ACCOUNTING BASISLecture 4

Accounting for business transactions

Assets

Liabilities &

Equity

ACCOUNTING EQUATION

LiabilitiesLiabilities EquityEquityAssetsAssets = +

TRANSACTION ANALYSIS EQUATION

The accounting equation MUST remain in balance after each transaction.

LiabilitiesLiabilities EquityEquityAssetsAssets = +

What is a business transaction?

A business transaction is any economic event that affects to financial position of the business and can

be measured reliably.

External Transactions occur between the

organization and an outside party.

Internal Transactions occur within the

organization.

TRANSACTIONS AND EVENTS

Exchanges of economic consideration between two parties.

Assets LiabilitiesOwners’Equity

-Owner’s withdrawal

-Expenses+Revenue

= +

The Accounting EquationA = L + OE

Different procedure for accounting equation

• A=L+O.E • L= A- O.E• O.E= A- L•Expenses are always less from owner’s equity•Revenues are always add to owner’s equity

Transaction analysis

On December 1, Chuck Taylor forms an athletic shoe consulting business. He sets it up as a Co.ltd..

TRANSACTION ANALYSIS – 1

Taylor personally invests $30,000 cash in the new company, the cash in a bank account opened under the name of FastForward, Inc.

Chuck Taylor invests $30,000 in the company .1

The accounts involved are:

-Cash /Asset/

-Owner’s Equity

Chuck Taylor invests $30,000 in the company .

Assets = Liabilities + O/Equity

Cash Supplies EquipmentAccounts Payable

Notes Payable O/Equity

(1) 30,000$ 30,000$

30,000$ -$ -$ -$ -$ 30,000$

30,000$ = 30,000$

1

FastForward purchases $2,500 of supplies for cash.2

The accounts involved are:

- Supplies / Asset/

- Cash / Asset/

FastForward purchases $2,500 of supplies for cash.

Assets = Liabilities + Equity

Cash Supplies EquipmentAccounts Payable

Notes Payable Equity

(1) 30,000$ 30,000$ (2) (2,500) 2,500

27,500$ 2,500$ -$ -$ -$ 30,000$

30,000$ = 30,000$

2

FastForward purchases $26,000 equipment for testing athletic shoes.3

The accounts involved are:

- Equipment / Asset/

- Cash / Asset/

FastForward purchases $26,000 equipment for testing athletic shoes.

Assets = Liabilities + Equity

Cash Supplies EquipmentAccounts Payable

Notes Payable Equity

(1) 30,000$ 30,000$ (2) (2,500) 2,500(3) (26,000) 26,000

1,500$ 2,500$ 26,000$ -$ -$ 30,000$

30,000$ = 30,000$

3

FastForward purchased $7,100 of supplies on credit.4

The accounts involved are:

- Supplies / Asset/

- Account payable / Liabilities/

FastForward purchased $7,100 of supplies on credit.

Assets = Liabilities + Equity

Cash Supplies EquipmentAccounts Payable

Notes Payable Equity

(1) 30,000$ 30,000$ (2) (2,500) 2,500(3) (26,000) 26,000(4) 7,100 7,100

1,500$ 9,600$ 26,000$ 7,100$ -$ 30,000$

37,100$ = 37,100$

4

FastForward provides consulting services to an athletic club and collects $4,200 in cash.

5The accounts involved are:

- Cash / Asset/

- Service revenue / Owner’s equity/

FastForward provides consulting services to an athletic club and collects $4,200 in cash.

Assets = Liabilities + Equity

Cash Supplies EquipmentAccounts Payable

Notes Payable Equity

(1) 30,000$ 30,000$ (2) (2,500) 2,500(3) (26,000) 26,000(4) 7,100 7,100(5) 4,200 4,200

5,700$ 9,600$ 26,000$ 7,100$ -$ 34,200$

41,300$ = 41,300$

5

FastForward pays $1,000 rent of the building where its store is located.6

The accounts involved are:

- Rent expense / Owner’s Equity/

- Cash / Asset/

FastForward pays $1,000 rent of the building where its store is located.

Assets = Liabilities + Equity

Cash Supplies EquipmentAccounts Payable

Notes Payable Equity

(1) 30,000$ 30,000$ (2) (2,500) 2,500(3) (26,000) 26,000(4) 7,100 7,100(5) 4,200 4,200(6) (1,000) (1,000)

4,700$ 9,600$ 26,000$ 7,100$ -$ 33,200$

40,300$ = 40,300$

6

FastForward pays the biweekly $700 salary of the company’s only employee.

