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Chapter 4

In this presentation...
1.
2.

describe the characteristics of business transactions


differentiate between a business transaction, a personal transaction and a
business event
3. explain the accounting equation process of the double-entry system of recording
4. identify the impact of business transactions on the accounting equation
5. prepare an accounting worksheet and a simplified income statement and
balance sheet
6. identify errors in the accounting worksheet and investigate the origin of the
errors
Note: The following topics discussed in Chapter 4 of the textbook are NOT taught in
unit 200101 AIM:
1. discuss how journals and ledger accounts can help in capturing accounting
information efficiently and effectively
2. apply debit and credit rules, and record simple transactions in the journals and
ledgers of the business
3. explain the purpose of a trial balance

Business Transactions
Business transactions are occurrences that
affect the assets, liabilities and equity items in
an entity
A business transaction is recorded when
It can be reliably measured in monetary terms
It occurs at arms length

Under the entity concept, every entity must


keep records of its business transactions
separate from any personal transactions of
the owners
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Examples of
business transactions
contribution of capital by owners
payment of salaries
receipt of bank interest
receipt of GST refund
purchase of laptop on credit
payment of accounts payable
depreciating office equipment
purchase of accounting software
charging interest on overdue accounts receivable
payment of advertising
withdrawal of capital
cash purchases
cash sales
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Personal Transactions
and Business Events
Personal transactions are transactions of the
owners, partners or shareholders that are
unrelated to the operation of the business
Business events are occurrences that will
probably affect the entity in some way, but are
not recorded as business transactions until an
exchange of goods occurs between the entity
and an outside entity
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Accounting Equation
ASSETS = LIABILITIES + EQUITY
A

(Own) =

(Owe) +

E
(Owner)

Assets = resources controlled by entity


Liabilities = External sources of funds
Equity = Internal sources of funds (from owners)
Assets need to be funded by owners and lenders.

Accounting Equation (cont)


Example
Stevens Seagulls needs $350,000 of assets to
do business. Steven only has $200,000 to
contribute as equity; his business needs to
borrow additional funds of $150,000 from a
bank which will become a liability of the
business.
A
$350 000

= $150 000 + $200 000


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The concept of duality


The accounting equation must be kept in
balance after a transaction is entered.
i.e., Assets MUST = Liabilities + Equity

In order to keep the equation in balance, a


transaction must be recorded twice.
A transaction has a dual effect on the
equation
Cash movement effect
Category of transaction effect
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Duality (cont)
Cash Movement
Money paid or received (Cash account)
Money going to be paid or received (Accounts
Payable/Receivable)

Category of the transaction


What is the nature of the transaction?
Purchase an asset = asset account
Receipt of money from sale Revenue account

Duality Example
The purchase of a motor vehicle via a loan
Cash effect Loan Payable (liability)
Payment will be made in the future

Category Effect Motor Vehicle (Asset)


This is the purchase of a motor vehicle to support the
business whilst the business generates revenue
A

Truck

= Loan

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The Expanded
Accounting Equation
Recall Chapter 1
Income produces an increase in equity
Expenses result in decreases in equity

Therefore
Profit (loss) is added to (subtracted from) opening
equity on the balance sheet
ASSETS = LIABILITIES + EQUITY + INCOME EXPENSES

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Relationship between Income


Statement and the Balance Sheet
Balance Sheet
(accounting equation)

Income Statement
R
Profits
Equity

A = L+ E
Less: E
Profits
-------Profit or Loss

Prepared by Simon Lenthen


University of Western Sydney

Equity

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Transaction Analysis
1.
2.
3.
4.

Read the transaction


Identify the cash effect
Identify the nature of the transaction
Check the equation balances.

