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A USER PERSPECTIVE
Chapter Two
Basic Accounting Equation
Assets =
Liabilities +
Shareholders Equity
Transaction Analysis
A +7,500 +7,500
C
Transaction Analysis
Transaction B: Purchased
equipment for $4,500.
Effects:
Assets (Cash) decrease
Assets (Equipment) increase
Effects on the Balance Sheet
Exhibit 2-1
Assets = Liabilities + Share- Equity
holders
Cash Inven- Equip- Accounts Common Retained
tory ment Payable Shares Earnings
A +7,500 +7,500
B -4,500 +4,500
C
Transaction Analysis
A +7,500 +7,500
B -4,500 +4,500
C +2,500 +2,500
2 -1,800
2 -1,800 E
Transaction Analysis -
Operating Period
Transaction 3: Purchase of new
inventory: cost of $2,100.
Effects:
Assets (Inventory) increase
Liabilities (Accounts Payable)
increase
Transaction Analysis
Transaction #3
Assets
Cash Accounts Inventory Prepaid Land Equipment
Receivable Insurance
3 +2,100
3 +2,100
Transaction Analysis -
Operating Period
Transaction 4: Received $2,200 from
customers as payments on their
accounts.
Effects:
Assets (Cash) increase
Assets (Accounts Receivable) decrease
Transaction Analysis
Transaction #4
Assets
Cash Accounts Inventory Prepaid Land Equipment
Receivable Insurance
4 +2,200 -2,200
5 -2,700
5 -2,700
Transaction Analysis -
Operating Period
Transaction 6a: Paid $360 for six-
month insurance policy.
Effects:
Assets (Prepaid Insurance) increase
Assets (Cash) decrease
Prepaid Expenses
6 - 360 + 360
a
6 - 60
b
6 - 60 E
b
Amortization of Assets
When an asset is used up over time,
some of the cost of the asset should
be shown as an expense in each
period in which it is used.
The amount shown as an expense in
any period is called the amortization
of the asset.
Amortization of Assets
Straight-line Amortization:
7 - 150
7 - 150 E
Transaction Analysis -
Operating Period
Transaction 8a: Issued new shares
for $5,000.
Effects:
Assets (Cash) increase
Shareholders Equity (Common
Shares) increase
Transaction Analysis
Transaction #8a
Assets
Cash Accounts Inventory Prepaid Land Equipment
Receivable Insurance
8 +5,000
a
8 +5,000
a
Transaction Analysis -
Operating Period
Transaction 8b: Borrowed from
the bank: $10,000.
Effects:
Assets (Cash) increase
Liabilities (Bank Loan) increase
Transaction Analysis
Transaction #8b
Assets
Cash Accounts Inventory Prepaid Land Equipment
Receivable Insurance
8 +10,000
b
8 +10,000
b
Transaction Analysis -
Operating Period
Transaction 8c: Purchased land
for $15,000.
Effects:
Assets (Cash) decrease
Assets (Land) increase
Transaction Analysis
Transaction #8c
Assets
Cash Accounts Inventory Prepaid Land Equipment
Receivabl Insurance
e
8 -15,000 +15,000
c
8
c
Accrued Expense
9 + 50 - 50 E
Transaction Analysis -
Operating Period
Transaction 10: Dividends were
declared and paid: $250.
Effects:
Assets (Cash) decrease
Shareholders Equity (Retained
Earnings) decrease
Transaction Analysis
Transaction #10
Assets
Cash Accounts Inventory Prepaid Land Equipment
Receivable Insurance
10 - 250
10 - 250 D
Financial Statements
Balance Sheet
Income Statement
Cash Flow Statement
Classified Balance Sheet
Profit
Revenues
Profitability Ratios
Return on Assets:
Profit
Average total assets invested
Profitability Ratios
Return on Equity:
Profit
Average total shareholders
equity
Cash Flow Statement