3. Learning Objectives
After completing this lecture, you will be able to:
1. define accounting and its main concepts
2. Differentiate between accrual and cash
accounting
3. Understanding accounting equation
4. Analyzing financial transactions of healthcare
organization in tabular way.
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4. What is Financial Accounting?
Financial accounting involves identifying,
measuring, recording, and communicating in
Money terms the economic events and status of
an organization.
This information is summarized and presented
in financial statements—the three most
important being the income statement, the
balance sheet, and the statement of cash flows.
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5. What is Financial Accounting?
Because these statements communicate
financial information about an organization,
financial accounting is often called “the
language of business.”
Managers of health services organizations
must understand the basics of financial
accounting because financial statements are
the best way to summarize a business’s
financial status and performance.
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6. The Users of Financial Accounting
Information
The predominant users of financial accounting information are those parties who
have a financial interest in the organization and hence are concerned with its
economic status.
All organizations, whether not-for-profit or investor owned, have stakeholders who
have an interest in the business.
In a not-for profit organization, such as a community hospital, the stakeholders
include managers, staff physicians, employees, suppliers, creditors, patients, and
even the community at large.
Investor-owned organizations have essentially the same set of stakeholders, plus
owners. Because all stakeholders, by definition, have an interest in the organization,
all stakeholders have an interest in its financial condition.
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7. The Users of Financial Accounting
Information
Of all the outside stakeholders, investors, who supply the capital (funds)
needed by businesses, typically have the greatest financial interest in
health services organizations. Investors fall into two categories:
1. owners (often stockholders) who supply equity capital to investor-owned
businesses, and
2. creditors (or lenders) who supply debt capital to both investor-owned and
not-for-profit businesses.
In general, there is only one category of owners. However, creditors
constitute a diverse group of investors including banks, suppliers granting
trade credit, and bondholders.
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8. Regulation and Standards in Financial
Accounting In united states
1. Securities and Exchange
Commission (SEC), an
independent regulatory agency
of the U.S. government, was
given the authority to establish
and enforce the form and
content of financial statements.
Nonconforming companies are prohibited from
selling securities to the public, so many
businesses comply to gain access to large
amounts of capital.
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9. Regulation and Standards in Financial
Accounting
2. the Financial Accounting Standards
Board (FASB)—a private organization
whose mission is to establish and
improve standards of financial
accounting and reporting for private
businesses.
Typically, the guidance issued by the FASB,
which is promulgated by numbered
statements, applies across a wide range of
industries and, by design, is somewhat
general in nature
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10. Regulation and Standards in Financial
Accounting
3. the American Institute of Certified
Public Accountants (AICPA)—the
professional association of public
(financial) accountants.
For example, financial statements in
the health services industry are based
on the AICPA Audit and Accounting
Guide titled Health Care Organizations,
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11. Regulation and Standards in
Financial Accounting In Egypt
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1. The Financial Regulatory Authority FRA is a public
Authority, having a legal status, established in
accordance to law 10 of the year 2009.
The Authority is responsible for supervising and regulating non-banking
financial markets and instruments, including the Capital Market, the Exchange,
all activities related to Insurance Services, Mortgage Finance, Financial Leasing,
Factoring and Securitization. FRA's role is to regulate the market and ensure its
stability and competitiveness to attract more local and foreign investments "
The mandate of the Authority also includes limiting inconsistency risks and
addressing problems arising from applying different supervisory rules".
12. Regulation and Standards in
Financial Accounting In Egypt
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The Financial Regulatory Authority FRA is replace the Egyptian
Insurance Supervisory Authority, the Capital Market Authority, and the
Mortgage Finance Authority in application of the provisions of the
supervision and regulation of Insurance law no. 10 of 1981, the Capital
Market law no. 95 of 1992, the Depository and Central registry law no.
93 of 2000, the Mortgage Finance law no. 148 of 2001, as well as other
related laws and decrees that are part of the mandates of the above
authorities.
