COLLEGE%20ACCOUNTING

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College Accounting First Canadian
Edition Price Haddock Brock Hahn
Reed
McGraw-Hill Ryerson
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CHAPTER 2
ANALYZING BUSINESS TRANSACTIONS
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OBJECTIVE 1 Define, identify, and understand
the relationship between asset, liability,
and owners equity accounts.
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• PROPERTY ASSETS
• Examples
• Cash
• Supplies
• Prepaid Rent
• Equipment

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FINANCIAL INTEREST LIABILITIES OWNERS
EQUITY

• LIABILITIES
• Example - Accounts Payable
• OWNERS EQUITY
• Example - John Arrow, Capital

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STARTING A BUSINESS
ARROW EMPLOYMENT SERVICES John Arrow , CGA -
Owner Virginia Richey - Office Manager
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OBJECTIVE 2 State the accounting equation
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TRANSACTION 1Owner Made Investment in Company
John Arrow invested 40,000 of his savings into
the business.

• The business now has 40,000 of property in the
  form of cash, which has been deposited in the
  bank.
• Arrow has a 40,000 financial interest in the
  business this is called equity or capital.

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TRANSACTION 1

Property Financial Interest

Cash J. Arrow, Capital

(a) Invested cash 40,000
(b) Increased equity
40,000
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TRANSACTION 2Prepaid Rent

• The firm prepaid the rent for the next eight
  months in the amount of 20,000.

• Rent is paid for the next eight months.

• The firm decreased its cash balance by 20,000.

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Property Financial Interest
Cash Prepaid
Rent J. Arrow, Capital

Previous balances 40,000
40,000
TRANSACTION 2
(c) Rented facilities 20,000
(d) Paid cash - 20,000
New balances 20,000 20,000
40,000
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TRANSACTION 3Purchased Equipment for Cash
Arrow purchased equipment for 10,000 in cash.

• The firm purchased new property --equipment for
  10,000.

• The firm paid out 10,000 in cash.

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Property
Financial

Interest
Prepaid
J. Arrow,
Cash Rent Equipment
Capital Previous balances
20,000 20,000
40,000
TRANSACTION 3
(e) Purch. equip.
10,000
(f) Paid cash -10,000
New balances 10,000 20,000
10,000 40,000
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TRANSACTION 4Purchased Equipment on Credit
Arrow purchased equipment for 5,000 on account.

• The firm purchased new property on account from
  Organ, Inc., in the form of equipment that cost
  5,000.

• The firm owed 5,000 to Organ, Inc.

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Property
Financial Interest
Prepaid
Accts. J. Arrow,
Cash Rent Equip.
Pay. Capital Previous
balances 10,000 20,000
10,000 40,000
TRANSACTION 4
(g) Purch. equip.
5,000
(h) Incurred debt
5,000
New balances 10,000 20,000 15,000
5,000 40,000
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TRANSACTION 5Purchased Supplies
Arrow purchased supplies for cash.

• The firm purchased supplies that cost 1,000.

• The firm paid 1,000 in cash.

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TRANSACTION 5

Property
Financial Interest

Ppd. J.
Arrow, Cash
Supplies Rent Equip. A/P
Capital Previous balances 10,000
20,000 15,000 5,000
40,000
(i) Purch. supplies 1,000
(j) Paid cash -1,000
New balances 9,000 1,000 20,000
15,000 5,000 40,000
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TRANSACTION 6Paying a Creditor
Arrow paid Organ 1,000 on account.

• The Firm paid 1,000 in cash.

• The claim of Organ, Inc., against the firm
  decreased by 1,000.

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TRANSACTION 6

Property
Financial Interest

Ppd. J.
Arrow, Cash
Supplies Rent Equip. A/P
Capital Previous balances 9,000
1,000 20,000 15,000 5,000
40,000
(k) Paid cash - 1,000
(j) Decreased debt
-1,000
New balances 8,000 1,000 20,000
15,000 4,000 40,000
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THE FUNDAMENTAL ACCOUNTING EQUATION

Property
Financial Interest Assets
Liab. Owners


Equity
Ppd.
J. Arrow, Cash
Supplies Rent Equip. A/P
Capital
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ARROW ACCOUNTING SERVICES Balance Sheet November
30, 20X5
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OBJECTIVE 3 Analyze the effects of business
transactions on a firms assets, liabilities,
and owners equity and record these effects in
accounting equation form.
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FUNDAMENTAL ACCOUNTING EQUATION

ASSETS LIABILITIES OWNERS EQUITY
44,000 4,000
40,000
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STUDENT ACTIVITY
ASSETS LIABILITIES
O\E
1. ?
6,000 50,000
(SOLUTION 56,000)
2. 60,000
? 52,000
(SOLUTION 8,000)
3. 50,000
4,000 ?
(SOLUTION 46,000)
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• REVENUE
• Sometimes called income.
• Produced from the inflow of money or other assets
  that result from the sale of goods or services.
• Added to the column headings under the Owners
  Equity section.
• Temporary O/E account.
• Closed out to O/E at the end of the accounting
  period.