7The accounts involved are:

- Salary expense / Owner’s Equity/

- Cash / Asset/

FastForward pays the biweekly $700 salary of the company’s only employee.

Assets = Liabilities + Equity

Cash Supplies EquipmentAccounts Payable

Notes Payable Equity

(1) 30,000$ 30,000$ (2) (2,500) 2,500(3) (26,000) 26,000(4) 7,100 7,100(5) 4,200 4,200(6) (1,000) (1,000)(7) (700) (700)

4,000$ 9,600$ 26,000$ 7,100$ -$ 32,500$

39,600$ = 39,600$

7

FastForward provides consulting services of $1,600 on account.8

The accounts involved are:

- Accounts receivable / Asset/

- Service revenue / Owner’s equity/

FastForward provides consulting services of $1,600 on account .

Assets = Liabilities + Equity

CashAccounts

Rec Supplies EquipmentAccounts Payable

Notes Payable Equity

(1) 30,000$ 30,000$ (2) (2,500) 2,500(3) (26,000) 26,000(4) 7,100 7,100(5) 4,200 4,200(6) (1,000) (1,000)(7) (700) (700)(8) 1,600 1,600

4,000$ 1,600$ 9,600$ 26,000$ 7,100$ -$ 34,100$

41,200$ = 41,200$

8

The client in transaction 8 pays $1,600 to FastForward.9

The accounts involved are:

- Cash / Asset /

- Accounts receivable / Asset /

The client in transaction 8 pays $1,900 to FastForward.

Assets = Liabilities + Equity

CashAccounts

Rec Supplies EquipmentAccounts Payable

Notes Payable Equity

(1) 30,000$ 30,000$ (2) (2,500) 2,500(3) (26,000) 26,000(4) 7,100 7,100(5) 4,200 4,200(6) (1,000) (1,000)(7) (700) (700)(8) 1,600 1,600(9) 1,600 (1,600)

5,600$ $0 9,600$ 26,000$ 7,100$ -$ 34,100$

41,200$ = 41,200$

9

FastForward pays $900 to CalTech Supply as partial payment for its earlier $7,100 purchase of supplies.

10The accounts involved are:

- Accounts payable / Liabilities /

- Cash / Asset /

FastForward pays $900 to CalTech Supply as partial payment for its earlier $7,100 purchase of supplies.

Assets = Liabilities + Equity

CashAccounts

Rec Supplies EquipmentAccounts Payable

Notes Payable Equity

(1) 30,000$ 30,000$ (2) (2,500) 2,500(3) (26,000) 26,000(4) 7,100 7,100(5) 4,200 4,200(6) (1,000) (1,000)(7) (700) (700)(8) 1,600 1,600(9) 1,600 (1,600)(10) (900) (900)

4,700$ $0 9,600$ 26,000$ 6,200$ -$ 34,100$

40,300$ = 40,300$

10

Owner withdrawal $600 cash for personal needs.1

1The accounts involved are:

- Owner’s withdrawal /Owner’s equity/

- Cash / Asset /

Owner withdrawal $600 cash for personal needs.

Assets = Liabilities + Equity

CashAccounts

Rec Supplies EquipmentAccounts Payable

Notes Payable Equity

(1) 30,000$ 30,000$ (2) (2,500) 2,500(3) (26,000) 26,000(4) 7,100 7,100(5) 4,200 4,200(6) (1,000) (1,000)(7) (700) (700)(8) 1,600 1,600(9) 1,600 (1,600)(10) (900) (900)(11) (600) (600)

4,100$ $0 9,600$ 26,000$ 6,200$ -$ 33,500$

39,700$ = 39,700$

11

ACCOUNTING TRANSACTIONSOn march 1, 2011, David opened his business . During the march , the business engaged in the following transactions.-David invested $20,000 of personal cash to start the business.- The business purchased equipment for $8000.- The business purchased Goods costing $12,000 on account.- The business sold goods costing $6000 for $8500 .- The business purchased supplies for $800.- The business paid for rent $600.- The business paid for salary $900.- The business sold goods costing $4000 for $5300 on account.- The business withdrew $500 for personal use.