FRA is also the admin authority for companies established under the
provisions of law of financial leasing issued by law no.95 for year 1995
13. Regulation and Standards in
Financial Accounting In Egypt
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2. Egyptian Society of Accountants &
Auditors
The Egyptian Society of Accountants and Auditors (ESAA)
is a voluntary professional organization for public
accountants established by a Royal Decree in 1946. The
institute is committed to raising the technical and practical
competence of the members of the profession and
ensuring the profession operates in accordance with
international best practices.
14. Generally Accepted Accounting
Principles GAAP
When taken together, all the guidance issued by FASB and the other organizations
constitute a set of guidelines called generally accepted accounting principles
(GAAP).
GAAP can be thought of as a set of objectives, conventions, and principles that have
evolved through the years to guide the preparation and presentation of financial
statements.
In essence, GAAP set the rules for the financial statement preparation game. Note,
however, that GAAP apply only to the area of financial accounting, as distinct from
other areas of accounting, such as managerial accounting (discussed in later
chapters) and tax accounting.
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15. Principles of Financial Accounting
1. Accounting Entity
The first step in the preparation of financial statements is to define the accounting
entity. This step is important for two reasons. First, for investor owned businesses,
financial accounting data must be pertinent to the business activity as opposed to
the personal affairs of the owners.
Second, within any business, the accounting entity defines the specific areas of the
business to be included in the statements.
For example, a healthcare system may create one set of financial statements for
the system as a whole as well as separate statements for its subsidiary hospitals. In
effect, the accounting-entity specification establishes boundaries that tell
accountants what data must be included as well as inform readers what business
(or businesses) is being reported
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16. Basic Concepts of Financial
Accounting
2. Going Concern
It is assumed that the accounting entity will operate as a going concern and will have an
indefinite life. This means that most assets should be valued on the basis of their value
to the ongoing business as opposed to their current market (liquidation) value.
For example, the land, buildings, and equipment of a hospital may have a value of $50
million when used to provide patient services, but if sold to an outside party for other
purposes, the value of these assets might only be $20 million. Furthermore, short-term
events should not be allowed to unduly influence the data presented in financial
statements.
The going concern assumption, coupled with the fact that financial statements must be
prepared for relatively short periods (as explained next), means that financial
accounting data are not exact but represent logical and systematic approaches applied to
complex measurement problems.
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17. Basic Concepts of Financial
Accounting
3.Accounting Period
Because it is assumed that accounting entities have an indefinite life, but users of financial statements require the
information that they convey on a frequent basis, it is common to report financial results on a regular basis.
The period covered by such statements, which is called an accounting period, can be any length of time over which an
organization’s managers, or outside parties, want to evaluate operational results. Most health services organizations use
calendar periods—months, quarters, and years—as their accounting periods. However, occasionally an organization will use a
fiscal year (financial year) that does not coincide with the calendaryear. For example, Access Health, a provider of
management services for health maintenance organizations, has a fiscal year that runs from October 1 to September 30. In this
book, an annual accounting period is used in the illustrations. However, financial statement information typically is also
prepared for periods shorter than one year.
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18. Basic Principles of Financial
Accounting
4. Monetary Unit
The monetary unit provides the common basis by which economic events are measured. In Egypt,
this unit is the Egyptian Pound EGP. Thus, all transactions and events must be expressed in EGP
terms.
Although this concept is simple enough, a major problem arises in implementation. In essence,
the assumption is made that the monetary unit has constant purchasing power over time. In other
words, financial statements ignore inflation. Thus, an EGP of revenue today is treated the same as
an EGP of revenue earned ten years ago, although today’s EGP is worth less (has less purchasing
power) than the EGP received years ago.
Similarly, a clinic today that could be built for LE10 million might have been built for LE 5 million
ten years ago. The accounting profession has grappled with the inflation impact problem for years
but has not yet developed a feasible solution.
