Post on 12-Jan-2016
Analyzing Changes in
Financial Position
Bad news guys…
• Balance sheets…
…become wrong almost as soon as they are made.
Business Transactions
• Anything that causes the financial position of the business to change is called a business transaction.
• When Stephen goes to buy a bottle of coke and a bag of chips from the gas station, what happens?
Business Transactions
• If a company buys a car worth $25,000, what happens?
• If we owe $8000 to the city for taxes, and we pay $1000 off tomorrow, what happens?
• If we bring in a company to inspect the building and they recommend replacing the windows, changing the light bulbs, and getting new doors, is this a transaction?
Source Documents
• ANY time an asset, a liability, or equity item is recorded for accounting purposes, we need some sort of proof/evidence that we did not just make up the number. This is called a source document.
• This is an original record of the transaction, and it gives the information needed for the accounting clerk to process properly.
• Cell phone bills, internet bills, electricity bills, copies of cheques, store receipts, credit card slips, cash register summaries.
• These all have to be filed. They may need to be looked at later by owners, managers, or auditors.
Source Documents
• What you need to know for now is the following:
• 1. Accounting entries are made from business papers known as source documents.
• 2. Source documents are kept on file for reference purposes and are proof of transactions.
Ready for another Accounting Standard?
• The Objectivity principle.
• Basically, accounting needs to be recorded using clear, verifiable evidence.
• If 15 different people look at the same evidence…they should all arrive at the same piece of evidence.
• Transactions should be recorded on fact, not opinion.
Objectivity Principle
• Receipts from the source are the absolute best source of information.
• There is no room for false interpretation.
Let’s go over some things.
• 1. What is a business transaction?
• 2. What are some examples of transactions?
• 3. Give an example of an event in a business that is not a transaction?
• 4. What is a source document?
• 5. What happens to source documents after the accounting entries have been completed?
• 6. What is the objectivity principle?
Equation Analysis Sheets
• So…how do transactions impact balance sheets?
• Let’s look at one from September 29th.
Equation Analysis Sheets
• We need a new way of recording changesto the balance sheet.
• We will be usingEquation AnalysisSheets.
Equation Analysis Sheets
Equation Analysis Sheets
• What if Metropolitan Movers makes a payment on its loan?
Equation Analysis Sheets
• What if one of the Accounts Receivable pays some of their debts to Metropolitan Movers?
Equation Analysis Sheets
• What if Metropolitan Movers purchases $1950 worth of equipment?
Equation Analysis Sheets
• Metro Movers buys a truck for $18,000. They pay $10,000 of it in cash, and get an $8000 loan for the rest.
Equation Analysis Sheets
• Metro Movers performs a service for B. Cava worth $1500. They send a bill to him saying he owes that much.
Equation Analysis Sheets
• Two ways to look at the increase in capital.
• 1. Metro Movers is a service business. When they do the move for B. Cava, he legally owes $1500. This is a gain for Metro Movers. Therefore, the Owner’s Equity (capital) is increased (J. Hofner).
• 2. The owner gets to claim whatever is left after liabilities are paid. Assets went up, liabilities did not, so the Owner’s capital goes up.
Homework: