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Analyzing Financial Position Changes: Transactions and Accounting Principles

In this chapter, we explore how business transactions affect the financial position of a company. A transaction is defined as any financial event that alters a business's financial standing, such as cash withdrawals or asset purchases. We delve into the importance of source documents that provide proof of these transactions. By applying the objective principle of GAAP, we ensure that transactions are recorded based on facts. Using examples from Metropolitan Movers, we analyze various transactions that impact cash, accounts receivable, and equity, demonstrating the fundamental accounting equation's balance.

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Analyzing Financial Position Changes: Transactions and Accounting Principles

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  1. CHAPTER 3--ANALYZING CHANGES IN FINANCIAL POSITION

  2. Business Transaction: • Any financial event that causes a change in the financial position of a business Example • Withdraw cash • Purchased asset Originate from source documents

  3. Source Document: • Business paper that is the original record of a transaction; provides proof of transaction • Includes all information needed to record the transaction

  4. Examples of Source Documents: • Receipts • Invoices • Bills • Cheques

  5. Objectivity Principle • GAAP states all accounting transactions will be recorded based on facts and not personal opinion • Source documents provide proof/fact of transaction

  6. METROPOLITAN MOVERS –TRANSACTION ANALYSIS: • Using the balance sheet on p. 61fill in the Equation Analysis Sheet for the BEGINNING BALANCES

  7. Transaction 1 • Metropolitan Movers pays $1 200 cash to Mercury Finance. • Cash decreases $1 200 • Accounts Payable- Mercury Finance decreases $1 200

  8. Transaction 2 • K. Lincoln, who owes Metropolitan Movers $2 500, pays $1 100 in partial payment of the debt. • Cash increases $1 100 • Accounts Receivable – K. Lincoln decreases $1 100

  9. Transaction 3 • Equipment costing $1 950 is purchased for cash. • Cash decreases $1 950 • Equipment increases $1 950

  10. Transaction 4 • A new pick-up truck is purchased at a cost of $18 000. Metropolitan Movers pays $10 000 cash and arranges a loan from Mercury Finance to cover the balance of the purchase price. • Cash decreases $10 000 • Truck increases $18 000 • Mercury Finance increases $8 000

  11. Transaction 5 • Metropolitan Movers completes a storage service for B. Cava at a price of $1 500. A bill is sent to B. Cava to indicate the additional amount that Cava owes. • Accounts Receivable increases $1 500 • J. Hofner, Capital increases $1 500

  12. Transaction 6 • J. Hofner, the owner, withdraws $500 for personal use. • Cash decreases $500 • J. Hofner, Capital decreases $500

  13. Transaction 7 • Truck requires engine repair. J. Hofnerpays $75 cash when the truck is picked up. • Cash decreases $75 • J. Hofner, Capital decreases $75

  14. New Balance • Calculate the new balances of each column.

  15. Do the total Assets = Total Liabilities + Owner’s Equity? Total Assets = Total Liabilities + Owner’s Equity 61 025 = 26 920 + 34 105 61 025

  16. Summary of Steps in Analyzing a transaction: • Identify all items (A,L,OE) that must be changed & make necessary changes (increase or decrease) • Make sure at least 2 accounts are affected (ie. A & A, A & L, A & OE) • Accounting Equation must balance after each transaction

  17. *OE is NOT always affected in each transaction • If O.E. has changed: • Increase $ earned (Revenue) • Increase owner investment (Capital) • Decrease owner withdrawal (Drawings) • Decrease Costs of operating business (expense) • Decrease loss on sale (expense)

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