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19. Accounting Methods: Cash Versus
Accrual
section, two different methods have been applied: cash accounting and
accrual accounting.
Although, as we discuss below, each method has its own set of advantages
and disadvantages, GAAP specify that only the accrual method can
receive an unqualified auditor’s opinion, so accrual accounting
dominates the preparation of financial statements.
Still, many small businesses that do not require audited financial
statements use the cash method, and knowledge of the cash method helps
our understanding of the accrual method, so we will discuss both methods
here.
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20. Accounting Methods: Cash Versus
Accrual
Cash Accounting
Under cash accounting, often called cash basis accounting, economic events are recognized
when the financial transaction occurs. For example, suppose Care Center For Nose And Ear, a
large ENT multispecialty group practice, provided services to a patient in December 2018. At
that time, the center billed the insurer, BUPA GLOBAL, the full amount that the insurer is
obligated to pay— LE 7,000. However, Care Center did not receive payment from the insurer
until February 2019.
If it used cash accounting, the LE 7,000 obligation on the part of the insurer would not
appear in Care Center 2018 income statement. Rather, the revenue would not be recognized
until the cash was actually received in February 2019.
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21. Accounting Methods: Cash Versus
Accrual
Cash Accounting
The core argument in favor of cash accounting is that the most important event to record is
the receipt of cash, not the provision of the service (i.e., the obligation to pay). Similarly,
Care Center’s expenditures would be recognized as the cash is physically paid out:
inventory costs would be recognized as supplies are purchased and paid,
labor costs would be recognized when employees are paid,
new equipment purchases would be recognized when the invoices are paid, and so on.
To put it simply, cash accounting records the actual flow of money into and out of a business.
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22. Accounting Methods: Cash Versus
Accrual
Cash Accounting advantages and disadvantages
There are two advantages to cash accounting.
1. First, it is simple and easy to understand. No complex accounting rules are required for the
preparation of financial statements.
2. Second, cash accounting is closely aligned to accounting for tax purposes, and hence it is very
easy to translate cash accounting statements into tax data. Because of these advantages, about 80
percent of all medical practices, typically the smaller ones, use cash accounting.
However, cash accounting has its disadvantages, primarily the fact that in its pure form it does not
present information on revenues owed to a business by payers or the business’s existing payment
obligations.
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23. Accounting Methods: Cash Versus
Accrual
Accrual accounting
often called accrual basis accounting, the economic event that creates
the financial transaction provides the basis for the accounting entry
rather than the transaction itself. When applied to revenues, the accrual
concept implies that revenue earned does not necessarily correspond to
the receipt of cash.
Why? Earned revenue is recognized in financial statements when a
service has been provided that creates a payment obligation on the part
of the purchaser, rather than when the payment is actually received.
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24. Accounting Methods: Cash Versus
Accrual
Accrual accounting
For healthcare providers, the payment obligation typically falls on the patient, a third-party
payer, or both. If the obligation is satisfied immediately, such as when a patient makes full
payment at the time the service is rendered, the revenue is in the form of cash. Thus, the
revenue is recorded for financial accounting purposes whether cash or accrual accounting is
used.
However, in most cases, the bulk of the payment for services is not received until later,
perhaps several months after the service is provided. In this situation, the revenue created by
the service does not create an immediate cash payment. If the payment is received within an
accounting period—one year for our purposes—the conversion of revenues to cash will be
completed, and, as far as the financial statements are concerned, the reported revenue is
cash. However, when the revenue is recorded (i.e., services are provided) in one accounting
period and payment does not occur until the next period, the revenue reported has not yet
been collected, and hence no cash has been received.
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25. Accounting Methods: Cash Versus
Accrual
Accrual accounting
Consider the Care Center example discussed earlier. Although the services
were provided in December 2004, the clinic did not receive its LE 7,000
payment until February 2019. Because Care Center’s accounting year ended on
December 31, and the Center actually uses accrual accounting, the Care
Center’s books were closed after the revenue had been recorded but before the
cash was received. Thus, Care Center reported this LE 7,000 of revenue on its
2018 income statement, even though no cash was collected.
