Analyzing Business Transactions

Transcription

1 2-1

2 McGraw-Hill 2007 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 2 Analyzing Business Transactions Section 1: Property and Financial Interest Section Objectives 1. Record in equation form the financial effects of a business transaction. 2. Define, identify, and understand the relationship between asset, liability, and owner s equity accounts.

3 Business Transactions The accounting process starts with the analysis of business transactions. 2-3

4 2-4 QUESTION: What is a business transaction? ANSWER: A business transaction is a financial event that changes the resources of a firm.

5 2-5 Beginning with Analysis

6 2-6 Meet JT s Consulting Services. JT s Consulting JT s Consulting Services is a firm that provides a wide range of accounting and consulting services. Jason Taylor is the sole proprietor of the firm. Tennille Brisbane is the office manager of the firm. Every month the firm bills clients for the services provided that month. Customers can also pay in cash when the services are provided.

7 2-7 Starting a Business... Jason Taylor opened a checking account with $90,000 in the name of JT s Consulting Services. Taylor owns the business because he supplied the property (funds).

8 2-8 A business transaction is analyzed to see how it affects this equation: Property = Financial Interest In a free enterprise system, all property is owned by someone.

9 Use these 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 = Financial Interest 2-9

10 2-10 Objective 1 Record in equation form the financial effects of a business transaction.

11 2-11 Business Transaction Jason Taylor withdrew $90,000 from personal savings and deposited it in a new checking account in the name of JT s Consulting Services. Analysis: (a) The business received $90,000 of property in the form of cash. (b) Taylor had an $90,000 financial interest in the business.

12 2-12 The equation remains in balance. Property = Financial Interest Cash = Jason Taylor, Capital (a) Invested cash + $90,000 (b) Increased equity + $90,000 New balances $90,000 = $90,000 Jason Taylor now has $90,000 equity in JT s Consulting Services.

13 2-13 QUESTION: ANSWER: What is equity? Equity or capital is the owner s financial interest in a business.

14 Purchasing Equipment for Cash 2-14

15 2-15 Business Transaction JT s Consulting Services issued a $10,000 check to purchase a computer and other equipment. Analysis: (c) The firm purchased new equipment for $10,000. (d) The firm paid out $10,000 in cash.

16 2-16 The equation remains in balance. Property = Financial Interest Cash + Equipment = Jason Taylor, Capital Previous balances $90,000 = $90,000 (c) Purchased equip. + $10,000 (d) Paid cash - 10,000 New balances $80,000 + $10,000 = $90,000 $90,000 = $90,000

17 2-17 Now the firm has cash and equipment. The total value of the property remains the same, $90,000. Jason Taylor s financial interest is also unchanged, $90,000.

18 2-18 Purchasing Equipment on Credit

19 2-19 QUESTION: ANSWER: What is buying on account? Buying on account is an arrangement to allow payment at a later date. It is also called a charge account or openaccount credit.

20 2-20 QUESTION: What are accounts payable? ANSWER: Accounts payable are the amounts a business must pay in the future.

21 2-21 Business Transaction JT s Consulting Services purchased additional office equipment on account from Office Plus for $12,000. Analysis: (e) The firm purchased new equipment that cost $12,000. (f) The firm owes $12,000 to Office Plus.

22 2-22 The equation remains in balance. Property = Financial Interest Cash + Equipment Accounts = Payable Jason Taylor, + Capital Previous balances $80,000 + $10,000 = $90,000 (e) Purchased equipment +12,000 (f) Incurred debt +$12,000 New balances $80,000 + $22,000 = $12,000 + $90,000 $102,000 = $102,000 Notice the new claim against the firm s property the creditor s claim of $12,000.

23 2-23 Purchasing Supplies

24 2-24 Business Transaction JT s Consulting Services issued a check for $3,000 to Office Supplies Inc. to purchase office supplies. Analysis: (g) The firm purchased office supplies that cost $3,000. (h) The firm paid $3,000 in cash.

25 2-25 (g) Purchased supplies The equation remains in balance. Property = Financial Interest Cash + Supplies + Equipment Accounts = Payable Previous balances $80,000 + $22,000 = $12,000 + $90,000 $3,000 Jason Taylor, + Capital (h) Paid cash -3,000 New balances $77,000 + $3,000 + $22,000 = $12,000 + $90,000 $102,000 = $102,000

26 Paying a Creditor 2-26

27 2-27 Business Transaction In order to reduce its debt, JT s Consulting Services issued a check for $5,000 to Office Plus. Analysis: (i) The firm paid $5,000 in cash. (j) The claim of Office Plus against the firm decreased by $5,000.

28 2-28 (i) Paid cash Property = Financial Interest Cash + Supplies + Equipment Accounts = Payable Previous balances $77,000 + $3,000 + $22,000 = $12,000 + $90,000 (j) Decreased debt -5,000 The equation remains in balance. -$5,000 Jason Taylor, + Capital New balances $72,000 + $3,000 + $22,000 = $7,000 + $90,000 $97,000 = $97,000

29 Renting Facilities 2-29

30 2-30 Business Transaction JT s Consulting Services issued a check for $7,000 to pay for rent for the months of December and January. Analysis: (k) The firm prepaid the rent for the next two months in the amount of $7,000. (l) The firm decreased its cash balance by $7,000.

31 2-31 (k) Paid cash Cash Property = Financial Interest + Supplies + Prepaid + Equipment Accounts Rent = Payable Previous balances $72,000 + $3,000 + $22,000 = $7,000 + $90,000-7,000 The equation remains in balance. Jason Taylor, + Capital (l) Prepaid rent +$7,000 New balances $65,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000 $97,000 = $97,000

32 2-32 Thank You for using College Accounting, 11th Edition Price Haddock Brock