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McGraw-Hill Ryerson

College Accounting First Canadian Edition Price • Haddock • Brock • Hahn • Reed. McGraw-Hill Ryerson. 1. CHAPTER 2. ANALYZING BUSINESS TRANSACTIONS. 2. OBJECTIVE 1 Define, identify, and understand the relationship between asset, liability, and

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McGraw-Hill Ryerson

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  1. College Accounting First Canadian Edition Price • Haddock • Brock • Hahn • Reed McGraw-Hill Ryerson 1

  2. CHAPTER 2 ANALYZING BUSINESS TRANSACTIONS 2

  3. OBJECTIVE 1 Define, identify, and understand the relationship between asset, liability, and owner’s equity accounts. 3

  4. PROPERTY = ASSETS • Examples: • Cash • Supplies • Prepaid Rent • Equipment 4

  5. FINANCIAL INTEREST = • LIABILITIES & OWNER’S EQUITY • LIABILITIES • Example - Accounts Payable • OWNER’S EQUITY • Example - John Arrow, Capital 5

  6. Arrow Accounting Services ARROW ACCOUNTING SERVICES STARTING A BUSINESS ARROW EMPLOYMENT SERVICES John Arrow , CGA - Owner Virginia Richey - Office Manager 6

  7. OBJECTIVE 2 State the accounting equation 7

  8. TRANSACTION #1Owner Made Investment in Company • The business now has $40,000 of property in the form of cash, which has been deposited in the bank. • Arrow has a $40,000 financial interest in the business; this is called equity or capital. John Arrow invested $40,000 of his savings into the business. 8

  9. TRANSACTION #1 Property = Financial Interest Cash = J. Arrow, Capital (a) Invested cash + $40,000 (b) Increased equity + $40,000 9

  10. TRANSACTION #2Prepaid Rent The firm prepaid the rent for the next eight months in the amount of $20,000. • Rent is paid for the next eight months. • The firm decreased its cash balance by $20,000. 10

  11. Property = Financial Interest Cash + Prepaid Rent = J. Arrow, Capital Previous balances $40,000 = $40,000 TRANSACTION #2 (c) Rented facilities + $20,000 (d) Paid cash - 20,000 New balances $20,000 + $20,000 = $40,000 11

  12. TRANSACTION #3Purchased Equipment for Cash Arrow purchased equipment for $10,000 in cash. • The firm purchased new property --equipment for $10,000. • The firm paid out $10,000 in cash. 12

  13. Property = Financial Interest Prepaid J. Arrow, Cash + Rent + Equipment = Capital Previous balances $20,000 + $20,000 = $40,000 TRANSACTION #3 (e) Purch. equip. + $10,000 (f) Paid cash -10,000 New balances $10,000 + $20,000 + $10,000 = $40,000 13

  14. TRANSACTION #4Purchased Equipment on Credit Arrow purchased equipment for $5,000 on account. • The firm purchased new property on account from Organ, Inc., in the form of equipment that cost $5,000. • The firm owed $5,000 to Organ, Inc. 14

  15. Property = Financial Interest Prepaid Accts. J. Arrow, Cash + Rent + Equip. = Pay. + Capital Previous balances $10,000 + $20,000 + $10,000 = + $40,000 TRANSACTION #4 (g) Purch. equip. + 5,000 (h) Incurred debt = +5,000 New balances $10,000 + $20,000 + $15,000 = $5,000 + $40,000 15

  16. TRANSACTION #5Purchased Supplies • The firm purchased supplies that cost $1,000. Arrow purchased supplies for cash. • The firm paid $1,000 in cash. 16

  17. TRANSACTION #5 Property =Financial Interest Ppd. J. Arrow, Cash + Supplies + Rent + Equip. = A/P + Capital Previous balances $10,000 + $20,000 + $15,000 = $5,000 + $40,000 (i) Purch. supplies + 1,000 (j) Paid cash-1,000 New balances $9,000 + $1,000 + $20,000 + $15,000 = $5,000 + $40,000 17

  18. TRANSACTION #6Paying a Creditor • The Firm paid $1,000 in cash. Arrow paid Organ $1,000 on account. • The claim of Organ, Inc., against the firm decreased by $1,000. 18

  19. TRANSACTION #6 Property =Financial Interest Ppd. J. Arrow, Cash + Supplies + Rent + Equip. = A/P + Capital Previous balances $ 9,000 $1,000 + $20,000 + $15,000 = $5,000 + $40,000 (k) Paid cash - 1,000 (j) Decreased debt =-1,000 New balances $8,000 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 19

  20. THE FUNDAMENTAL ACCOUNTING EQUATION Property = Financial Interest Assets = Liab. + Owner’s Equity Ppd.J. Arrow, Cash + Supplies + Rent + Equip. = A/P + Capital 20

  21. Liabilities Accounts Payable 4,000.00 Owner’s Equity John Arrow, Capital 40,000.00 Liab. & O/E 44,000.00 Assets Cash 8,000.00 Supplies 1,000.00 Prepaid Rent 20,000.00 Equipment 15,000.00 Total Assets 44,000.00 Ppd. J. Arrow, Cash + Supplies + Rent + Equip. = A/P + Capital New bal. $8,000 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 ARROW ACCOUNTING SERVICES Balance Sheet November 30, 20X5 21

  22. 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. 22

  23. FUNDAMENTAL ACCOUNTING EQUATION ASSETS = LIABILITIES + OWNER’S EQUITY $44,000 = $4,000 + $40,000 23

  24. STUDENT ACTIVITY ASSETS = LIABILITIES + O\E 1. ? = $6,000 + $50,000 (SOLUTION: $56,000) 2. $60,000 =? + $52,000 (SOLUTION: $8,000) 3. $50,000 =$4,000 + ? (SOLUTION: $46,000) 24

  25. REVENUE • Sometimes called income. • Produced from the inflow of money or other assets that result from the sale of goods or services. • Added to the column headings under the Owner’s Equity section. • Temporary O/E account. • Closed out to O/E at the end of the accounting period. 25

  26. TRANSACTION #7Selling Services for Cash • The firm received $10,500 in cash for services provided to clients. Arrow earned $10,500 in revenue from cash clients. • The owner’s equity increased by $10,500 because of this inflow of assets from revenue. (Revenue, such as fees earned, always increases the owner’s equity) 26

  27. TRANSACTION #7 Assets = Liab. + Owner’s Equity Prepaid Accounts J. Arrow Cash + Supplies + Rent + Equip. = Payable + Capital + Revenue Previous bal. $ 8,000 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 -----------------------------+-------------------------- ------------------+------------------ (m) Rec. cash+10,500 (n) Owner's equity incr. by revenue + 10,500 New balances $ 18,500 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 + $10,500 $54,500 $54,500 27

  28. TRANSACTION #8Selling Services on Credit • The firm provided services to clients, charging their accounts in the amount of $3,500. Arrow earned $3,500 in fees from clients who charged the amount to their accounts. • The owner’s equity increased by $3,500 because of this inflow of assets from revenue. • Revenue, such as fees earned, always increases the owner’s equity. • The company did not receive cash since the transaction was on account; accounts receivable was increased. 28

  29. Assets = Liab. + Owner's Equity Accts. Prepaid Arrow, Cash + Rec. + Supplies + Rent + Equip. = A/P + Capital + Rev. Pre. bal. $18,500 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 + $10,500 _______ ______ _____ ______ _______ _____ _______ ______ ------------------------------------+--------------------------- --------------------+----------------- TRANSACTION #8 (o) Rec. new asset + 3,500 (p) O/E incr. by revenue + 3,500 New bal. $18,500 +$ 3500 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 + $14,000 $58,000 $58,000 29

  30. TRANSACTION #9Collected Receivable • The firm received $1,500 in cash. Arrow received $1,500 in payments from charge clients. • Accounts receivable decreased by $1,500. 30

  31. Assets = Liab. + Owner's Equity Accts. Prepaid Arrow, Cash + Rec. + Supplies + Rent + Equip. = A/P + Capital + Rev. Pre. bal. $18,500 + $3,500 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 + $14,000 _______ ______ ______ ______ ______ ______ _______ ______ ------------------------------------+----------------------------- ----------------+------------------- TRANSACTION #9 q) Rec. cash.+1,500 (r) A/R decr. -1,500 New bal. $20,000 + $2,000 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 + $14,000 $58,000 $58,000 31

  32. EXPENSES • Involve the various costs of doing business. • Examples: • labour (salaries expense) • utilities (telephone bill) 32

  33. TRANSACTION #10Employees’ Salaries • Cash was reduced by payment of $2,500 to cover the salaries. Arrow paid salaries for the month. • Owner's equity decreased by the $2,500 expense. 33

  34. Assets = Liab. + Owner's Equity Accts. Prepaid Arrow, Cash + Rec. + Supplies + Rent + Equip. = A/P + Capital + Rev. - Exp. Pre. bal. $20,000 + $2,000 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 + $14,000 ______ ______ ______ ______ ______ ______ _______ ______ _____ -------------------------------+----------------------------- ----------------------+---------------------- TRANSACTION #10 (s) Paid cash-2,500 (t) O/E decr. by sal. exp. -2,500 New bal. $17,500 + $2,000 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 + $14,000 -2,500 $55,500 $55,500 34

  35. TRANSACTION #11Utilities Expense • Cash was reduced by payment of $300 for utilities. Arrow paid utilities for the month. • Owner's equity decreased by the $300 expense. 35

  36. Assets = Liab. + Owner's Equity Accts. Prepaid Arrow, Cash + Rec. + Supplies + Rent + Equip. = A/P + Capital + Rev. - Exp. Pre. bal. $17,500 + $2,000 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 + $14,000 -2,500 ______ _____ ______ ______ ______ ______ _______ ______ _____ ---------------------------------+--------------------------- ---------------------+----------------------- TRANSACTION #11 (u) Paid cash - 300 (v) O/E decr. by util. exp. -300 New bal. $17,200 + $2,000 + $1,000 + $20,000 + $15,000 = $4,000 + $40,000 + $14,000 -2,800 $55,200 $55,200 36

