Download CHAPTER 03 AA Analyzing Business Transactions Using T

Welcome Back
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Welcome Back
Time for Any
Question
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CHAPTER # 02
REVIEW
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Chapter 02
Analyzing Business
Transactions
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Analyzing Business
Transactions
Section 1: Property and Financial Interest
Section Objectives
2-1.
Record in equation form the financial
effects of a business transaction.
2-2. Define, identify, and understand the
relationship between asset, liability,
and owner’s equity accounts.
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Steps to analyze the effect of a business
transaction
1. Describe the financial event.
 Identify the property.
 Identify who owns the property.
 Determine the amount of increase or decrease.
2. Make sure the equation is in balance.
Property (asset) = Financial Interest
(creditors and owners)
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Define, identify, and understand the relationship between
asset, liability, and owner’s equity accounts
Assets, Liabilities, and Owner’s
Equity
QUESTION:
What are assets?
ANSWER:
Assets are property owned by a
business.
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Liabilities and Equity
QUESTION:
What are liabilities?
ANSWER:
Liabilities are debts or obligations of a
business
QUESTION:
What is owner’s equity?
ANSWER:
Owner’s equity is the term used by sole
proprietorships. It is the financial interest of an
owner of a business. It is also called proprietorship
or net worth.
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The Balance Sheet
QUESTION:
What is a Balance Sheet?
ANSWER:
A balance sheet is a formal report of the
financial position of a business on a
certain date. It reports the assets,
liabilities, and owner’s equity of the
business
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The Balance Sheet
Assets – the amount and types of property owned by the business
 Liabilities – the amount owed to the creditors


Equity – the owner’s interest
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Property
Assets
Liabilities +
Owner’s
Equity
Financial
Interest
Property equals Financial Interest
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Analyzing Business
Transactions
Section 2: The Accounting Equation and
Financial Statements
Section Objectives
2-3 Analyze the effects of business transactions on a
firm’s assets, liabilities, and owner’s equity and
record these effects in accounting equation form.
2-4 Prepare an income statement.
2-5 Prepare a statement of owner’s equity and a
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balance sheet.
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The Fundamental Accounting Equation
QUESTION:
What is the fundamental accounting
equation?
ANSWER:
The fundamental
accounting equation
is the relationship
between assets and
liabilities plus
owner’s equity.
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The Fundamental Accounting Equation


In accounting terms the firm’s assets must equal
the total of its liabilities and owner’s equity.
This equality can be expressed in equation form as:
Assets


=
Liabilities + Owner’s Equity
The entire accounting process of analyzing,
recording and reporting business transactions is
based on the fundamental accounting equation.
If any two parts of the equation are known, the third
part can be determined.
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Revenues
QUESTION:
What is revenue?
ANSWER:
A revenue is an inflow of money or
other assets that results from the
sales of goods or services or from
the use of money or property. It is
also called income.
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Expenses
QUESTION:
What is an expense?
ANSWER:
An expense is an outflow of cash,
use of other assets, or incurring of a
liability.
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Prepare an Income Statement
QUESTION:
What is an income statement?
ANSWER:
An income statement is a formal report
of business operations covering a
specific period of time. It is also called
a profit and loss statement or a
statement of income and expenses.
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The income statement has
a three-line heading
The third line shows that the report covers
operations over a period of time
Wells’ Consulting Services
Income Statement
Month Ended December 31, 2016
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Total Expenses
Net Income
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$47,000.00
$8,000.00
650.00
8,650.00
$ 38,350.00
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The income statement reports revenue
Wells’ Consulting Services
Income Statement
Month Ended December 31, 2016
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Total Expenses
Net Income
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$47,000.00
8,000.00
650.00
8,650.00
$ 38,350.00
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The income statement also reports expenses
Wells’ Consulting Services
Income Statement
Month Ended December 31, 2016
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Total Expenses
Net Income
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$47,000.00
8,000.00
650.00
8,650.00
$ 38,350.00
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The result is net income or net loss for the period
Wells’ Consulting Services
Income Statement
Month Ended December 31, 2016
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Total Expenses
Net Income
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$47,000.00
8,000.00
650.00
8,650.00
$ 38,350.00
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Prepare a Statement of Owner’s Equity and Balance
Sheet
A Statement of Owner’s Equity
Wells’ Consulting Services
Statement of Owner’s Equity
Month Ended December 31, 2016
Carolyn Wells, Capital, December 1, 2016
Net Income for December
$38,350.00
Less Withdrawals for December
5,000.00
Increase in Capital
Carolyn Wells, Capital, December 31, 2016
$100,000.00
33,350.00
$133,350.00
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The Balance Sheet
Wells’ Consulting Services
Balance Sheet
December 31, 2016
Assets
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Total Assets
Liabilities
111,350.00
5,000.00
1,500.00
8,000.00
11,000.00
136,850.00
Accounts Payable
Owner’s Equity
Carolyn Wells, Capital
Total Liabilities and Owner’s Equity
3,500.00
133,350.00
136, 850.00
A single line shows that the amounts above it are being added or
subtracted.