When accrual accounting is used, the amount of revenues not collected is
noted in another financial statement (the balance sheet), which shows users
that not all revenues represent cash receipts.
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26. Mahmoud shaqria
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1. Identify
Transactio
n
2. Record
Journal
Entries
3. Post
Ledger
Entries
4. Unadjusted
Trial Balance
5. adjusted
Entries
6. adjusted
Trial
Balance
7. Financial
Statements
8. Close
your
Books
Accounting
Cycle
27. Chart of Accounts
It’s a list contains all accounts used in
healthcare organization and code for each
account
Each healthcare Organization has its own
strategy to coding accounts
In next slides we have the seven main
accounts and codes for hospitals for example
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28. Mahmoud shaqria
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Chart of
accounts
To help
manage the
large number
of accounts,
businesses
have a
document
called a chart
of accounts,
which assigns
a unique
numeric code
to each
account.
1.Assets
Chart of accounts
Name of Account Main control subsidiary code
Assets 01
Current Assets 01
Receivables from credit co 01 010101
Receivables from patients 02 010102
Receivables from credit co 03 010103
Pledge & Other Receivables 04 010104
Inventory & Stock 05 010105
Prepaid Expenses 06 010106
Cash in Hand 07 010107
Cheque in Hand 08 010108
Cash at Bank 09 010109
Non Current Assets 02
Land 01 010201
Building 02 010202
Equipment's 03 010203
Furniture & Fixture 04 010204
IT& Computers 05 010205
Motor Vehicles 06 010206
Goodwill/ Accreditation (General Authority for Accreditation and Health
Supervision)/ JCI
07 010207
Work in Progress 08 010208
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2. Depreciation
Chart of accounts
Name of Account Main control subsidiary code
Depreciation and Impairment 02
02
Dep- Land 01 020201
Dep-Building 02 020202
Dep-Equipment's 03 020203
Dep-Furniture & Fixture 04 020204
Dep-IT& Computers 05 020205
Dep-Motor Vehicles 06 020206
Dep-Goodwill/ Accreditation 07 020207
Dep-Work in Progress 08 020208
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3. Liabilities
1Chart of accounts
Name of Account Main Control Subsidiary code
Liabilities 03
Current Liabilities 01
Payables to credit co 01 030101
Payables to Patients 02 030102
Payables to Associated Br. 03 030103
Pledge & Other Payables 04 030104
Payables to Suppliers 05 030105
Accrued Expenses 06 030106
Payables to Staff- benefits 07 030107
Current Portion of Loans 08 030108
Current Income Tax Liabilities 09 030109
Non Current Liabilities 02
Long term Loans 01 030201
Guarantee Payables 02 030202
Security Payables 03 030203
Employees Incentive Plans 04 030204
Deferred Income Tax Liabilities 05 030205
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Chart of accounts
4. Equity
1Chart of accounts
Name of Account Main Control Subsidiary code
Equities 04
Preferred Capital Stocks 01
Common Capital Stocks 01 040101
Reserves 02 040102
Retained Earnings 03 040103
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Chart of accounts
5. Revenues Chart of accounts
Name of Account Main control subsidiary code
Revenues 05
ENT 01
Outpatients 01 050101
Inpatients 02 050102
Derma 02
Outpatients 01 050201
Inpatients 02 050202
Internal Medicine 03
Outpatients 01 050301
Inpatients 02 050302
Ophthalmology 04
Outpatients 01 050401
Inpatients 02 050402
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Chart of accounts
6. Deductions
Revenues
Chart of accounts
Name of Account Main control subsidiary code
Deductions from Revenues 06
ENT 01
Contractual Discounts 01 060101
Bad Debts 02 060102
Derma 02
Contractual Discounts 01 060201
Bad Debts 02 060202
Internal Medicine 03
Contractual Discounts 01 060301
Bad Debts 02 060302
Ophthalmology 04
Contractual Discounts 01 060401
Bad Debts 02 060402
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Chart of accounts
7. Expenses Chart of accounts
Name of Account Main control subsidiary code
Revenues 07
ENT 01
Expenses- Outpatients 01 070101
Expenses- Inpatients 02 070102
Derma 02
Expenses- Outpatients 01 070201
Expenses- Inpatients 02 070202
Internal Medicine 03
Expenses- Outpatients 01 070301
Expenses- Inpatients 02 070302
Ophthalmology 04
Expenses- Outpatients 01 070401
Expenses- Inpatients 02 070402
35. Accounting Equation
The two basic elements of a business are what it owns and what it owes. Assets
are the resources a business owns. For example, Google has total assets of
approximately $40.5 billion.
