MGMT 30A 2- Transactions Analysis

Double-entry accounting

Each transaction affects at least two accounts, must balance debits = credits

Financial statement effects template (FSET)

Put each transaction into balance sheet and income statement

For each transaction, what three questions does FSET ask?

1) what accounts are affected?

2) what is the direction of the effect?

3) what is the amount of the effect?

T-Accounts

Capture increases and decreases to individual balance sheet and income statement accounts

Asset t-account

Left: +, normal balance; right: -

Liabilities t-account

Left: - ; right: +, normal balance

Equity t-account

Left: - ; right: +, normal balance

Journal entries

Capture the effects of transactions - Left: debit, right: credit

Transaction analysis: stock issuance

Both cash asset and contributed capital (common stock) increase

Transaction analysis: bank loan

Both cash asset and liabilities (note payable) increase

Transaction analysis: rental agreement

Cash asset and Noncash asset (security deposit) increase and decrease by the same amount

Transaction analysis: purchase inventory

Noncash asset (inventory) and liabilities (accounts payable) increase

Accrual accounting

Recognizes revenue and expenses occur, not when paid

Matching principle

Recognized in the same time period as the related revenues are recognized

Accounting cycle

1) record transactions

2) prepare accounting adjustments

3) prepare financial statements

4) close the books

Four types of accounting adjustments

Prepaid expenses, unearned revenues, accrued expenses, accrued revenues

Deferrals

Delay recognition in the income statement (of the revenue or the expense) after the cash exchange

Prepaid expenses (aka deferred expenses)

Paid cash first, recognize expenses afterwards

Unearned revenue (aka deferred revenue)

Received cash first, recognize revenue afterwards

Accruals

Recognize (revenue or expense) in the income statement in advance of the cash exchange

Accrued expenses

Recognize expenses first, pay cash afterwards

Accrued revenue

Recognize revenue first, receive cash afterwards