A double line indicates final amounts for the column or section of a
report.
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The Importance of Financial
Statements
• Business managers and
owners use the balance
sheet and the income
statement to control current
operations and plan for the
future.
 Creditors, prospective investors,
governmental agencies, and others
are interested in the profits of the
business and in the asset and equity
structure.
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Financial statements are prepared in
a specific order:
1st Income Statement
2nd Statement of Owner’s equity
3rd Balance Sheet
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Chapter 03
Analyzing Business
Transactions Using T
Accounts
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Analyzing Business Transactions
Using T Accounts
Section 1: Transactions That Affect
Assets, Liabilities, and Owner’s Equity
Section Objectives
3-1 Set up T accounts for assets, liabilities,
and owner’s equity.
3-2 Analyze business transactions and enter
them in the accounts.
3-3 Determine the balance of an account.
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The Accounting Equation
ASSETS
The property a
business owns
=
LIABILITIES
The debts of
the business
+
OWNER’S
EQUITY
The owner’s financial
interest in the business
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Classification of Accounts

Asset Accounts
Asset accounts show the property a business
owns.

Liability Accounts
Liability accounts show the debts of the
business.

Owner’s Equity Accounts
Owner’s equity accounts show the owner’s
financial interest in the business.
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Set up T accounts for assets, liabilities and owner’s equity
T Accounts
=
ASSETS
+
LIABILITIES
OWNER’S EQUITY
-
-
Record
Increases
Record
Decreases
Record
Decreases
Record
Increases
Record
Decreases
Record
Increases
LEFT SIDE
RIGHT SIDE
LEFT SIDE
RIGHT SIDE
LEFT SIDE
RIGHT SIDE
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+
+
-
+
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Analyze business transactions and enter them in the
accounts
Effects of Business Transactions
Steps to analyze the effects of the business
transactions:
1. Analyze the financial event.

Identify the accounts affected.

Classify the accounts affected.

Determine the amount of increase or decrease for each
account.
2. Apply the left-side-right side rules for each account
affected.
3. Make the entry in T-account form.
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Initial Investment
Carolyn Wells withdrew $100,000 from personal
savings and deposited it in the new business
checking account for Wells’ Consulting Services.

LEFT
Increases to asset accounts are recorded on the
left side of the T account.

RIGHT
Increases to owner’s equity accounts are
recorded on the right side of the T account.
Cash
(a) 100,000
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Carolyn Wells, Capital
(a) 100,000
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Business Transaction
Wells’ Consulting Services issued a $5,000 check to
purchase a computer and other equipment.
Analysis:
(b) The asset account, Equipment, is increased by $5,000.
(b) The asset account, Cash, is decreased by $5,000.
Equipment
(b) 5,000
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Cash
(b) 5,000
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Purchase of Equipment on Account
The firm bought office equipment for $6,000 on account
from Office Plus.
Analysis:
(c) The asset account, Equipment, is increased by $6,000.
(c) The liability account, Accounts Payable, is increased by $6,000.
Equipment
(c) 6,000
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Accounts Payable
(c) 6,000
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Purchase of Supplies for Cash
Wells’ Consulting Services issued a check for $1,500 to
Office Delux Inc. to purchase office supplies.
Analysis:
(d) The asset account, Supplies, is increased by $1,500.
(d) The asset account, Cash, is decreased by $1,500.
Supplies
(d) 1,500
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Cash
(d) 1,500
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Payment of a Liability
Wells’ Consulting Services issued a check in the
amount of $2,500 to Office Plus.
Analysis:
(e) The asset account, Cash, is decreased by $2,500.
(e) The liability account, Accounts Payable, is decreased by $2,500.
Accounts Payable
(e) 2,500
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Cash
(e) 2,500
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Prepayment of Rent
Wells’ Consulting Services issued a check for $8,000 to
pay rent for the months of December and January.
Analysis:
(f) The asset account, Prepaid Rent, is increased by $8,000.
(f) The asset account, Cash, is decreased by $8,000.
Prepaid Rent
(f) 8,000
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Cash
(f) 8,000
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Determine the balance of an account
An account balance is the difference between
the amounts recorded on the two sides of an
account.
A footing is a small pencil figure written at the
base of an amount column showing the sum of
the entries in the column.
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Recording Account Balances
IF

