Chapter 3: Analyzing Changes in Financial Position
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1 Chapter 3: Analyzing Changes in Financial Position Created by D. Gilroy Heart Lake Secondary School 5
2 Business Transactions Events occur daily that cause the financial position of a business change. Each of these events is called a???? business transaction. When an asset, liability, or equity item is recorded for accounting purposes, a business paper or is required to verify the dollar amount. source document 6
3 Source Documents What would be some examples of source documents? Ø Hydro bill Ø Telephone bill Ø Cheque copies Ø Store receipts Ø Cash register summary Ø Credit card slips 7
4 Source 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. 8
5 GAAP The Objectivity Principle The objectivity principle states that accounting will be recorded on the basis of objective evidence. What does that mean? ü Different people looking at the same evidence will arrive at the same values for the transaction. ü Transactions are recorded on fact, not personal opinion. 9
6 Analyzing Changes in Financial Position Equation Analysis Sheet 13
7 Equation 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. 14
8 Example Opening Balance Sheet 15
9 1. Set up sheet with Beginning Balances as per B/S Set up beginning balances Accounting Equation $53,300 = $20,120 + $33,180 Set up column Headings One per account name 16
10 1. Set up sheet with Beginning Balances as per B/S Accounting Equation $53,300 = $20,120 + $33,180 A = L + OE 17
11 2. Metropolitan Movers pays $1,200 cash to Mercury Finance. 18
12 2. Metropolitan Movers pays $1,200 cash to Mercury Finance. Accounting Equation $52,100 = $18,920 + $33,180 19
13 3. K. Lincoln, who owes Metropolitan Movers $2,500, pays $1,100 in partial payment of debt. 20
14 3. K. Lincoln, who owes Metropolitan Movers $2,500, pays $1,100 in partial payment of debt. Accounting Equation $52,100 = $18,920 + $33,180 21
15 4. Equipment costing $1,950 is purchased for cash. 22
16 4. Equipment costing $1,950 is purchased for cash. Accounting Equation $52,100 = $18,920 + $33,180 23
17 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. 24
18 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. Accounting Equation $60,100 = $26,920 + $33,180 25
19 6. Metro Movers complete a storage service for B. Cava at a price of $1,500. A bill is sent to B. Cava. 26
20 6. Metro Movers complete a storage service for B. Cava at a price of $1,500. A bill is sent to B. Cava. Accounting Equation $61,600 = $26,920 + $34,680 27
21 7. J. Hofner, the owner, withdraws $500 for personal use. 28
22 7. J. Hofner, the owner, withdraws $500 for personal use. Accounting Equation $61,100 = $26,920 + $34,180 29
23 8. One of the trucks requires engine work costing $375. The repair is paid in cash when the truck is picked up. 30
24 8. One of the trucks requires engine work costing $375. The repair is paid in cash when the truck is picked up. Accounting Equation $60,725 = $26,920 + $33,805
25 Update the Balance Sheet based on the balances at the end of the Equation Analysis Sheet 32
26 Summary of Steps in Analyzing a Transaction 1. Identify all items (assets and liabilities) that must be changed and make all 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. 33
27 Summary of Steps in Analyzing a Transaction 2. 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. Make certain that at least two of the individual items / accounts have changed. It is possible for several items to change, but there can never be only one change. 34
28 Summary of Steps in Analyzing a Transaction 4. Make sure that the equation is still in balance. The fundamental accounting equation (Assets = Liabilities + Owner s Equity) must always be in balance. 35
Account Balances and Terminology. Created by D. Gilroy Heart Lake Secondary School
Account Balances and Terminology Created by D. Gilroy Heart Lake Secondary School 42 Pacific Trucking Ledger Cash Supplies Draw a line to Bank Loan B. Rissien, 3,265 500 2 2,465 signify a total 18,000
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