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Analyzing Transactions
By Laurie L. Swanson
PrinciplesofAccountingHelpLesson #2
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Use this presentation to help you
learn how to analyzebusiness transactions.
Analyzing Transactions
Cash DR
CR
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Foundation
The prerequisite for this tutorial is a thorough understanding of account types.
See Help Lesson #1 Understanding Accounts
Asset Liability ExpenseRevenueOwnersEquity
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Business Transaction
A business transactionis any event that affects the financial condition of a company and can be reliably measured in a dollar amount.
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Source DocumentsMost business transactions are evidenced by source documents. Examples of source documents include invoices, bills, checks, and bank deposit slips.
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10 Reams Paper $30.00
1 Box Envelopes 17.50
Tax 3.90
Total Due $51.40
Office MixInvoice
Sold To:Jones Consulting
pd. by ck. #103
When you are working an accounting problem, the information about a transaction found in the source document has already been interpreted and is presented to you in written form.
For instance, the transaction supported by this purchase invoice might read:
Purchased office supplies for cash, $51.40.
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For this tutorial, we will use the transactions of Jones Career Consulting. This is a consulting services business owned and operated by Karen Jones.
The Business
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Double-Entry AccountingIn financial accounting, we use a systemknown as double-entry accounting. Thismeans that each transaction will affect atleast two different accounts.
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Analyzing a TransactionWhen analyzing transactions, it is helpful to answer the following three questions:
1. What accounts are involved in the transaction?2. What is the classification of each account?3. What is happening to each accountis it
increasing or decreasing?
The following slides will help clarify these questions.
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Analyzing a Transaction
Most transactions contain clues that help you identify the accounts involved in the transaction.
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Analyzing a Transaction
The first transaction for Jones Career Consulting occurred on May 1 and was as follows:
Karen Jones invested $7,500 cash in her new business.
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Analyzing a Transaction
Recall that most transactions contain clues that help you identify the accounts involved in the transaction.
Further recall that each transaction will involve at least two different accounts.
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Karen Jones $7,500 in her new business.
invested cash
Analyzing a Transaction
In the first transaction for Jones Career Consulting, two words should stand out.
invested cash
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Analyzing a TransactionKaren Jones invested $7,500 cash in her new business.
When you see the word invested in a transaction description, it points to an investment in the owners capital account. Recall from Lesson 1 that the account name for capital is the owners name followed by the word Capital. In this case, the account would be Karen Jones, Capital.
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Analyzing a TransactionKaren Jones invested $7,500 cash in her new business.
When you see the word cash in a transaction description, it indicates the Cash account.
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Chart of AccountsRecall from Lesson 1 that accountants refer to the Chart of Accounts when in doubt about the account title to use.
Chart of AccountsAssetsCashAccounts ReceivableOffice SuppliesOffice EquipmentBuilding
LiabilitiesAccounts PayableMortgage Payable
Owners EquityKaren Jones, CapitalKaren Jones, Drawing
RevenueConsulting Income
ExpensesRent ExpenseUtilities ExpenseWages ExpenseInterest Expense
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Analyzing a TransactionOnce the accounts involved in a transactionhave been determined, the next step is toidentify the classification of each account.
Accounts fall into one of only fiveclassifications. The five types of accountspreviously defined for you are
Asset Liability ExpenseRevenueOwnersEquity
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Analyzing a Transaction
In the first transaction for Jones Career Consulting, two accounts were identified:
Karen Jones, Capital
Cash
and
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Analyzing a TransactionWhen classifying these accounts, Cash falls intothe category of Asset and Karen Jones, Capitalfalls into the category of Owners Equity.
Chart of AccountsAssetsCashAccounts ReceivableOffice SuppliesOffice EquipmentBuilding
LiabilitiesAccounts PayableMortgage Payable
Owners EquityKaren Jones, CapitalKaren Jones, Drawing
RevenueConsulting Income
ExpensesRent ExpenseUtilities ExpenseWages ExpenseInterest Expense
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Effect on the AccountThe next step is to determine what ishappening to each account in thetransaction or what is the effect on thetransaction.An account may either be
increasing or decreasing.
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Karen Jones invested $7,500 cash in her new business.
Review the First Transaction
The two accounts involved in thistransaction are Karen Jones, Capital andCash .
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What Happens to the Capital Account?
When an owner invests an asset in the company, the owners equity will increase. In this transaction, Karen Jones, Capital is increasing.
Karen Jones, Capital
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What Happens to the Cash Account?
When a business receives cash from any source, the Cash account will increase.
Cash
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Stumbling BlockIt is important that you understand that you must analyze each account separately when answering the questions what classification and what effect.
In any given transaction, there may be two accounts increasing, two accounts decreasing, or one increasing and one decreasing.
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The next transaction for Jones Career Consulting occurred on May 3 and was as follows:
The business purchased $300 in supplies on account.
Another Transaction
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Analyzing a Transaction
Recall that the first step in analyzing a transaction is to determine the accountsinvolved. In this transaction the two clues that stand out are
The business purchased $300 in supplies from Office Mix on account.on account
supplies
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Analyzing a Transaction
The word supplies in this transaction description indicates the use of the supplies account.
If we refer to the Chart of Accounts for Jones Consulting Services, we find that this company specifically calls this account Office Supplies.
The business purchased $300 in supplies from Office Mix on account.
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Analyzing a Transaction
The words on account in a transaction description indicate that a transaction occurred without payment. Payment will be made at a later date.
The business purchased $300 in suppliesfrom Office Mix on account.
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More About On Account
Remember on account means that payment will be made at a later date.
A company may either make purchases onaccount or provide goods or services on account.
When a purchase is made on account, the company owes an amount to a creditor. The account used to keep up with amounts owed by a company is Accounts Payable.
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More About On Account
When a service or product is provided on account, the company will receive payment from a customer at a later date. The account used to keep up with amounts owed to a company is Accounts Receivable.
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Analyzing a Transaction
In this transaction, Jones Career Consulting has made a purchase on account and will pay for the supplies at a later date. Therefore, Accounts Payable is the account that is indicated in this transaction.
The business purchased $300 in suppliesfrom Office Mix on account.
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Analyzing a TransactionRecall that the second step in analyzing ina transaction is to identify theclassification of each account.
Review the five account classifications.
Asset Liability ExpenseRevenueOwnersEquity
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Analyzing a TransactionWhen classifying the accounts in the currenttransaction, Office Supplies falls into thecategory of Asset and Accounts Payable is aLiability.
Chart of AccountsAssetsCashAccounts ReceivableOffice SuppliesOffice EquipmentBuilding
LiabilitiesAccounts PayableMortgage Payable
Owners EquityKaren Jones, CapitalKaren Jones, Drawing
RevenueConsulting Income
ExpensesRent ExpenseUtilities ExpenseWages ExpenseInterest Expense
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Effect on the AccountThe next step is to determine what ishappening to each account in thetransaction or what is the effect on thetransaction.An account may either be
increasing or decreasing.
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The business purchased $300 in supplies on account.
Review the Second Transaction
The two accounts involved in thistransaction are Office Supplies andAccounts Payable .
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What Happens to the Office Supplies Account?
When additional supplies are purchased, the amount of the Office Supplies account increases.
Office Supplies
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What Happens to Accounts Payable?
Accounts Payable is used to keep up with amounts owed by a company. When a business receives goods or services but does not pay for them, the amount the company owes increases.
Accounts Payable
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Transaction Analysis Sheet
It is helpful to use a Transaction Analysis Sheet in this process. A Transaction Analysis Sheet is simply a grid with headings tohelp you remember the questions involved in analyzing transactions and to provide you space to answer thosequestions for each transaction.
What Accounts? What Classification? What Effect?
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Transaction Analysis Sheet
Use the Transaction Analysis Sheet to analyze the following transactions.
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Transaction Analysis Sheet
What Accounts? What Classification? What Effect?1.
1. Jones Career Consulting provided servicesfor a customer receiving a cash payment of $500.
Cash
Consulting Income Increasing
Asset Increasing
Revenue
Remember that each account is analyzed separately.
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Transaction Analysis Sheet
What Accounts? What Classification? What Effect?1.
2.
2. Jones Career Consulting pays the utilitiesbill of $175.
Cash
Consulting Income Increasing
Asset Increasing
Revenue
Utilities ExpenseCash Asset Decreasing
IncreasingExpense
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Next StepWe have now added to the foundation we are building for analyzing business transactions. The next step is to learn about Debits and Credits.
Choose Help Lesson #3 Debits and Credits
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Keep PracticingYou now have a firm foundation built for analyzing business transactions. It takes time and practice to learn how to effectively analyze transactions, but if you keep at it, you will be very accomplished at this in no time!
Analyzing TransactionsAnalyzing TransactionsFoundationBusiness TransactionSource DocumentsSlide Number 6The BusinessDouble-Entry AccountingAnalyzing a TransactionAnalyzing a TransactionSlide Number 11Analyzing a TransactionAnalyzing a TransactionAnalyzing a TransactionAnalyzing a TransactionChart of AccountsAnalyzing a TransactionAnalyzing a TransactionAnalyzing a TransactionEffect on the AccountReview the First TransactionWhat Happens to the Capital Account?What Happens to the Cash Account?Stumbling BlockAnother TransactionAnalyzing a TransactionAnalyzing a TransactionAnalyzing a TransactionMore About On AccountMore About On AccountAnalyzing a TransactionAnalyzing a TransactionAnalyzing a TransactionEffect on the AccountReview the Second TransactionWhat Happens to the Office Supplies Account?What Happens to Accounts Payable?Transaction Analysis SheetTransaction Analysis SheetTransaction Analysis SheetTransaction Analysis SheetNext StepKeep Practicing