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Transaction analysis ppt @ BEC-DOMS

Transaction analysis ppt @ BEC-DOMS

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Transcript

  • 1. FINANCIAL ACCOUNTING BASICS
  • 2.
    • G. Transaction Analysis
    • H. Balance Sheet Changes
    • I. Accounting Conventions
    • Practice Exercise - at the end of Part Two there is an exercise that you should complete before proceeding to Part Three
    • (Once you have completed this exercise, you can compare your results with the solution available on Blackboard)
  • 3. G. TRANSACTION ANALYSIS
    • Every business transaction can be analyzed in terms of its effect on
    • Assets , Liabilities , and Equity . What combinations are possible,
    • given that the balance sheet equation must remain in balance?
    A = L + E Sample Transaction 1. + +
    • Company borrows cash from bank
    • (+ Cash, + Bank Loan Payable)
    • Purchases inventory on account
    • (+ Inventory, + Account Payable)
    2. + +
    • Investors purchase common stock from company
    • (+ Cash, + Common Stock)
    3. +, -
    • Cash purchase of equipment
    • (+ Equipment, - Cash)
    • Collection of account receivable
    • (+ Cash, - Accounts Receivable)
  • 4. G. TRANSACTION ANALYSIS (cont) A = L + E Sample Transaction 5. - -
    • Company pays dividend to stockholders
    • (- Cash, - Retained earnings)
    6. + -
    • Company purchases stock from stockholder, will pay
    • in future
    • (- Common Stock, + Payable to Stockholder)
    4. - -
    • Company pays bank loan
    • (- Loan Payable, - Cash)
    • Pays account payable to supplier
    • (- Account Payable, - Cash)
    7. - +
    • Liability is converted into equity investment, e.g.,
    • convertible bonds are converted into common stock
    • (- Bonds Payable, + Common Stock)
  • 5. G. TRANSACTION ANALYSIS (cont) Combinations 1 – 5 are most common; 6 – 9 are rare A = L + E Sample Transaction Next, we will analyze the effect that each of a series of transactions has on a company’s balance sheet. 8. +, -
    • Company incurs new liability to pay existing liability,
    • e.g., account payable to supplier is converted into
    • long-term note payable
    • (- Account Payable, + Note Payable)
    9. +, -
    • Company distributes stock dividend to stockholders
    • (+ Common Stock, - Retained Earnings)
  • 6. H. BALANCE SHEET CHANGES ABC Company Balance Sheet January 2, Year 1 Assets Liabilities and Equity Assets Liabilities and Equity Cash $ 10,000 Paid-in capital $ 10,000 Total $10,000 Total $10,000 2. On January 3, ABC Company borrows $5,000 from Multi Bank. ABC Company Balance Sheet January 3, Year 1 Cash $ 15,000 Note payable $ 5,000 Paid-in capital 10,000 Total $15,000 Total $15,000
    • On January 2, owners invest $10,000 in ABC Company to begin the business.
  • 7. H. BALANCE SHEET CHANGES (cont)
    • On January 5, ABC Company purchases $8,000 of inventory from suppliers, on account. Payment will be made on January 10.
    ABC Company Balance Sheet January 5, Year 1 Assets Liabilities and Equity Inventory 8,000 Accounts payable $ 8,000 Cash $15,000 Total $23,000 Note payable 5,000 Paid-in capital 10,000 Total $23,000
    • On January 9, ABC Company sells inventory that cost $2,000 for
    • $2,500 in cash.
    ABC Company Balance Sheet January 9, Year 1 Assets Liabilities and Equity Cash $17,500 Note payable 5,000 Accounts payable $ 8,000 Paid-in capital 10,000 Retained earnings 500 Total $23,500 Inventory 6,000 Total $23,500
  • 8. H. BALANCE SHEET CHANGES (cont) 5. On January 10, ABC Company pays for inventory purchased on January 5.
    • On January 12, ABC Company sells inventory that cost $4,000 for $5,000, on
    • account. Payment will be received on January 31.
    ABC Company Balance Sheet January 12, Year 1 ABC Company Balance Sheet January 10, Year 1 Assets Liabilities and Equity Assets Liabilities and Equity Cash $ 9,500 Inventory 6,000 Total $15,500 Note payable $ 5,000 Paid-in capital 10,000 Retained earnings 500 Total $15,500 Cash $ 9,500 Accts receivable 5,000 Inventory 2,000 Total $16,500 Note payable $ 5,000 Paid-in capital 10,000 Retained earnings 1,500 Total $16,500
  • 9. H. BALANCE SHEET CHANGES (cont) 7. On January 31, ABC Company collects the account receivable in cash. ABC Company Balance Sheet January 31, Year 1 Assets Liabilities and Equity Cash $14,500 Inventory 2,000 Total $16,500 Note payable $ 5,000 Paid-in capital 10,000 Retained earnings 1,500 Total $16,500
  • 10. I. ACCOUNTING CONVENTIONS 1. Preparing a new balance sheet after each transaction is cumbersome. 2. Instead, changes in balance sheet amounts are reflected in “accounts”. 3. Any balance sheet account can be increased and decreased. 4. Accountants often use “T accounts” to summarize the effects of transactions. 5. The Cash T account for ABC Company is shown below. + Cash - Balance, Jan 1 0 1. Jan 2 10,000 2. Jan 3 5,000 4. Jan 9 2,500 8,000 5. Jan 10 7. Jan 31 5,000 22,500 8,000 Balance, Jan 31 14,500
  • 11. I. ACCOUNTING CONVENTIONS
    • 6. Accounting Conventions
    • a. Assets (including cash) are:
        • increased by making entries on the left side of the account and
        • decreased by making entries on the right side of the account
    • b. Liabilities and equity are:
        • increased by making entries on the right side of the account and
        • decreased by making entries on the left side of the account
    • If right side entries equal left side entries when each transaction is
    • recorded, then A = L + E
    • d. Left side entries are called debits and right side entries are called credits
    • e. To make sure that A = L + E after each transaction, for each transaction debits must equal credits
  • 12. PRACTICE EXERCISE
    • On the next page, make the “T-account” entries necessary to account for transactions 1 - 7.
    • For each entry, make sure that debits equal credits.
  • 13. PRACTICE EXERCISE (cont) Cash Inventory Note Payable Paid-in Capital Retained Earnings Accounts Receivable Accounts Payable End of Part Two