Class Notes (1,100,000)
CA (650,000)
McMaster (50,000)
COMMERCE (2,000)
Lecture 2

COMMERCE 1AA3 Lecture Notes - Lecture 2: Net Income, Income Statement, Railways Act 1921


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Firat Sayin
Lecture
2

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Chapter 2: Business Transactions
The Account
Account
A record of each assets, liabilities of owners’ equity
o Basic summary device of accounting
Assets
Cash
o Money and other medium of exchange
Accounts Receivable
o Promise for future collection of cash
o More informal
o Usually from selling goods
Notes Receivable
o Signed by customer promising to pay
o More binding and has interest
o Usually from lending out money
Inventory
o Products sold to customers
Prepaid Expenses
o Expenses paid in advance
o Asset because they provide a future benefit
Land, Buildings, Equipment, Furniture & Fixtures
o Listed under property, plant, equipment
Liabilities
Accounts Payable
o Promise to pay in future
Notes Payable
o Signed by company promising to pay
Accrued Liabilities
o Liability for an expense you haven’t paid yet
o E.g. Interest and salary payable
Stockholders’ Equity
Common Stock
o Owners investment in the company
Retained Earnings
o Cumulative net income/loss
Dividends
o Optional distribution to owners
Revenues
o Increase in equity from providing goods
Expenses
o Cost of operating a business

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Transactions
Transaction
An event that affects financial position
o Can be reliably recorded
Accounting for Business Transactions
Transaction 1
Students invest $50,000 in a company
o ↑ Cash (Asset)
Company issues Common Shares
o ↑ Common Stock (Equity)
$50,000 Assets = $50,000 Equity
Transaction 2
Company pays $40,000 cash for land
o ↓ Cash (Asset)
o ↑ Land (Asset)
$50,000 Assets = $50,000 Equity
Transaction 3
Company buys supplies for $3,700 on account
o ↑ Supplies (Asset)
o ↑ Accounts Payable (Liability)
$53,700 Assets = $3,700 Liabilities + $50,000
Equity
Transaction 4
Company earns $7,000 sales revenue in cash
o ↑ Cash (Asset)
o ↑ Revenue (Equity)
$60,700 Assets = $3,700 Liabilities + $57,000
Equity
Transaction 5
Company earns $3,000 service revenue on
account
o ↑ Accounts Receivable (Asset)
o ↑ Revenue
$63,700 Assets = $3,700 Liabilities + $60,000
Equity
Transaction 6
Company pays $,1,000 rent, $1,200 salary,
$400 utilities
o ↓ Cash (Asset) – $2,700
o ↑ Expense (↓ Equity) $2,700
$61,000 Assets = $3,700 Liabilities + $57,300
Equity
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Transaction 7
Company pays $1,900 on account for
supplies from transaction 3
o ↓ Cash (Asset)
o ↓ Accounts Payable (Liability)
$59,100 Assets = $1,800 Liabilities + $57,300
Equity
Transaction 8
Owner pays $30,000 to remodel his home
o Transaction of personal entity
o Not a transaction for business entity
Transaction 9
Business collects $1,000 on account from
transaction 5
o ↑ Cash (Asset)
o ↓ Accounts Receivable (Asset)
$59,100 Assets = $1,800 Liabilities + $57,300
Equity
Transaction 10
Company sells land from transaction 2 for
$22,000 cash
o ↑ Cash (Asset)
o ↓ Land (Asset)
$59,100 Assets = $1,800 Liabilities + $57,300
Transaction 11
Company pays $2,100 dividends from cash
o ↓ Cash (Asset)
o ↑ Dividends (↓ Equity)
$57,000 Assets = $1,800 Liabilities + $55,200
Summary of Transactions
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