Analyzing Businesshorowitk/documents/Chapter02_001.pdf · 2-3 Meet JT’s Consulting Services....
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Transcript of Analyzing Businesshorowitk/documents/Chapter02_001.pdf · 2-3 Meet JT’s Consulting Services....
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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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Property = Financial Interest
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.
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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
Property = Financial Interest
- 10,000
$10,000
The company buys equipment for $10,000 cash.
$90,000 = $90,000
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Accounts
= Payable
(e) Purchased equipment
(f) Incurred debt
New balances $80,000 + $22,000 = $12,000 + $90,000
Property = Financial Interest
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.
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Accounts
= Payable
(g) Purchased
supplies
(h) Paid cash
New
balances $77,000 + $3,000 + $22,000 = $12,000 + $90,000
Property = Financial Interest
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.
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Accounts
= Payable
(i) Paid cash
New
balances $72,000 + $3,000 + $22,000 = $7,000 + $90,000
Property = Financial Interest
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
Property = Financial Interest
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.
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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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Assets = Liab. + Owner's Equity
Accts. Prepaid Accts. J. Taylor,
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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Assets = Liab. + Owner's Equity
Accts. Prepaid Accts. J. Taylor,
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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Assets = Liab. + Owner's Equity
Accts. Prepaid Accts. J. Taylor,
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
Accts. Prepaid Accts. J. Taylor,
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:
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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
JT’s Consulting Services
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
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
JT’s Consulting Services
Income Statement
Month Ended December 31, 2010
The income statement reports revenue.
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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
JT’s Consulting Services
Income Statement
Month Ended December 31, 2010
The income statement also reports expenses.
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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
JT’s Consulting Services
Income Statement
Month Ended December 31, 2010
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
Jason Taylor, Capital, December 31, 2010
$27,500.00
4,000.00
$90,000.00
23,500.00
$113,500.00
JT’s Consulting Services
Statement of Owner’s Equity
Month Ended December 31, 2010
A Statement of Owner’s Equity
Prepare a Statement of Owner’s
Equity and Balance SheetObjective 5
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Assets
Cash 83,500.00
Accounts Receivable 5,000.00
Supplies 3,000.00
Prepaid Rent 7,000.00
Equipment 22,000.00
Total Assets 120,500.00
Liabilities
Accounts Payable 7,000.00
Owner’s Equity
Jason Taylor, Capital 113,500.00
Total Liabilities and Owner’s Equity 120,500.00
JT’s Consulting Services
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:
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JT’s Consulting Services
Statement of Owner’s Equity
Month Ended December 31, 2010
Jason Taylor, Capital, December 1, 2010
Net Income for December
Less Withdrawals for December
Increase in Capital
Jason Taylor, Capital, December 31, 2010
22,400.00
3,000.00
80,000.00
19,400.00
113,500.00
JT’s Consulting Services
Balance Sheet
December 31, 2010
Assets
Cash $83,500.00
Accounts Receivable 5,000.00
Supplies 3,000.00
Prepaid Rent 7,000.00
Equipment 22,000.00
Total Assets $ 120,500.00
Liabilities
Accounts Payable $7,000.00
Owner’s Equity
Jason Taylor, Capital 113,500.00
Total Liabilities and Owner’s Equity $ 120,500.00
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Thank Youfor using
College Accounting, 12th Edition
Price • Haddock • Farina