Liabilities and owner’s equity are the rights or claims against these resources.
Thus, Google has $40.5 billion of claims against its $40.5 billion of assets.
Claims of those to whom the company owes money (creditors) are called
liabilities.
Claims of owners are called owner’s equity. Google has liabilities of $4.5
billion and owners’ equity of $36 billion.
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36. Accounting Equation
We can express the relationship of assets, liabilities, and owner’s equity
as an
equation:
Assets = Liabilities + Owner’s Equity
This relationship is the basic accounting equation. Assets must equal
the sum of
liabilities and owner’s equity. Liabilities appear before owner’s equity in
the basic
accounting equation because they are paid first if a business is
liquidated.
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37. Accounting Equation
Assets
As noted above, assets are resources a business owns. The business
uses its assets in carrying out such activities as production and sales.
The common characteristic possessed by all assets is the capacity to
provide future services or benefits.
For example, Care Center owns an ambulance that provides
economic benefits from delivering patients. Other assets of Care Center
are beds, chairs, autoclaves , Equipment, and, of course, cash.
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38. Accounting Equation
Liabilities
are claims against assets—that is, existing debts and obligations. Businesses of all sizes usually
borrow money and purchase merchandise on credit. These
economic activities result in payables of various sorts:
• Care Center, for instance, purchases Medicines and Supplies on credit from suppliers. These
obligations are called accounts payable.
• Care Center also has a note payable to First National Bank for the money
borrowed to purchase New Microscope.
• Care Center may also have salaries and wages payable to physicians , nurses, employees and sales
and real estate taxes payable to the local government.
All of these persons or entities to whom Care Center owes money are its creditors. Creditors may
legally force the liquidation of a business that does not pay its debts. In that case, the law requires
that creditor claims be paid before ownership claims.
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39. Accounting Equation
Owner’s Equity
The ownership claim on total assets is owner’s equity. It is equal to total
assets minus total liabilities. Here is why: The assets of a business are
claimed by either creditors or owners. To find out what belongs to owners,
we subtract the creditors’ claims (the liabilities) from assets.
The remainder is the owner’s claim on the assets—the owner’s equity.
Since the claims of creditors must be paid before ownership claims,
owner’s equity is often referred to as residual equity.
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40. Accounting Equation
INCREASES IN OWNER’S EQUITY
In a proprietorship, owner’s investments and revenues increase owner’s equity.
1. Investments by Owner. Investments by owner are the assets the owner puts into
the business. These investments increase owner’s equity. They are recorded in a
category called owner’s capital.
2. Revenues. Revenues are the gross increase in owner’s equity resulting from
business activities entered into for the purpose of earning income. Generally,
revenues result from selling merchandise, performing services, renting property, and
lending money. Common sources of revenue are sales, fees, services, commissions,
interest, dividends, royalties, and rent.
Revenues usually result in an increase in an asset. They may arise from different
sources and are called various names depending on the nature of the business.
Care Center, for instance, has two categories of revenues—outpatients and inpatients .Mahmoud shaqria
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41. Accounting Equation
DECREASES IN OWNER’S EQUITY
In a proprietorship, owner’s drawings and expenses decrease owner’s equity.