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TRANSACTION 7Selling Services for Cash
Arrow earned 10,500 in revenue from cash clients.

• The firm received 10,500 in cash for services
  provided to clients.

• The owners equity increased by 10,500 because
  of this inflow of assets from revenue.
  (Revenue, such as fees earned, always increases
  the owners equity)

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TRANSACTION 7

Assets
Liab. Owners Equity

Prepaid
Accounts J. Arrow
Cash Supplies Rent
Equip. Payable Capital Revenue
Previous bal. 8,000 1,000
20,000 15,000 4,000
40,000
---------------------------------------
---------------- ------------------------
------------

(m) Rec. cash 10,500
(n) Owner's equity incr. by revenue
10,500
New balances 18,500 1,000
20,000 15,000 4,000 40,000
10,500
54,500
54,500
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TRANSACTION 8Selling Services on Credit
Arrow earned 3,500 in fees from clients who
charged the amount to their accounts.

• The firm provided services to clients, charging
  their accounts in the amount of 3,500.

• The owners equity increased by 3,500 because of
  this inflow of assets from revenue.
• Revenue, such as fees earned, always increases
  the owners equity.
• The company did not receive cash since the
  transaction was on account accounts receivable
  was increased.

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Assets
Liab. Owner's
Equity
Accts. Prepaid
Arrow, Cash
Rec. Supplies Rent Equip.
A/P Capital Rev.
Pre. bal. 18,500 1,000
20,000 15,000 4,000 40,000
10,500
_______ ______ _____ ______
_______ _____ _______
______
-------------------------------------------------
-------------- ---------------------------
----------

TRANSACTION 8
(o) Rec. new asset 3,500
(p) O/E incr. by
revenue


3,500
New bal. 18,500 3500 1,000
20,000 15,000 4,000 40,000
14,000
58,000
58,000
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TRANSACTION 9Collected Receivable
Arrow received 1,500 in payments from charge
clients.

• The firm received 1,500 in cash.

• Accounts receivable decreased by 1,500.

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Assets
Liab. Owner's Equity
Accts.
Prepaid
Arrow,
Cash Rec. Supplies Rent
Equip. A/P Capital
Rev. Pre. bal. 18,500
3,500 1,000 20,000 15,000
4,000 40,000 14,000
_______ ______ ______
______ ______ ______ _______
______
-------------------------------------------------
---------------- -----------------------
------------

TRANSACTION 9
q) Rec. cash. 1,500
(r) A/R
decr.
-1,500
New bal. 20,000 2,000 1,000
20,000 15,000 4,000 40,000
14,000
58,000
58,000
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• EXPENSES

• Involve the various costs of doing business.

• Examples
• labour (salaries expense)
• utilities (telephone bill)

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TRANSACTION 10Employees Salaries
Arrow paid salaries for the month.

• Cash was reduced by payment of 2,500 to cover
  the salaries.

• Owner's equity decreased by the 2,500 expense.

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Assets
Liab. Owner's Equity
Accts.
Prepaid
Arrow, Cash
Rec. Supplies Rent Equip.
A/P Capital Rev. - Exp. Pre.
bal. 20,000 2,000 1,000
20,000 15,000 4,000 40,000
14,000 ______ ______
______ ______ ______ ______
_______ ______ _____
-----------------------------------------
------------------- ------------------------
--------------------

TRANSACTION 10
(s) Paid cash -2,500
(t) O/E decr. by
sal. exp.


-2,500
New bal. 17,500 2,000 1,000
20,000 15,000 4,000 40,000
14,000 -2,500
55,500
55,500
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TRANSACTION 11Utilities Expense
Arrow paid utilities for the month.

• Cash was reduced by payment of 300 for
  utilities.

• Owner's equity decreased by the 300 expense.