Three Examples follow

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Transaction Analysis
Example 1
Capital contribution
Owner contributes $100,000 in cash to start a
business

1. Key words Cash, Owner


2. Cash increases $100,000 (Asset)
3. Owner increases Capital (Equity)
4. Assets (A)
= Liabilities (L) + Equity (E)
Cash $100 000

=0

+ Capital $100 000


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Transaction Analysis
Example 2
Purchase of an Asset with cash
Firm purchases new laptop computer for $3,500
and pays by cash

1. Key words Cash, Computer


2. Cash decreases $3,500 (Asset)
3. New computer purchased $3,500 (Asset)
4. A
=L
+E
Cash -$3 500
Computer +$3 500

=0

+0
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Transaction Analysis
Example 3
Income Earned
CCS sends an invoice to Aussie Wallabies for providing
tennis coaching services totalling $30,000

1. Key words Invoice, Services


2. Accounts Receivables (AR) increases $30,000
(Asset)
3. Fees Revenue increases $30,000 (Income)
4.
A
AR+$30 000

=L
=0

+
+

E
Fees Revenue $30 000
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The Accounting Worksheet


Summarises the duality associated with each
business transaction
All business transactions of the entity can be
entered into the worksheet
Then the individual columns of the worksheet
can be totalled and used as the basis for
preparing financial statements

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The accounting worksheet

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Errors in recording business


transactions
1. Single entry error
Concept of duality must be applied to every
transaction
Worksheet will not balance if only one part of
transaction is entered

2. 2. Transposition error
Occurs when 2 of the digits are transposed

e.g. Payment of $5,340 cash is recorded as $5,430


decrease in profit difference of $90

A transposition error is always divisible by 9


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Errors in recording business


transactions
3. Incorrect entry
Recording 2 increases or 2 decreases on one side
or
Recording an increase to one side and a decrease
to the other side
e.g. Owner withdraws cash of $4,000 and records the
transaction as an increase in cash and a decrease in
equity. Asset side will be $8,000 higher than claims side

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Using the accounting equation


to solve for missing figures
The accounting equation can also help us
solve for missing figures because the assets
side must always equal the claims side
Example
T. Faff has current assets of $17,000, current liabilities
of $4,000, non-current liabilities of $40,000 and equity
of $80,000. What is the amount of non-current assets?
Assets = Liabilities
+ Equity
17 000 + ? = 4 000 + 40 000 + 80 000
(see other side)
? = 44 000
+ 80 000 17 000
? = 107 000
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Capturing Accounting Information:


Journal and Ledger Accounts
Analysing each transaction by using the
accounting equation is not appropriate for a
large number of transactions
Instead, we can use the journal or ledger to
effectively and efficiently capture accounting
information

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Slides 23 to 26
Note
The topics on slides 23 to 26 being:
The Journal;
The Ledger; and
The Trial balance
are not taught in unit 200101 AIM.
They are shown here for a students general
awareness and knowledge.
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The Journal
Journals record transaction information found
on source documents
Entered in date order
The journal entry will consist of
the transaction date,
the name of the two accounts affected by the
transaction,
and whether each account is debited or credited.
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The Journal (cont)


There are five separate journals
Cash Receipts Journal (for cash received by the
business)
Cash Payments Journal (for cash paid by the
business)
Sales Journal (for credit sales to customers)
Purchases Journal (for credit purchases from
suppliers)
General Journal (any transaction not related to the
above)
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The Ledger
A ledger is an account that accumulates all the
information about changes in specific account
balances.
Each ledger account will have
a debit (left side)
a credit (right side)

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The Trial Balance


The trial balance is a list of ledger account
balances that is prepared at the end of the
period.
The purpose of the trial balance is
To assist in the preparation of the financial
statements
To check the accuracy of the ledger or journal
entries

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Summary
Business transactions are occurrences that
affect the assets, liabilities and equity items
in an entity
business transactions are an exchange of
goods that occurs between the entity and an
outside entity
The accounting equation
Assets = Liabilities + Equity
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Summary (Cont)
A transaction has a dual effect on the
equation
Cash movement effect
Category of transaction effect

Transaction analysis
1.
2.
3.
4.

Read the transaction


Identify the cash effect
Identify the nature of the transaction
Check the equation balances.
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Summary (cont)
An accounting worksheet is a summary of
business transactions
Good for smaller businesses

Larger businesses will have Journals and


Ledgers - we do not teach and students do not
have to learn journals, ledgers and the trial
balance for unit 200101 AIM

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Prepared by Simon Lenthen


University of Western Sydney

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