1.Drawings. An owner may withdraw cash or other assets for personal use. We use a separate
classification called drawings to determine the total withdrawals for each accounting period.
Drawings decrease owner’s equity. They are recorded in a category called owner’s drawings.
2.Expenses. Expenses are the cost of assets consumed or services used in the process of earning
revenue. They are decreases in owner’s equity that result from operating the business. For
example, Care Center recognizes the following expenses: cost of medicines , supplies (adhesive
tapes, bandages, medicated wound dressing, gauze and sponges, ointments and solutions , etc.);
salaries and wages expense; utilities expense (electric, gas, and water expense); patient’s delivery
expense (gasoline, repairs, licenses, etc.); rent expense; interest expense; and property tax expense.
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42. Accounting Equation
In summary, owner’s equity is increased by an owner’s investments and by revenues from
business operations. Owner’s equity is decreased by an owner’s withdrawals of assets and
by expenses. Illustration 1-6 expands the basic accounting equation by showing the
accounts that comprise owner’s equity. This format is referred to as the expanded
accounting equation.
Basic Equation: Assets = Liabilities + Owner’s Equity
Expanded Equation: Assets = Liabilities + Owner’s Capital - Owner’s Drawings
+ Revenues - Expenses
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43. Transaction Analysis
The following examples are business transactions for a Care Center during its first month of operations.
Transaction (1). Investment by Owner. Dr A. Mohamed decides to open a clinic center which he names Care
Center. On September 1, 2018, he invests EGP 1,500,000 cash in the center. This transaction results in an equal
increase in assets and owner’s equity
Basic Analysis The asset Cash increases EGP 1,500,000, and owner’s equity identified as
Owner’s Capital increases EGP 1,500,000.
Equation Analysis Assets = Liabilities + Owner’s Equity
Cash = owner’s Capital
+ 1,500,000 + 1,500,000 Initial Investment
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44. Transaction Analysis
Transaction (2). Purchase of Equipment for Cash. Care Center purchases ENT Unit for EGP 25,000 cash. This transaction
results in an equal increase and decrease in total assets, though the composition of assets changes. Cash decreases
EGP25,000, and the asset Equipment increases EGP25,000. The specific effect of this transaction and the cumulative effect of
the first two transactions are:
Basic Analysis Cash decreases EGP 25,000, and the asset Equipment increases EGP25,000.
Equation Analysis Assets = Liabilities + Owner’s Equity
Cash + Equipment= owner’s Capital
+ 1,500,000 + 1,500,000 Initial Investment
- 25,000 +25,000
1,475,000 + 25,000 = 1,500,000
1,500,000 = 1,500,000Mahmoud shaqria
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45. Mahmoud shaqria
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Transaction
Analysis
Transaction (3). Purchase of Supplies on Credit. Care Center purchases for
EGP 200,000 from Medwish Company some medical disposals and other
supplies expected to last several months. Medwish agrees to allow Care Center
to pay this bill in October. This transaction is a purchase on account (a credit
purchase). Assets increase because of the expected future benefits of using the
medical disposals and other supplies, and liabilities increase by the amount due
Medwish Company.
Basic Analysis The asset Supplies increases EGP 200,000, and the liability Accounts Payable
increases by EGP200,000.
Equation Analysis Assets = Liabilities + Owner’s Equity
Cash + Supplies + Equipment= Accounts Payable + owner’s Capital
1,475,000 + 25,000 = 1,500,000
+200,000 +200,0000
1,700,000 1,700,000
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Transaction
Analysis
Transaction (4). Services Provided for Cash. Care Center
receives EGP 20,000 cash from Ahmad Aly for Ear surgery which
was operated by the center. This transaction represents Care
Center principal revenue-producing activity. Recall that revenue
increases owner’s equity.
Basic Analysis Cash increases EGP20,000, and revenues (specifically, surgery Revenue) increase
EGP20,000.
Equation Analysis Assets = Liabilities + Owner’s Equity
Cash + Supplies + Equipment= Accounts Payable + owner’s Capital + Revenues
1,475,000 200,000 25,000 = 200,000 1,500,000
+ 20,000 +20,000
1,495,000 200,000 25,000 200,000 1,500,000 20,000
1,720,000 1,720,000
47. Transaction Analysis
Note that we do not have room to give details for each individual
revenue and expense account in this illustration. Thus, revenues
(and expenses when we get to them) are summarized under one
column heading for Revenues and one for Expenses.
However, it is important to keep track of the category (account) titles
affected (e.g., Service Revenue) as they will be needed when we
prepare financial statements
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48. Mahmoud shaqria
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Transaction
Analysis
Transaction (5). Purchase of Advertising on Credit. bill for EGP 2,500 from
the AL qanat News for advertising but postpones payment until a later date.
This transaction results in an increase in liabilities and a decrease in owner’s
equity. The specific categories involved are Accounts Payable and expenses
(specifically, Advertising Expense). The effect on the equation is: :
Basic Analysis The asset Supplies increases EGP 200,000, and the liability Accounts Payable
increases by EGP200,000.
Equation Analysis Assets = Liabilities + Owner’s Equity
Cash + Supplies + Equipment= Accounts Payable + owner’s Capital + Revenues - Expenses
1,495,000 200,000 25,000 = 200,000 1,500,000 20,000
+2,500 - 2,500
1,495,000 + 200,000 + 25,000 = 202,500 + 1,500,000 + 20,000 - 2,500
1,717,500 1,717,500
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Transaction
Analysis
Transaction (6). Services Provided for Cash and Credit. Care Center
provides Eyes Examination for Private Al Manar Language School students.
The center receives cash of EGP 30,000 from School , and it bills the balance
of EGP 10,000 on account. This transaction results in
an equal increase in assets and owner’s equity.
Basic
Analysis
Three specific items are affected: Cash increases EGP 30,000, Accounts Receivable increases EGP
10,000, and Service Revenue increases 40,000.
Equation
Analysis
Assets = Liabilities + Owner’s Equity
Cash +accounts receivable + Supplies + Equipment= Accounts Payable + owner’s Capital + Revenues - Expenses
1,495,000 200,000 + 25,000 = 202,500 + 1,500,000 + 20,000 - 2,500
+30,000 + 10,000 = +40,000
1,525,000 + 10,000 + 200,000 +25,000 = 202,500 + 1,500,000 + 60,000 - 2,500
1,760,000 = 1,760,000
50. Mahmoud shaqria
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Transaction
Analysis
Transaction (7). Payment of Expenses. Care Center pays the following expenses
in cash for September: rent EGP 11,000, salaries and wages of employees
EGP50,000, and utilities EGP 2,800. These payments result in an equal decrease
in assets and expenses.
The effect of these payments on the equation is:
Basic
Analysis
Cash decreases EGO63,800, and the specific expense categories (Rent Expense, Salaries
and Wages Expense, and Utilities Expense) decrease owner’s equity by the same
amount.
Equation
Analysis
Assets = Liabilities + Owner’s Equity
Cash +accounts receivable + Supplies + Equipment= Accounts Payable + owner’s Capital + Revenues - Expenses
1,525,000 10,000 200,000 25,000 = 202,500 1,500,000 60,000 2,500
-63,800 - 11,000 Rent
- 50,000 Sal.
- 2,800 Util.
1,461,200 10,0000 200,000 25,000 202,500 1,500,000 60,000 66,300
- 1,696,200 1,696,200
51. Mahmoud shaqria
51
Transaction
Analysis
Transaction (8). Payment of Accounts Payable. Care Center pays its EGP
2,500 AL qanat News bill in cash. The company previously [in Transaction (5)]
recorded the bill as an increase in Accounts Payable and a decrease in
owner’s equity
Basic
Analysis
This cash payment “on account” decreases the asset Cash by EGP 2,500 and also decreases the
liability Accounts Payable by EGP 2,500.
