = L + OE)

20. Practice
Page 69: Review questions 1-10 and exercises 1-3