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: