analyzing business - mercer county community collegehorowitk/documents/chapter02_001.pdf2-15 jt’s...

Analyzing Business

Transactions

Section 1: Property and Financial Interest

Chapter

2

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.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

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Meet JT’s Consulting Services.

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.

JT’s Consulting

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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 = Financial Interest

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Business Transaction

Jason Taylor withdrew $90,000 from personalsavings and deposited it in a new checking account in the name of JT’s Consulting Services.

(a) The business received $90,000 of property in the

form of cash.

Analysis:

(b) Taylor had an $90,000 financial interest in the business.

Record in equation form the financial

effects of a business transaction

Objective 1

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Cash = Jason Taylor, Capital

(b) Increased equity

(a) Invested cash

New balances $90,000 = $90,000

+ $90,000

+ $90,000

The owner invested cash into the business.

Jason Taylor now has $90,000 equity in JT’s

Consulting Services.

2-7

Cash + Equipment = Jason Taylor, Capital

Previous balances $90,000 = $90,000

(c) Purchased equip. +

(d) Paid cash

New balances $80,000 + $10,000 = $90,000


- 10,000

$10,000

The company buys equipment for $10,000 cash.

$90,000 = $90,000

2-8

Accounts

= Payable

(e) Purchased equipment

(f) Incurred debt

New balances $80,000 + $22,000 = $12,000 + $90,000


Cash + Equipment

Previous balances $80,000 + $10,000 = $90,000

Jason Taylor,

+ Capital

+12,000

+$12,000

$102,000 = $102,000

Notice the new claim against the firm’s

property – the creditor’s claim of $12,000.

The company buys $12,000 of equipment

on account.

2-9

Accounts

= Payable

(g) Purchased

supplies

(h) Paid cash

New

balances $77,000 + $3,000 + $22,000 = $12,000 + $90,000


Cash + Supplies + Equipment

Previous

balances $80,000 + $22,000 = $12,000 + $90,000

Jason Taylor,

+ Capital

$3,000

-3,000

$102,000 = $102,000

The firm purchases supplies for $3,000 cash.

2-10

Accounts

= Payable

(i) Paid cash

New

balances $72,000 + $3,000 + $22,000 = $7,000 + $90,000


Cash + Supplies + Equipment

Previous

balances $77,000 + $3,000 + $22,000 = $12,000 + $90,000

Jason Taylor,

+ Capital

(j) Decreased

debt

-5,000

-$5,000

$97,000 = $97,000

The firm makes a payment of $5,000 on account.

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Accounts

= Payable

(k) Paid

cash

New

balances $65,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000


Cash + Supplies + Prepaid + Equipment

Rent

Previous

balances $72,000 + $3,000 + $22,000 = $7,000 + $90,000

Jason Taylor,

+ Capital

(l) Prepaid

rent

-7,000

+$7,000

$97,000 = $97,000

The firm makes a payment of $7,000 rent

in advance.

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QUESTION:

What are assets?

Assets are property owned by a

business.

ANSWER:

Define, identify, and understand the relationship

between asset, liability, and owner’s equity accounts

Assets, Liabilities, and Owner’s Equity

Objective 2

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QUESTION:

What are liabilities?

Liabilities are debts or obligations of a

business.

ANSWER:

QUESTION:

Owner’s equity is the term used for sole

proprietorships. It is the financial interest of

an owner of a business. It is also called

proprietorship or net worth.

ANSWER:

Liabilities and Equity

What is owner’s equity?

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QUESTION:

What is a Balance Sheet?

A balance sheet is a formal report of a

business’s financial condition on a certain

date. It reports the assets, liabilities, and

owner’s equity of the business.

ANSWER:

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JT’s Consulting Services

Balance Sheet

November 30, 2010

Liabilities – the amount owed to the creditors

Assets – the amount and types of property owned by the business

Equity – the owner’s interest

Assets

Cash 65,000.00

Supplies 3,000.00

Prepaid Rent 7,000.00

Equipment 22,000.00

Total Assets 97,000.00

Liabilities

Accounts Payable 7,000.00

Jason Taylor, Capital 90,000.00

Total Liabilities and Owner’s Equity 97,000.00

Owner’s Equity

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Assets

Property equals Financial Interest

Liabilities +

Owner’s

EquityPropertyFinancial

Interest

Analyzing Business Transactions

Section 2: The Accounting Equation and

Financial Statements

Chapter

2

Section Objectives

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.

4. Prepare an income statement.

5. Prepare a statement of owner’s equity and a

balance sheet.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

2-18

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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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 Fundamental Accounting Equation

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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Objective 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.

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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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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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Assets = Liab. + Owner’s Equity

Prepaid Accounts J. Taylor,

Cash + Supplies + Rent + Equip. = Payable + Capital + Revenue

Previous

balances $65,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000

(m) Recd. cash +26,000

(n) Increased

owner's equity + 26,000

New balances $91,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000 + $26,000

$123,000 = $123,000

The firm receives $26,000 in cash for services

provided to clients.

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Assets = Liab. + Owner's Equity

Accts. Prepaid Accts. J. Taylor,

Cash + Rec. + Supplies + Rent + Equip. = Pay. + Capital + Rev.

Previous

balances $91,000 + $3,000 + $7,000 + 22,000 = $7,000 + $90,000 + $26,000

_______ ______ _____ ______ ______ _____ ______ ______

(o) Received

new asset + $9,000

(p) Increased

owner’s equity + 9,000

New bal. $91,000 + $9,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000 + $35,000

$132,000 = $132,000

The company performs services on account

for $9,000.

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Cash + Rec. + Supplies + Rent + Equip. = Pay. + Capital + Rev.

Previous

Balances $91,000 + $9,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000 + $35,000

_______ ______ ______ ______ ______ ______ ______ ______

(q) Recd.

cash +4,000

(r) Decreased

accts. rec. - 4,000

New bal. $95,000 + $5,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000 + $35,000

$132,000 = $132,000

Collection of $4,000 from customers

on account.

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Cash + Rec. + Supplies + Rent + Equip. = Pay. + Capital + Rev. - Exp.

Previous

balances $95,000 + $5,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000 + $35,000

______ ______ ______ ______ ______ ______ ______ ______ _____

(s) Paid

cash -7,000

(t) Decreased

owner’s equity - 7,000

New bal. $88,000 + $5,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000 + $35,000 - $7,000

$125,000 = $125,000

The firm pays $7,000 in salaries expense

for the month.

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Cash + Rec. + Supplies + Rent + Equip. = Pay. + Capital + Rev. - Exp.

Previous

balances $88,000 + $5,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000 + $35,000 - 7,000

______ ______ _______ _______ _______ ________ _______ _______ ______

(u) Paid

cash -500

(v) Decreased

owner’s equity -500

New bal. $87,500 + $5,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000 + $35,000 - $ 7,500

$124,500 = $124,500

The firm pays $500 for utilities

expenses.

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Assets = Liab. + Owner’s Equity


Cash + Rec. + Supp. + Rent + Equip. = Pay. + Capital + Rev. - Exp.

Previous

balances $87,500 + $5,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000 + $35,000 - $7,500

______ _____ _____ ______ ______ ______ ______ ______ ______

(w) Withdrew

cash -4,000

(x) Decreased

owner's equity -4,000

New bal. $83,500 + $5,000 + $3,000 + $7,000 + $22,000 = $7,000 + $86,000 + $35,000 - $7,500

$120,500 = $120,500

The firm records a withdrawal by the owner

of $4,000.

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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.

Prepare An Income StatementObjective 4

QUESTION:

What is an income statement?

ANSWER:

2-30

Revenue

Fees Income $35,000.00

Expenses

Salaries Expense $7,000.00

Utilities Expense 500.00

Total Expenses 7,500.00

Net Income $ 27,500.00


Income Statement

Month Ended December 31, 2010

The income statement has

a three-line heading.

The third line shows that the report covers

operations over a period of time.

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Revenue


Expenses

Salaries Expense 7,000.00



Net Income $ 27,500.00


Income Statement


The income statement reports revenue.

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Revenue


Expenses




Net Income $27,500.00


Income Statement


The income statement also reports expenses.

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Revenue


Expenses




Net Income $27,500.00


Income Statement


The result is net income or net loss for the period.

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37

Jason Taylor, Capital, December 1, 2010

Net Income for December

Less Withdrawals for December

Increase in Capital


$27,500.00

4,000.00

$90,000.00

23,500.00

$113,500.00


Statement of Owner’s Equity


A Statement of Owner’s Equity

Prepare a Statement of Owner’s

Equity and Balance SheetObjective 5

2-35

Assets

Cash 83,500.00

Accounts Receivable 5,000.00

Supplies 3,000.00


Equipment 22,000.00

Total Assets 120,500.00

Liabilities

Accounts Payable 7,000.00

Owner’s Equity


Total Liabilities and Owner’s Equity 120,500.00


Balance Sheet

December 31, 2010

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.

The Balance Sheet

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Business managers and

owners use the balance

sheet and the income

statement to control current

operations and plan for the

future.

The Importance of Financial

Statements

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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1st Income Statement

2nd Statement of Owner’s equity

3rd Balance Sheet

Financial statements are prepared in

a specific order:

2-38


Statement of Owner’s Equity



Net Income for December

Less Withdrawals for December

Increase in Capital


22,400.00

3,000.00

80,000.00

19,400.00

113,500.00


Balance Sheet

December 31, 2010

Assets

Cash $83,500.00

Accounts Receivable 5,000.00

Supplies 3,000.00


Equipment 22,000.00

Total Assets $ 120,500.00

Liabilities

Accounts Payable $7,000.00

Owner’s Equity


Total Liabilities and Owner’s Equity $ 120,500.00

2-39

Thank Youfor using

College Accounting, 12th Edition

Price • Haddock • Farina

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