3 4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements Principles of Accounting, Volume 1: Financial Accounting

The balance sheet would experience an increase in assets and an increase in liabilities. As we can see by this entry, more than two accounts may be used in an entry. Note that the total amount of debits must still equal the total amount of credits.

This demonstrates double-entry accounting, which keeps the accounting equation in balance. Recall that in
this transaction Treehouse agreed to purchase audiology equipment
and pay for it later. To reference the flow chart, this transaction
therefore starts on the bottom left corner of the chart at “Receive
a Good – Received.” Has transaction analysis accounting it made a payment for that good? As a second example of accounting transaction analysis, suppose a business is started with a capital injection of 30,000 cash by the owner. Accounting transaction analysis is the process involved of the first step in the accounting cycle which is to identify and analyze bookkeeping transactions.

Step 2 of 3

On the cash basis it will be several weeks before
we know those expenses had been incurred and that Treehouse had
earned $2,500 in revenue. But on the accrual basis, Treehouse would
recognize both those expenses and the expected revenue immediately
after delivering the program. In the above example, suppose the cash payment for the rent was the amount of 4,000, using the six step process we have the following analysis of the transaction.

Assets and equity are just two of the six classifications of accounts, the other four being liability, withdrawal, revenue, and expense. Read them all from our article classification of accounts. Bold City Consulting pays $1,500 of cash dividends to Brian Miller, the stockholder. During the month, Bold City Consulting paid $2,300 cash for expenses incurred, such as salaries (1,350 dollars), building rent (750 dollars), and utilities (200 dollars). Step 1 Bold City Consulting paid $150 of the $250 it owed to a supplier. The accounts involved in the transaction are Accounts Payable and Cash.

Cash Flow Statement

To
keep costs down, she decided she would continue to tutor while
running the program. She also decided that the organization’s most
pressing need, particularly with new tutors on board, was
transportation. After shopping around, she decided to purchase a
minivan for $35,000.

• The final step involved in transaction analysis is to apply the rules of debit and credit on accounts.
• Examples of assets include cash, accounts receivable, inventory, property, equipment, and investments.
• When a government pays salaries it has less cash and, in
  turn, less current financial resources to apply elsewhere.
• Identify which accounts the transaction if going to affect.
• The other account involved is John’s capital account, which would be credited.

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Accounting Transaction Analysis

For Level 2 and
Level 3 assets, the owner must discount the reported asset value to
account for uncertainty in that valuation. Some transactions affect only the asset side of
the equation. For instance, imagine if Treehouse had purchased the
audiology equipment with cash rather than on credit. This system is popular because it’s fast, easy to
present, and appeals to our desire for symmetry.

When a government pays salaries it has less cash and, in
turn, less current financial resources to apply elsewhere. So
practically speaking, expenditures and expenses are not that
different. For this reason, when thinking about the fund
financial statements, we need to re-think how we recognize certain
revenues.

Remember that the accounting equation must remain balanced, and
assets need to equal liabilities plus equity. On the asset side of
the equation, we show an increase of $20,000. On the liabilities
and equity side of the equation, there is also an increase of
$20,000, keeping the equation balanced. Changes to assets,
specifically cash, will increase assets on the balance sheet and
increase cash on the statement of cash flows.

With this simple framework we can do the
accounting recognition for most of the basic types of transactions
a typical public organization will encounter. We’ll cover those
more nuanced accounting rules in the lectures on non-profit
financial management and government financial management. Under governmental accounting rules, the money
Rochester expects to spend on OPEB benefits over the next 30 years
must be recognized as a long-term liability. Those rules follow
from the idea that employees earn OPEB benefits as part of their
salary. Once earned, those benefits become a long-term liability
that appears on the City’s balance sheet.

Introduction to Transaction Analysis: The Basic Accounting Equation

Investments the organization
intends to hold less than a year that have a clear market price and
can be easily liquidated are known as marketable
securities. Investments the organization intends to hold
longer than one year, or that are less liquid, are known simply as
investments. You’ll see investments classified as both a current and non-current
asset. This transaction will have a big impact on
Treehouse’s balance sheet. It will draw down its cash, and it will
bring in a large capital item that will stay with on the balance
sheet for several years. Treehouse’s stakeholders should know about
this transaction sooner than later.