basic accounting transactions copyright © 2004 by gaylen bunker all right reserved this material...
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Basic AccountingTransactions
Copyright © 2004 by Gaylen BunkerAll right reserved
This material may not be reproducedwithout permission of Gaylen Bunker
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BusinessAllstars.com 2
Finding investors who are willing to invest in the company increases cash and creates an investor’s claim on the assets. Investors expect the company to be successful and pay a return on their investment.
Widget Company
This is an “ASSET SOURCE”.
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BusinessAllstars.com 3
The company orders products to sell (inventory) by issuing a purchase order (IOU to Vendors)
Vendors are the ones who sell wholesale to us.
Widget Company
This is an “ASSET SOURCE”.
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BusinessAllstars.com 4
Paying workers for the work they perform is an expense to the business. This reduces cash and
reduces the investor’s claim on the assets.
Widget Company
This is an “ASSET USE”.
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BusinessAllstars.com 5
The company receive bills or INVOICES for the use of a building and must pay rent.
Widget Company
This is an “ASSET USE”.
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BusinessAllstars.com 6
Widget Company
This is an “ASSET EXCHANGE”.
When the company purchases equipment it can issue an IOU or pay directly, as in this case.
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BusinessAllstars.com 7
When products are sold customers, they may sign an IOU instead of paying cash. As a result of this, four things happen: (1) The IOU
becomes a company asset, (2) Revenue is earned, (3) Inventory is reduced, and (4) Cost of the goods sold are subtracted from revenue.
Widget Company
This is an “ASSET SOURCE”.
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BusinessAllstars.com 8
Thirty days after the inventory was received, the company pays cash to the wholesaler to cancel their IOU. The
wholesalers usually send an INVOICE or bill for payment.
Widget Company
This is an “ASSET EXCHANGE”.
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BusinessAllstars.com 9
The machine has significant wear and tear after much use, reducing its value to the company. This needs to be reflected through depreciation
expense subtracted from revenue for the period.
Widget Company
This is an “ASSET USE”.
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BusinessAllstars.com 10
Several days after the sale, the customers pay on their account and the company cancels their IOU.
Widget Company
This is an “ASSET EXCHANGE”.
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BusinessAllstars.com 11
At the end of the year the company figures out how much profit it made. It uses a conservative depreciation expense to show the
investors a good Net Income for the year.
Widget Company
The government allows companies to report a more aggressive depreciation expense on the income tax return, reducing the taxes it actually pays.
E.B.I.T. stands for Earnings Before Interest and Taxes
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BusinessAllstars.com 12
As a result of operating the business, a profit is made and a portion of the profit is paid to the investors as a DIVIDEND.
Widget Company
This is an “ASSET USE”.