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Assets
Liab. Owner's Equity
Accts.
Prepaid
Arrow, Cash
Rec. Supplies Rent Equip.
A/P Capital Rev. - Exp.
Pre. bal. 17,500 2,000
1,000 20,000 15,000 4,000
40,000 14,000 -2,500
______ _____ ______
______ ______ ______ _______
______ _____
-------------------------------------------------
----------- --------------------------------
------------

TRANSACTION 11
(u) Paid cash - 300
(v) O/E decr. by
util. exp.


-300
New bal. 17,200 2,000 1,000
20,000 15,000 4,000 40,000
14,000 -2,800
55,200
55,200
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OBJECTIVE 4 Prepare an income statement.
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• THE INCOME STATEMENT
• Reports the results of business operations.
• Date of income statement represents a specific
  period of time such as a month, a quarter, or a
  year.
• Shows the income and expenses for the period.

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ARROW ACCOUNTING SERVICES INCOME STATEMENT Month
Ended December 31, 20X5

Revenue Fees Income 14,000.00
Expenses Salaries Expense 2,500.00
Utilities Expense 300.00 Total
Expenses 2,800.00
Net Income 11,200.00
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Assets
Liab.
Owner's Equity Accts.
Prepaid
Accts. J. Arrow, Cash Rec.
Supplies Rent Equip. Payable
Capital Rev. - Exp.


16,200 2,000 1,000 20,000
15,000 4,000 39,000 14,000
- 2,800 -------------------------------
----------------------- -------------------
--------------------
54,200
54,200
ARROW ACCOUNTING SERVICES
Income Statement
Month Ended December 31,
20X5
Revenue Fees Income 14,000.00
Expenses Salaries Expense 2,500.00
Utilities Expense 300.00
Total Expenses 2,800.00
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OBJECTIVE 5 Prepare a statement of owners
equity.
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ARROW ACCOUNTING SERVICES STATEMENT OF OWNERS
EQUITY Month Ended December 31, 20X5 John
Arrow, Capital, December 1, 20X5 Net Income
for December Less Withdrawals for December
Increase in Capital John Arrow, Capital,
December 31, 20X5
11,200.00 1,000.00
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OBJECTIVE 6 Prepare a balance sheet.
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Assets
Liab.
Owner's Equity Accts.
Prepaid
Accts. J. Arrow, Cash Rec.
Supplies Rent Equip. Payable
Capital Rev. - Exp.


16,200 2,000 1,000 20,000
15,000 4,000 39,000 14,000 - 2,800
----------------------------------------
-------------- ---------------------------
------------
54,200
54,200
ARROW ACCOUNTING SERVICES
BALANCE SHEET
December 31,
20X5
Liabilities Accounts Payable 4,000.00
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ARROW ACCOUNTING
SERVICES INCOME STATEMENT Month Ended December
31, 20X5
Revenue Fees Income 14,000.00 Expenses
Salaries Expense 2,500.00 Utilities
Expense 300.00 Total Expenses
2,800.00 Net Income 11,200.00
ARROW ACCOUNTING SERVICES STATEMENT OF OWNERS
EQUITY Month Ended December 31, 20X5
John Arrow, Capital, Dec. 1, 20X5
40,000.00 Less Withdrawals for December
1,000.00
Net Income for December 11,200.00
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ARROW ACCOUNTING SERVICES STATEMENT OF OWNERS
EQUITY Month Ended December 31, 20X5 John
Arrow, Capital, December 1, 20X5 40,000.00 Net
Income for December 11,200.00 Less
Withdrawals for December
1,000.00 Increase in Capital 10,200.00 John
Arrow, Capital, December 31, 20X5 50,200.00
ARROW ACCOUNTING SERVICES BALANCE SHEET December
31, 20X5 Assets
Liabilities Cash 16,200.00 Accounts
Payable 4,000.00 Accounts
Receivable 2,000.00 Supplies
1,000.00 Prepaid Rent 20,000.00 Owners
Equity Equipment 15,000.00 Total
Assets 54,200.00 Total Liab. O.E.
54,200.00
John Arrow, Capital 50,200.00
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OBJECTIVE 7 Calculate simple return on
investment.
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CALCULATE SIMPLE RETURN ON INVESTMENT

Money in Savings Account would earn 3.75 annual
interest. For the month, the bank would have paid
125 interest on 40,000. (Interest (I)
Principle (p) x Interest Rate (r) x Time (t) OR
40,000 x 0.0375 x1/12) From the operation of
Arrow Employment Services, Johns money has
earned 11,200 in one month. His return on
investment is 24.8 Net income / Average
Investment 11,200 / (40,000 50,200) / 2


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