chapter 3--analyzing changes in financial position
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CHAPTER 3--ANALYZING CHANGES IN FINANCIAL POSITION
Business Transaction:Any financial event that
causes a change in the financial position of a businessExample
Withdraw cashPurchased asset
Originate from source documents
Source Document:Business paper that is the
original record of a transaction; provides proof of transaction
Includes all information needed to record the transaction
Examples of Source Documents:
Receipts
Invoices
Bills
Cheques
Objectivity PrincipleGAAP states all accounting
transactions will be recorded based on facts and not personal opinion
Source documents provide proof/fact of transaction
METROPOLITAN MOVERS –TRANSACTION ANALYSIS:
Using the balance sheet on p. 61 fill in the Equation Analysis Sheet for the BEGINNING BALANCES
ASSETS LIABILITIES O.E. Cash Accounts
ReceivableEquipme
ntTrucks Account
s Payable
Laon Payabl
e
J. Hofner, Capital
B. Cava K. Lincoln Central Supply
Mercury Finance
Beg. Balances
Trans. 1 Trans. 2 Trans. 3 Trans. 4 Trans. 5 Trans. 6 Trans. 7New Balances
ASSETS LIABILITIES O.E. Cash Accounts
ReceivableEquipme
ntTrucks Account
s Payable
Laon Payabl
e
J. Hofner, Capital
B. Cava K. Lincoln
Central Supply
Mercury Finance
Beg. Balances
13 500
1 300 2 500 11 500 24 500 1 750 18 370 33 180
Trans. 1 Trans. 2 Trans. 3 Trans. 4 Trans. 5 Trans. 6 Trans. 7New Balances
Transaction 1Metropolitan Movers pays $1
200 cash to Mercury Finance.
Cash decreases $1 200Accounts Payable- Mercury
Finance decreases $1 200
ASSETS LIABILITIES O.E. Cash Accounts
ReceivableEquipmen
tTrucks Account
s Payable
Laon Payabl
e
J. Hofner, Capital
B. Cava K. Lincoln
Central Supply
Mercury Finance
Beg. Balances
13 500
1 300 2 500 11 500 24 500 1 750 18 370 33 180
Trans. 1 -1 200 -1 200 Trans. 2 Trans. 3 Trans. 4 Trans. 5 Trans. 6 Trans. 7New Balances
Transaction 2K. Lincoln, who owes Metropolitan
Movers $2 500, pays $1 100 in partial payment of the debt.
Cash increases $1 100Accounts Receivable – K. Lincoln
decreases $1 100
ASSETS LIABILITIES O.E. Cash Accounts
ReceivableEquipmen
tTrucks Account
s Payable
Laon Payabl
e
J. Hofner, Capital
B. Cava K. Lincoln
Central Supply
Mercury Finance
Beg. Balances
13 500
1 300 2 500 11 500 24 500 1 750 18 370 33 180
Trans. 1 -1 200 -1 200 Trans. 2 +1
100 -1 100
Trans. 3 Trans. 4 Trans. 5 Trans. 6 Trans. 7New Balances
Transaction 3 Equipment costing $1 950 is
purchased for cash.
Cash decreases $1 950Equipment increases $1 950
ASSETS LIABILITIES O.E. Cash Accounts
ReceivableEquipmen
tTrucks Account
s Payable
Laon Payabl
e
J. Hofner, Capital
B. Cava K. Lincoln
Central Supply
Mercury Finance
Beg. Balances
13 500
1 300 2 500 11 500 24 500 1 750 18 370 33 180
Trans. 1 -1 200 -1 200 Trans. 2 +1
100 -1 100
Trans. 3 -1 950 +1 950 Trans. 4 Trans. 5 Trans. 6 Trans. 7New Balances
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 000Truck increases $18 000Mercury Finance increases $8 000
ASSETS LIABILITIES O.E. Cash Accounts
ReceivableEquipme
ntTrucks Accounts
PayableLaon
PayableJ.
