BA Lesson #7 - Analyzing Business Transactions

Welcome to our seventh lesson! From the definition of accounting, to its history, to the generally accepted accounting principles, and lastly to the elements of financial statements, we think that you are well-equipped to jump on this seventh lesson as we discuss Analyzing Business Transactions.

Analyzing business transactions is the number one step for you to grasp the concept of debit and credit or the so-called double-entry system. This is very crucial so take time reading this.

The only thing that you need to do in analyzing business transactions is to identify the elements affected by the transaction. You must identify which accounts increase and which accounts decrease. Let’s look on the following transaction:

a.    NVESTMENT OF CASH

Increase in Cash

Increase in Owner’s Capital

b.    PURCHASE OF EQUIPMENT ON CASH

Increase in Equipment

Decrease in Cash

c.    PURCHASE OF MACHINE ON ACCOUNT

Since you did not use your cash to pay for the machine, it arises to a liability. So the effect would have to be:

Increase in Equipment

Increase in Accounts Payable

d.    RENDERED SERVICES AND RECEIVED CASH PAYMENT

Increase in Cash

Increase in Service Revenue

e.    RENDERED SERVICES ON ACCOUNT

Increase in Account Receivable

Increase in Service Revenue

f.     PAYMENT OF ACCOUNTS RECEIVABLE ON ACCOUNT

Increase in Cash

Decrease in Account Receivable

g.    SETTLEMENT OF ACCOUNTS PAYABLE

Decrease in Account Payable

Decrease in cash

h.    PURCHASE OF OFFICE SUPPLIES ON CASH

Increase in Office Supplies

Decrease in Cash

i.      USE OF OFFICE SUPPLIES

Increase in Office Supplies Expense

Decrease in Office Supplies

j.      WITHDRAWAL OF CASH FOR PERSONAL USE

               Increase Owner’s Drawing

               Decrease Cash

k.    PAID CASH FOR EMPLOYEES SALARIES

Increase Wages Expense

Decrease Cash

            Make sure that before you jump from transaction to another, you have understood it very well. The purpose of this lesson is not for you to memorize the effects. It is just a tool for you to analyze the transaction. Again, do not memorize. Just analyze.

         Now let’s go to more complex illustrations and let us put amounts in the transactions.

a.    The owner invested $100,000

Increase in Cash by 100,000

Increase in Owner’s Capital by 100,000

b.    The entity purchased equipment for $50,000. Half of the amount is paid and half of it is promised to be paid next year.

Increase in Equipment by 50,000

Increase in Note Payable by 25,000

Decrease in Cash by 25,000

Note that we use Note Payable here because the firm signed a promissory note.

c.    Rendered services for $50 and collected half of the bill

Increase in Cash by 25

Increase in Account Receivable by 25

Increase in Service Revenue by 50

Purchased office supplies on account for $1,000

Increase in Office Supplies by 1,000

Increase in Account Payable by 1,000

e.    Used $200 worth of office supplies

Increase in Office Supplies Expense by 200

Decrease in Office Supplies by 200

f.     Collected the balance of the customer from transaction (c)

Increase in Cash by 25

Decrease in Account Receivable by 25

g.    Paid $200 for electric bill

Increase in Electrical Expense by 200

Decrease in Cash by 200

h.    Paid $1,200 for employees’ salaries

Increase in Wages Expense by 1,200

Decrease in Cash by 1,200

i.      Withdrew $60

Increase in Owner’s Drawing by 60

Decrease in Cash by 60

Now we’re done in our analysis! Probably you are ready to the next level. On our next lesson, we will discuss the accounting equation and how to make tabular analysis. Tabular analysis is an effective tool to illustrate that the accounting equation is always true.

You may want to check our free test materials to evaluate yourself. Feel free to print and reproduce it for educational purposes!

PHOTO REFERENCE

http://www.whitleylegalgroup.com/practices/transactions.html