  37. OBJECTIVE 4 • Prepare an income statement. 37

  38. THE INCOME STATEMENT • Reports the results of business operations. • Date of income statement represents a specific period of time such as a month, a quarter, or a year. • Shows the income and expenses for the period. 38

  39. ARROW ACCOUNTING SERVICES INCOME STATEMENT Month Ended December 31, 20X5 Revenue Fees Income 14,000.00 Expenses Salaries Expense 2,500.00 Utilities Expense 300.00 Total Expenses 2,800.00 Net Income 11,200.00 39

  40. Net Income, 11,200.00 Assets = Liab. + Owner's Equity Accts. Prepaid = Accts. J. Arrow, Cash + Rec. + Supplies + Rent + Equip. = Payable + Capital + Rev. - Exp. 16,200 + 2,000 + 1,000 + 20,000 + 15,000 = 4,000 + 39,000 + 14,000 - 2,800 ---------------------------+--------------------------- ---------------------+------------------ $54,200 $54,200 ARROW ACCOUNTING SERVICES Income Statement Month Ended December 31, 20X5 Revenue Fees Income 14,000.00 Expenses Salaries Expense 2,500.00 Utilities Expense 300.00 Total Expenses 2,800.00 40

  41. OBJECTIVE 5 • Prepare a statement • of owner’s equity. 41

  42. 40,000.00 10,200.00 50,200.00 ARROW ACCOUNTING SERVICES STATEMENT OF OWNER’S EQUITY Month Ended December 31, 20X5 John Arrow, Capital, December 1, 20X5 Net Income for December Less Withdrawals for December Increase in Capital John Arrow, Capital, December 31, 20X5 11,200.00 1,000.00 37 42

  43. OBJECTIVE 6 • Prepare a balance sheet. 43

  44. Assets Cash 16,200.00 Accounts Receivable 2,000.00 Supplies 1,000.00 Prepaid Rent 20,000.00 Equipment 15,000.00 Total Assets 54,200.00 Owner’s Equity John Arrow, Capital 50,200.00 Total Liab. & Owners Equity 54,200.00 Assets = Liab. + Owner's Equity Accts. Prepaid = Accts. J. Arrow, Cash + Rec. + Supplies + Rent + Equip. = Payable + Capital + Rev. - Exp. 16,200 + 2,000 + 1,000 + 20,000 + 15,000 = 4,000 + 39,000 +14,000 - 2,800 ---------------------------+--------------------------- ---------------------+------------------ $54,200 $54,200 ARROW ACCOUNTING SERVICES BALANCE SHEET December 31, 20X5 Liabilities Accounts Payable 4,000.00 44

  45. Increase in Capital 10,200.00 John Arrow, Capital, Dec. 31, 20X5 50,200.00 ARROW ACCOUNTING SERVICES INCOME STATEMENT Month Ended December 31, 20X5 Revenue Fees Income 14,000.00 Expenses Salaries Expense 2,500.00 Utilities Expense 300.00 Total Expenses 2,800.00 Net Income 11,200.00 ARROW ACCOUNTING SERVICES STATEMENT OF OWNER’S EQUITY Month Ended December 31, 20X5 John Arrow, Capital, Dec. 1, 20X5 40,000.00 Less Withdrawals for December 1,000.00 Net Income for December 11,200.00 45

  46. ARROW ACCOUNTING SERVICES STATEMENT OF OWNER’S EQUITY Month Ended December 31, 20X5 John Arrow, Capital, December 1, 20X5 40,000.00 Net Income for December 11,200.00 Less Withdrawals for December 1,000.00 Increase in Capital 10,200.00 John Arrow, Capital, December 31, 20X5 50,200.00 ARROW ACCOUNTING SERVICES BALANCE SHEET December 31, 20X5 Assets Liabilities Cash 16,200.00 Accounts Payable 4,000.00 Accounts Receivable 2,000.00 Supplies 1,000.00 Prepaid Rent 20,000.00 Owner’s Equity Equipment 15,000.00 Total Assets 54,200.00 Total Liab. & O.E. 54,200.00 John Arrow, Capital 50,200.00 46

  47. OBJECTIVE 7 • Calculate simple return • on investment. 47

  48. CALCULATE SIMPLE RETURN ON INVESTMENT Money in Savings Account would earn 3.75% annual interest. For the month, the bank would have paid $125 interest on $40,000. (Interest (I) = Principle (p) x Interest Rate (r) x Time (t) OR $40,000 x 0.0375 x1/12) From the operation of Arrow Employment Services, John’s money has earned $11,200 in one month. His return on investment is 24.8% Net income / Average Investment = $11,200 / (40,000 + 50,200) / 2 48

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