Equation
Analysis
Assets = Liabilities + Owner’s Equity
Cash +accounts receivable + Supplies + Equipment= Accounts Payable + owner’s Capital + Revenues - Expenses
1,461,200 10,000 200,000 25,000 = 202,500 1,500,000 60,000 66,300
-2,500 - 2,500
1,458,700 10,000 200,000 25,000 200,000 1,500,000 60,000 66,300
1,693,700 1,693,700
52. Mahmoud shaqria
52
Transaction
Analysis
Transaction (9). Receipt of Cash on Account. Care Center receives EGP
10,000 in cash from Al Manar School which had been billed for services [in
Transaction (6)]. This does not change total assets, but it changes the
composition of those assets.
Basic
Analysis
Cash increases EGP 10,000, and Accounts Receivable decreases EGP 10,000
Equation
Analysis
Assets = Liabilities + Owner’s Equity
Cash +accounts receivable + Supplies + Equipment= Accounts Payable + owner’s Capital + Revenues - Expenses
1,458,700 10,000 200,000 25,000 = 202,500 1,500,000 60,000 66,300
+ 10,000 - 10,000
1,468,700 0 200,000 25,000 200,000 1,500,000 60,000 66,300
1,693,700 1,693,700
53. Mahmoud shaqria
53
Transaction
Analysis
Transaction (10). Withdrawal of Cash by Owner. Dr A. Mohamed
withdraws EGP15,000 in cash from the business for his personal use.
This transaction results in an equal decrease in assets and owner’s
equity. Both Cash and Owner’s Drawings decrease EGP15,000,
Basic
Analysis
Cash decreases EGP15,000, and Owner’s Drawings decreases EGP15,000due to owner’s
withdrawal
Equation
Analysis
Assets = Liabilities + Owner’s Equity
Cash +accounts receivable + Supplies + Equipment= Accounts Payable + owner’s Capital + Revenues - Expenses
1,468,700 10,000 200,000 25,000 = 202,500 1,500,000 60,000 66,300
- 15,000 - 15,000 withdrawal
1,453,700 0 200,000 25,000 200,000 1,485,000 60,000 66,300
1,678,700 1,678,700
54. Mahmoud shaqria
54
Summary
of
Transaction
s
This table
summarizes the
September
transactions of
Care Center to
show their
cumulative effect
on the basic
accounting
equation. It also
indicates the
transaction
number and the
specific effects of
each transaction.
No
Transaction
Assets Liabilities Owner’s Equity
Cash
Acc.Rec.
Supplies
Equip.
Acc.Pay.
Capital
Drawings
Revenues
Expenses
(1) Initial Inv. +1,500,000 +1,500,000
(2) Buying
Equip.
-25,000 +25,000
(3) Buying
supp.
+200,000 +200,000
(4) Rev. +20,000 +20,000
(5) advertising +2,500 -2,500
(6)
Rev. +30,000 +10,000 +40,000
(7) Exp. -63,800 -11,000
-50,000
-2,800
(8) Payment
acc. pay.
-2,500 -2,500
(9) Receipt
acc. Rec.
+10,000 -10,000
(10) withdrawal -15,000 -15,000
1,453,700 0 200,000 25,000 200,000 1,500,000 15,000 60,000 66,300
1,678,700 1,678,700
55. Assignments
Transactions made by Al Amal a medical center, for the month of August
are shown below. Prepare a tabular analysis which shows the effects of these
transactions on the expanded accounting equation, similar to that shown in the
previous slide
1. The owner invested EGP250,000 cash in the center.
2. The center purchased EGP70,000 of office equipment on credit.
3. The center received EGP8,000 cash in exchange for services performed.
4. The center paid EGP1,850 for this month’s rent.
5. The owner withdrew EGP1,000 cash for personal use.
Mahmoud shaqria
55
