Accounting in action

Effects of Transactions in
the accounting equation
The Accounting Equation (Expanded)
Assets = Liabilities + Capital-Drawings+Revenues-Expenses)

Business transactions that affect the

accounting equation
 Basic accounting equation
LO9

• The basic accounting equation provides the

underlying framework for recording and
summarising the economic events of an entity
OWNER’S
ASSETS = LIABILITIES +
EQUITY

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Basic accounting equation continued
• Assets
– Resources owned by a business
– Used in carrying out such activities as production,
consumption and exchange
• Liabilities
– Claims against assets
– Consist of existing debts and obligations

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Basic accounting equation continued
• Owner’s equity
– Represents the ownership claim to total assets
OWNER’S
ASSETS – LIABILITIES =
EQUITY

– Owner’s equity is increased by investments by the

owner and by revenue
– Owner’s equity is decreased by drawings and
expenses
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 USING THE BUILDING BLOCKS
LO10
• A transaction
– is a record of an economic event of an entity
– may be internal or external
– affects two or more components of the basic
accounting equation
• Transaction analysis is the process of
identifying the specific effects of transactions
and events on the accounting equation

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Transaction identification process

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 Transaction analysis
Example
• Loc Nguyen decides to open a computer
programming service which he names
Softbyte
(1) On 1 September, he invests $15 000 cash in the
business
Assets = Liabilities + Owner’s Equity
L. Nguyen,
Cash = Capital
(1) +$15 000 = +$15 000 Investment

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 Transaction analysis continued
(2) Softbyte purchases computer equipment for
$7000 cash
Assets = Liabilities + Owner’s Equity
L. Nguyen,
Cash + Equipment = Capital
Old balance $15 000 $15 000
(2) -7 000 +$7 000
New balance $ 8 000 + $7 000 = $15 000
$15 000 $15 000

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 Transaction analysis continued
(3) Softbyte purchases $1600 supplies on credit
from Acme Supply Company
Assets = Liabilities + Owner’s Equity
Accounts L. Nguyen,
Cash + Supplies + Equipment = Payable + Capital
Old bal. $8 000 $7 000 $15 000
(3) +$1 600 +$1 600
New bal. $8 000 + $1 600 + $7 000 = $1 600 + $15 000
$16 600 $16 600

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 Transaction analysis continued
(4) Softbyte receives $1200 cash from customers for
services provided
Assets = Liabilities + Owner’s Equity
Accounts L. Nguyen,
Cash + Supplies + Equipment = Payable + Capital
Old bal. $8 000 $1 600 $7 000 $1 600 $15 000
(4) +1 200 +1 200 Service Revenue
New bal. $9 200 + $1 600 + $7 000 = $1 600 + $16 200
$17 800 $17 800

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 Transaction analysis continued
(5) Softbyte receives a bill for $250 for advertising
and decides to pay later
Assets = Liabilities + Owner’s Equity
Accounts L. Nguyen,
Cash + Supplies + Equipment = Payable + Capital
Old bal. $9 200 $1 600 $7 000 $1 600 $16 200
(5) + 250 - 250 Advertising Exp
New bal. $9 200 + $1 600 + $7 000 = $1 850 + $15 950
$17 800 $17 800

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 Transaction analysis continued
(6) Softbyte provides $3500 of services for
customers of which $1500 is for cash and the
rest is on account
Assets = Liabilities + Owner’s Equity
Accounts Accounts L. Nguyen,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old bal. $ 9 200 $1 600 $7 000 $1 850 $15 950
(6) +1 500 +2 000 +3 500 Service Rev
New bal. $10 700 + $2 000 + $1 600 + $7 000 = $1 850 + $19 450
$21 300 $21 300

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 Transaction analysis continued
(7) Paid cash for monthly expenses: Store rent $600,
Salaries $900, Utilities $200
Assets = Liabilities + Owner’s Equity
Accounts Accounts L. Nguyen,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old bal. $10 700 $2 000 $1 600 $7 000 $1 850 $19 450
(7) -1 700 - 600 Rent Exp
- 900 Salaries Exp
- 200 Utilities Exp
New bal. $ 9 000 + $2 000 + $1 600 + $7 000 = $1 850 + $17 750
$19 600 $19 600

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 Transaction analysis continued
(8) Softbyte pays its $250 advertising bill in cash This
was previously recorded as an Accounts Payable in
(5)
Assets = Liabilities + Owner’s Equity
Accounts Accounts L. Nguyen,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old bal. $ 9 000 $2 000 $1 600 $7 000 $1 850 $17 750
(8) - 250 - 250
New bal. $ 8 750 + $2 000 + $1 600 + $7 000 = $1 600 + $17 750
$19 350 $19 350

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 Transaction analysis continued
(9) Softbyte receives $600 in cash from customers
who had been billed for services in (6)
Assets = Liabilities + Owner’s Equity
Accounts Accounts L. Nguyen,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old bal. $ 8 750 $2 000 $1 600 $7 000 $1 600 $17 750
(8) + 600 - 600
New bal. $ 9 350 + $1 400 + $1 600 + $7 000 = $1 600 + $17 750
$19 350 $19 350

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 Transaction analysis continued
(10) Loc Nguyen withdraws $1300 cash from
Softbyte for his personal use
Assets = Liabilities + Owner’s Equity
Accounts Accounts L. Nguyen,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old bal. $ 9 350 $2 000 $1 600 $7 000 $1 600 $17 750
(9) -1 300 -1 300 Drawings
New bal. $ 8 050 + $1 400 + $1 600 + $7 000 = $1 600 + $16 450
$18 050 $18 050

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 FINANCIAL STATEMENTS
LO11

• Four financial statements are prepared from

the summarised accounting data
• Each statement provides management,
owners and other interested parties with
relevant financial information
• Each set of financial statements is
accompanied by explanatory notes and
supporting schedules that are an integral part
of the statements
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FINANCIAL STATEMENTS continued
1. Statement of comprehensive income
– Presents income and expenses
– Reports profit (or loss) for a specific period of time
2. Statement of changes in equity
– Summarises the changes in owner’s equity for a
specific period of time

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FINANCIAL STATEMENTS continued
3. Statement of financial position
– Reports the assets, liabilities and owners equity at
a specific date
4. Statement of cash flows
– Summarises information about the cash inflows
(receipts) and cash outflows (payments) for a
specific period of time

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 Income Statement
SOFTBYTE
Income Statement
for the month ended 30 September 2010

Income
Service revenues $ 4 700
Expenses
Salaries expense $900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1 950
Profit $ 2 750
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Statement of Changes in Equity

SOFTBYTE
Statement of Changes in Equity
for the month ended 30 September 2010

L. Nguyen, Capital 1/09/09 $ 0

Add: Investments $15 000
Net profit 2 750 17 750
Less: Drawings 1 300
L. Nguyen, Capital 30/09/10 $16 450

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Statement of Financial Position
SOFTBYTE
Statement of Financial Position
as at 30 September 2010
Assets
Cash $ 8 050
Accounts receivable 1 400
Supplies 1 600
Equipment 7 000
Total assets $18 050
Liabilities and owner’s equity
Liabilities
Accounts payable $ 1 600
Owner’s Equity
L. Nguyen, Capital 16 450
Total liabilities and
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presentation equity
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 Statement of Cash Flows
SOFTBYTE
Statement of Cash Flows
for the month ended 30 September 2010
Cash flows from operating activities
Cash receipts from customers $ 3 300
Cash payments for expenses (1 950)
Net cash provided by operating activities $ 1 350
Cash flows from investing activities
Purchase of equipment (7 000)
Cash flows from financing activities
Investments by owner 15 000
Drawings by owner (1 300) 13 700
Net increase in cash 8 050
Cash at beginning of period 0
Cash at end of period
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 Interrelationship
of financial statements
• Profit must be computed first, so the income
statement is prepared first
• The statement of changes in financial position
depends on results of income statement and
statement of changes in equity
• The ending cash figure in the statement of
cash flows is reported in the statement of
financial position

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Interrelationships for Softbyte
• Profit of $2750 shown on income statement is
added to the beginning balance of owner’s
capital in statement of changes in equity
• Ending owner’s capital of $16 450 is reported
on the statement of financial position
• Ending cash of $8050 on the statement of
cash flows matches cash figure on the
statement of financial position

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Interrelationships for Softbyte

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 Assets = Liabilities + Capital
Assets = Liabilities + Capital(-Drawings+Revenues-Expenses)

Transaction ASSETS =LIABILITIES +CAPITAL Account

Investment of the Investment

owner(cash, goods)
Withdrawal of the Withdrawal
owner(cash or /Drawings
goods)
Borrowed money by
issuing a Promissory
Note
Payment of the Interest
principal and Expense
interest of the
promissory Note
 Assets = Liabilities + Capital
Assets = Liabilities + Capital(-Drawings+Revenues- Expenses)

Transaction ASSETS =LIABILITIES +CAPITAL Account

Purchase of short-
term investment in
cash(trading
Securities)
Sale of short-term Gain on sale
investment in cash at in trading
securities
a gain(trading securities)
Sale of short-term Loss on sale in
investment in cash at trading
securities
a loss
Cash advance to an
employee
 Assets = Liabilities + Capital
Assets = Liabilities + Capital(-Drawings+Revenues-Expenses)
Transaction ASSETS =LIABILITIES +CAPITAL Account

Purchase of
supplies for cash
Purchase of
supplies on
account
Purchase of fixed
asset for cash
Purchase of fixed
asset on account
Partial/full
payment of
accounts payable
 Assets = Liabilities + Capital
Assets = Liabilities + Capital(-Drawings+Revenues- Expenses)
Transaction ASSETS =LIABILITIES +CAPITAL Account

Sale of fixed asset Gain on sale of

at a gain fixed asset

Sale of fixed asset Loss on sale of

at a loss fixed asset

Rendered services Service

for cash Income/Revenue

Rendered services Service

on account Income/Revenue

Partial/full
collection accounts
receivable
 Assets = Liabilities + Capital
Assets = Liabilities + Capital(-Drawings+Revenues- Expenses)

Transaction ASSETS =LIABILITIES +CAPITAL Account

Received cash for Commission

commission Income, rent
income,
income, rent dividend
income, dividend income
income
Payment of Expenses, e.g.,
expenses in cash salaries, rent,
utilities,
transportation,
entertainment,
advertising, gas
and oil,
commission, etc
Accounting in action

end