Textbook Notes (363,559)
Canada (158,426)
Management (802)
MGT120H5 (65)
Kathy Falk (10)
Chapter 2


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University of Toronto Mississauga
Kathy Falk

Transaction Analysis Chapter 2 Transaction: A transaction is any event that has financial Impact on the business: • Can be measured • Provide objective information • Must be able to assign $ amount to transaction The Account The account summarizes the changes that occur in the Accounting equation: Assets = Liabilities and Shareholders’ Equity The Accounting Equation: Assets (what the company owns) = Liabilities (what the company owes) + Equity (what the company owes to the owners) Assets are economic resources that benefit the business now and in the future Including: - Short term: Cash, Accounts receivable, Inventory, Notes receivable, prepaid expenses, - Long term: Land Buildings, Equipment, furniture, and fixtures Liabilities are the debts of the company Including: - Short term: Notes payable, Accounts payable Accrued liabilities (for expenses incurred but not paid) - Long term: (bonds and mortgages) Shareholders’ equity represents the claims to the assets of the company. Including: - Contributed capital – common shares - Retained earnings – accumulation of net income minus net losses and dividends Accounting Cycle: 1. Transaction occurs 2. Analyze the transaction 3. Record in a journal 4. Transfer to general ledger 5. Trial Balance Accounting for Business Transactions A transaction is an event that both affects the financial position of the business entity and can be reliably recorded. Accounting for Business Transactions Example The Falks incorporated their business on May 1, 2010: 1) Invested $70,000 to begin a consulting business, Falk Consulting Inc. and issued common shares. 2) Purchased land for their business, paying $50,000 in cash. 3) Bought stationery and other supplies, agreeing to pay $750 to the supplier within 30 days. 4) Earned service revenue of $6,750 and collected this amount in cash. 5) Performed services for customers on account for $4,200. 6) Paid $3,400 for the following cash expenses: office rent $1,500, employee salary $1,400 and utilities $500. 7) Collected $1,250 from a customer on account. 8) Declared and paid a dividend of $2,500 to the shareholders. 9) Paid $500 to the store from which it purchased $750 worth of supplies in transaction #3. Falk Consulting Inc. - Income Statement For the Month Ended May 31, 2010 Revenue: Service revenue $10950 Expenses: Rent expense $1500 Salary expense 1400 Utilities expense 500 Total expenses 3400 Net income 7550 Falk Consulting Inc. - Statement of Retained Earnings For the Month Ended May 31, 2010 Retained earnings, May 1, 2010 $0 Add: Net income for the month 7550 7550 Less: Dividends (2500) Retained earnings, May 31, 2010 $5,050 Falk Consulting Inc. - Balance Sheet--------May 31, 2010 Asset Liabilities Cash $21600 A/P $250 A/R 2950 Shareholder’s Equity Office 750 Common shares $70000 Supplies Land 50000 Retain Earning 5050 Total shareholder’s equity $70500 Total Assets 75300 Total liabilities and shareholder’s 75300 equity Double-Entry Accounting: Double-entry bookkeeping uses debits and credits to record the dual effects of each business transaction. Assets = Liabilities + Shareholders’ Equity The T-Account Account Title Debit Credit (Left side) (Right side) Increases and Decreases in the Accounts Account Asset= Liabilities + Equity Equation Rules of D and Debit Credit Debit Cred
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