Chapter 2 - Transaction Analysis
• Business activity is all about transactions.
• A transaction is any event that has a financial impact on a business and can be measured.
• Not everything is a transaction..like an ad..it's not a transaction until someone actually buys a product.
• Transactions provide objective information about the financial impacts on a company. Every transaction has two sides: giving
something and receiving something. We always record both sides of this transaction. Must be able to assign a dollar amount
to a transaction to record it in the books.
The Account - the record of all the changes in a particular asset, liability or shareholder's equity.
Assets - diff asset accounts
• Cash and cash equivalents - means money and any medium exchange including bank account balances, paper currency,
coins, GIC's and cheques.
• Accounts receivable - selling goods or services and receives a promise for future cash collection.
• Notes receivables - usually specify an interest rate. It is like an AR, but it's more promising since the customer signs the note.
And the company will receive the note, holding it until you pay.
• Inventory - the products the company sells to customers. Can also be called merchandise inventory and merchandise.
• Prepaid expenses - an asset because the payment provides a future benefit for the business. Like prepaid rent, prepaid
insurance, and office supplies. This is when you pay expenses in advance.
• Land - the land you're using to operate
• Equipment, furniture and fixtures - businesses have seperate asset accounts for each type of equipment, for example, office
equipment, manufacturing equipment, and store equipment. The furniture and fixtures account includes these assets, which
are similar to equipment.
Liabilities - diff liabilities accounts. Liability is a debt.
• Accounts payable - the company needs to pay the debt from purchasing inventory on credit.
• Notes payable - it includes the amounts that the company must pay because the company is the one that signs the promissory
notes that require future payments. Also carries interest.
• Accrued liabilities - is a liability for an expense you haven't paid. Interest payable and salary payable are accrued liability
accounts for most companies. Income taxes payable is another liability.
Shareholder's Equity - the owner's claims to the assets of a corporation. A corporation uses contributed capital, retained earnings and
dividends accounts to record changes in the company's shareholders' equity. In a proprietorship, there is a single capital account. In a
partnership, there is two for each owner's capital balance.
• Contributed capital - shows the owner's investment in the corporation. Common shares or share capital are typical contributed
capital account titles. ON PAGE 63 and 64. When you invest, you are issuing shares. THIS AFFECTS YOUR CASH AMOUNT
ALSO. WHEN YOU INVEST IN YOUR BUSINESS (PAGE65) THE MONEY GOES INTO COMMON SHARES ACCOUNT AND
CASH ACCOUNT TO MAKE LEFT AND RIGHT SIDE EQUAL. • Retained earnings - shows the cumulative net income earned by the corporation over its lifetime, MINUS ITS CUMULATIVE
NET LOSSES AND DIVIDENDS. ON PAGE 66, if you look at it from A=L+OE..service revenue would be under the heading of
retained earnings. Because revenue increases retained earnings.
• Dividends - this is a decrease in retained earnings. Cause you use up the retained earnings in order to pay dividends. This is
optional and it is decided by the board of directors. Is a contra (negative) account. So the money that goes into these accounts
are in the debit side. THIS IS ON PAGE 87.
• Revenues - the money you make from your business.
• Expenses - decreases shareholder's equity. Opposite of revenues. Decreases due to the costs of operating the business. A