Hofner, Capital
B. Cava K. Lincoln
Central Supply
Mercury Finance
Beg. Balances
13 500 1 300 2 500 11 500 24 500 1 750 18 370 33 180
Trans. 1 -1 200 -1 200 Trans. 2 +1 100 -1
100
Trans. 3 -1 950 +1 950 Trans. 4 -10 000 +18
000 +8
000
Trans. 5 Trans. 6 Trans. 7New Balances
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
ASSETS LIABILITIES O.E. Cash Accounts
ReceivableEquipme
ntTrucks Accounts
PayableLaon
PayableJ.
Hofner, Capital
B. Cava K. Lincoln
Central Supply
Mercury Finance
Beg. Balances
13 500 1 300 2 500 11 500 24 500 1 750 18 370 33 180
Trans. 1 -1 200 -1 200 Trans. 2 +1 100 -1
100
Trans. 3 -1 950 +1 950 Trans. 4 -10 000 +18
000 +8
000
Trans. 5 +1 500
+1 500
Trans. 6 Trans. 7New Balances
Transaction 6 J. Hofner, the owner, withdraws $500 for
personal use.
Cash decreases $500 J. Hofner, Capital decreases $500
ASSETS LIABILITIES O.E. Cash Accounts
ReceivableEquipme
ntTrucks Accounts
PayableLaon
PayableJ.
Hofner, Capital
B. Cava K. Lincoln
Central Supply
Mercury Finance
Beg. Balances
13 500 1 300 2 500 11 500 24 500 1 750 18 370 33 180
Trans. 1 -1 200 -1 200 Trans. 2 +1 100 -1
100
Trans. 3 -1 950 +1 950 Trans. 4 -10 000 +18
000 +8
000
Trans. 5 +1 500
+1 500
Trans. 6 -500 -500 Trans. 7New Balances
Transaction 7 Truck requires engine repair. J. Hofner
pays $75 cash when the truck is picked up.
Cash decreases $75J. Hofner, Capital decreases
$75
ASSETS LIABILITIES O.E. Cash Accounts
ReceivableEquipme
ntTrucks Accounts
PayableLaon
PayableJ.
Hofner, Capital
B. Cava K. Lincoln
Central Supply
Mercury Finance
Beg. Balances
13 500 1 300 2 500 11 500 24 500 1 750 18 370 33 180
Trans. 1 -1 200 -1 200 Trans. 2 +1 100 -1
100
Trans. 3 -1 950 +1 950 Trans. 4 -10 000 +18
000 +8
000
Trans. 5 +1 500
+1 500
Trans. 6 -500 -500 Trans. 7 -75 -75New Balances
New Balance
Calculate the new balances of each column.
ASSETS LIABILITIES O.E. Cash Accounts
ReceivableEquipme
ntTrucks Accounts
PayableLaon
PayableJ.
Hofner, Capital
B. Cava K. Lincoln
Central Supply
Mercury Finance
Beg. Balances
13 500 1 300 2 500 11 500 24 500 1 750 18 370 33 180
Trans. 1 -1 200 -1 200 Trans. 2 +1 100 -1
100
Trans. 3 -1 950 +1 950 Trans. 4 -10 000 +18
000 +8
000
Trans. 5 +1 500
+1 500
Trans. 6 -500 -500 Trans. 7 -75 -75New Balances
875 2 800 1 400
13 450 42 500 1 750 25 170 34 105
Do the total Assets = Total Liabilities + Owner’s Equity?
Total Assets= Total Liabilities + Owner’s Equity
61 025 = 26 920 + 34 105
61 025
Summary of Steps in Analyzing a transaction:1. Identify all items (A,L,OE) that must be
changed & make necessary changes (increase or decrease)
2. Make sure at least 2 accounts are affected (ie. A & A, A & L, A & OE)
3. Accounting Equation must balance after each transaction
*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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