THEN
the total on the right side is larger
than the total on the left side,
the balance is recorded on the right
side.
the total on the left side is larger,
the balance is recorded on the left
side.
an account shows only one amount,
that amount is the balance.
an account contains entries on only
one side,
the total of those entries is the
account balance.
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Computing the
Account Balance
Cash
(a) 100,000
Bal. 83,000
(b)
(d)
(e)
(f)
5,000
1,500
2,500
8,000
----------17,000
Footing
(100,000 – 17,000)
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Summary of Account Balances
ASSETS
Cash
=
LIABILITIES
Accounts Payable
+
OWNER’S EQUITY
Carolyn Wells, Capital
(a) 100,000 (b) 5,000
(d) 1,500
(e) 2,500
(f)
8,000
Bal. 83,000
17,000
( e) 2,500 (c) 6,000
(b)
Account balances
for
Carter
Consulting
Bal. 3,500
Services
100,000
Supplies
SUMMARY OF ACCOUNT BALANCES
(d) 1,500
ASSETS
Prepaid Rent
(f)
8,000
= LIABILITIES + OWNER’S EQUITY
83,000
1,500
8,000
11,000
3,500
100,000
Equipment
103,500
=
3,500
+
100,000
(b) 5,000
(c) 6,000
Bal. 11,000
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Analyzing Business Transactions
Using T Accounts
Section 2: Transactions That Affect Revenue,
Expenses, and Withdrawals
Section Objectives
3-4 Set up T accounts for revenue and expenses.
3-5 Prepare a trial balance from T accounts.
3-6 Prepare an income statement, a statement of
owner’s equity, and a balance sheet.
3-7 Develop a chart of accounts.
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T-Account for Revenue
Owner’s Equity
Decrease
Increase
Side
Side
_
+
Revenue
Decrease
Increase
Side
Side
_
+

Revenues increase owner’s equity.

Increases in owner’s equity appear on the right side
of the T account.

Therefore, increases in revenue appear on the right
side of revenue T accounts.
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Revenue
Decrease
Increase
Side
Side
_
+
The right side of the revenue account shows
increases and the left side shows decreases.
Decreases in revenue accounts are rare but might
occur because of corrections or transfers.
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Set up T accounts for revenues and expenses
Recording Revenue from Services Sold
for Cash
Cash
Fees Income
(g) 36,000
Bal. 83,000
(g) 36,000
$36,000 is entered on the
left (increase) side of the
asset account Cash.
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$36,000 is entered on the
right side of the Fees
Income account.
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Recording Revenue from Services Sold
on Credit
In December, Wells’ Consulting Services earned
$11,000 from various charge account clients.
Analysis:
(h) The asset account, Accounts Receivable, is increased
by $11,000.
(h) The revenue account, Fees Income, is increased by
$11,000.
Accounts Receivable
(h) 11,000
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Fees Income
(h) 11,000
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Receipt of Payments on Account
Charge account clients paid $6,000, reducing the
amount owed to Wells’ Consulting Services.
Analysis:
(i) The asset account, Cash, is increased by $6,000.
(i)
The asset account, Accounts Receivable, is decreased by
$6,000.
Cash
(i) 6,000
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Accounts Receivable
(i) 6,000
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Expenses
Owner’s Equity
Decrease
Side
Increase
Side
_
+
Expense
Revenue
Increase
Side
Decrease
Side
Decrease
Side
Increase
Side
+
_
_
+

Expenses decrease owner’s equity.

Decreases in owner’s equity appear on the left side of
the T accounts.
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Payment of Salaries
In December, Wells’ Consulting Services paid $8,000 in
salaries.
Analysis:
(j) The asset account, Cash, is decreased by $8,000.
(j) The expense account, Salaries Expense, is increased by
$8,000.
Salaries Expense
(j) 8,000
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Cash
(j) 8,000
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Payment of Utilities
Wells’ Consulting Services issued a check for $650 to
pay the utilities bill.
Analysis:
(k) The asset account, Cash, is decreased by $650.
(k) The expense account, Utilities Expense, is increased by
$650.
Utilities Expense
(k)650
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Cash
(k) 650
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Owner’s Withdrawals
Owner’s Equity
Decrease
Increase
Side
Side
_
+
Expense
Revenue
Increase
Decrease
Decrease
Increase
Side
Side
Side
Side
+
_
_
+
Owner Drawing
Increase
Decrease
Side
Side
+
_
Drawing decreases owner’s equity.
 Decreases in owner’s equity appear on the left side of the T accounts.

