2
Analyzing Business
Transactions
Section 1: Property and Financial Interest
Section Objectives
JT’s Consulting
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.
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Steps to analyze the effect of a
business transaction.
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Objective 1 Record in equation form the financial
effects of a business transaction
Business Transaction
Analysis:
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The owner invested cash into the business.
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The company buys equipment for $10,000 cash.
Property = Financial Interest
$90,000 = $90,000
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The company buys $12,000 of equipment
on account.
Property = Financial Interest
$102,000 = $102,000
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The firm purchases supplies for $3,000 cash.
Property = Financial Interest
New
balances $77,000 + $3,000 + $22,000 = $12,000 + $90,000
$102,000 = $102,000
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The firm makes a payment of $5,000 on account.
New
balances $72,000 + $3,000 + $22,000 = $7,000 + $90,000
$97,000 = $97,000
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The firm makes a payment of $7,000 rent
in advance.
Property = Financial Interest
New
balances $65,000 + $3,000 + $7,000 + $22,000 = $7,000 + $90,000
$97,000 = $97,000
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Objective 2 Define, identify, and understand the relationship
between asset, liability, and owner’s equity accounts
QUESTION:
ANSWER:
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JT’s Consulting Services
Balance Sheet
November 30, 2010
Assets Liabilities
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Liabilities +
Financial
Owner’s
Assets
Property Interest
Equity
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Chapter
2
Analyzing Business Transactions
The fundamental
accounting equation
is the relationship
between assets and
liabilities plus owner’s
equity.
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The Fundamental Accounting Equation
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:
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Objective 3
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QUESTION:
What is revenue?
ANSWER:
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QUESTION:
What is an expense?
ANSWER:
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The firm receives $26,000 in cash for services
provided to clients.
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The company performs services on account
for $9,000.
Assets = Liab. + Owner's Equity
(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
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Collection of $4,000 from customers
on account.
(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
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The firm pays $7,000 in salaries expense
for the month.
(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
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The firm pays $500 for utilities
expenses.
Assets = Liab. + Owner's Equity
(u) Paid
cash -500
(v) Decreased
owner’s equity -500
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The firm records a withdrawal by the owner
of $4,000.
Assets = Liab. + Owner’s Equity
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
$120,500 = $120,500
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Objective 4 Prepare An Income Statement
QUESTION:
ANSWER:
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The income statement has The third line shows that the report covers
a three-line heading. operations over a period of time.
Revenue
Fees Income $35,000.00
Expenses
Salaries Expense $7,000.00
Utilities Expense 500.00
Total Expenses 7,500.00
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The income statement reports revenue.
Revenue
Fees Income $35,000.00
Expenses
Salaries Expense 7,000.00
Utilities Expense 500.00
Total Expenses 7,500.00
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The income statement also reports expenses.
Revenue
Fees Income $35,000.00
Expenses
Salaries Expense 7,000.00
Utilities Expense 500.00
Total Expenses 7,500.00
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The result is net income or net loss for the period.
Revenue
Fees Income $35,000.00
Expenses
Salaries Expense 7,000.00
Utilities Expense 500.00
Total Expenses 7,500.00
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Objective 5 Prepare a Statement of Owner’s
Equity and Balance Sheet
A Statement of Owner’s Equity
JT’s Consulting Services
Statement of Owner’s Equity
Month Ended December 31, 2010
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The Balance Sheet
JT’s Consulting Services
Balance Sheet
December 31, 2010
Assets Liabilities
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.
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The Importance of Financial
Statements
Business managers and
owners use the balance
sheet and the income
statement to control current
operations and plan for the
future.
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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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
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Thank You
for using
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