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The Owner Withdraws Funds
Carolyn Wells wrote a check to withdraw $5,000 cash for
personal use.
Analysis:
(l) The asset account, Cash, is decreased by $5,000.
(l) The owner’s equity account, Carolyn Wells, Drawing, is
increased by $5,000.
Carolyn Wells, Drawing
(l) 5,000
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Cash
(l) 5,000
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The Rules of Debit and Credit
• A debit is an entry on the left side of an account.
• A credit is an entry on the right side of an account.
• A double-entry system is an accounting system that
involves recording the effects of each transaction as
debits and credits in separate accounts.
• Every transaction in a Double entry accounting
system has at least one debit and one credit.
•The total of the debits and credits recorded in the
separate accounts must be EQUAL.
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Any Account
Left Side
Right Side

Accountants refer to the left side of an account as the debit side
instead of saying the left side.

The right side of the account is called the credit side.
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Rules for Debits and Credits
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Prepare a trial balance from T accounts
1. Use the proper heading to include who, what,
and when information.
2. List the accounts in chart of account order or in
the same order as they appear in the financial
statement.
3. Enter the ending balance of each account in the
appropriate Debit or Credit column.
4. Total the Debit column.
5. Total the Credit column.
6. Compare the column totals. They should be
equal.
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The Trial Balance
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Errors
Some common errors in a trial balance are:
 Adding trial balance columns incorrectly
 Recording only half a transaction – for example, recording
a debit but not recording a credit, or vice versa
 Recording both halves of a transaction as debits or credits
rather than recording one debit and one credit
 Recording the incorrect amount for a transaction
 Recording a debit for one amount and a credit for a
different amount
 Mathematical errors in calculating account balances
 Forgetting to carry over an account balance to the Trial
Balance
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Prepare an income statement, a statement of owner’s equity,
and a balance sheet
 After the trial balance is prepared, the financial statements
are prepared.
 Net income from the income statement is used on the
statement of owner’s equity.
 The ending balance of the Carolyn Wells, Capital account,
computed on the statement of owner’s equity, is used on
the balance sheet.
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Wells’ CONSULTING SERVICES
Income Statement
Month Ended December 31, 2016
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Total Expenses
Net Income
47,000.00
8,000.00
650.00
8,650.00
38,350.00
Wells’ CONSULTING SERVICES
Statement Of Owner’s Equity
Month Ended December 31, 2016
Carolyn Wells, Capital, Dec. 1, 2016
100,000.00
Net Income for December
38,350.00
Less Withdrawals for December
5,000.00
Increase in Capital
33,350.00
Carolyn Wells, Capital, Dec. 31, 2016
133,350.00
ASSETS
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Total Assets
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Wells’ CONSULTING SERVICES
Balance Sheet
December 31, 2016
LIABILITIES
111,350.00
Accounts Payable
5,000.00
1,500.00
8,000.00
OWNER’S EQUITY
11,000.00
Carolyn Wells, Capital
136,850.00
Total Liabilities and Owner’s Equity
3,500.00
133,350.00
136,850.00
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Develop a chart of accounts
 Each account has a number and a name.
 The Balance Sheet accounts are listed
first, followed by the Statement of
Owner’s Equity accounts, ending with the
income statement accounts.
 The account number is assigned based
on the type of account.
 Each account should have a number
assigned to its title (name)
 Balance Sheet accounts are listed before
income statement accounts.
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Permanent and Temporary Accounts
A permanent account is an account
that is kept open from one
accounting period to the next.
A temporary account is an account
whose balance is transferred to
another account at the end of an
accounting period. A temporary
account is “zeroed out” at the end of
the accounting period.
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Homework assignment
 Using Connect – 5 Questions for 50 Points for Chapter 03.
 Log in Connect web site and do “Connect Orientation” for 10
Points
 Quiz # 01 is due at home; today till 09/13 at 11:59 PM.
 Prepare chapter 4 “The
Ledger.”
General Journal and General
Happiness is having all
homework up to date
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Thank you and See You
Next Week at the Same
Time, Take Care
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