Acct 01/29 class 2

Understanding Transactions:

Transactions involve exchanges: something is received and something is given up. Always affects at least two items in the accounting equation.

Key Terms:

• Cash Transactions: Cash inflow (cash receipt) or outflow (cash payment).

• Supplies Transactions: Record only transactions involving supplies.

Transaction Analysis Examples

Transaction 1: Equity Financing

Jordan incorporates Studios on August 1. Issues common stock for $10,000 cash, which is deposited in the bank:

• Received: $10,000 cash (Asset increases).

• Given up: Issued common stock (Owner's equity increases).

Account Impact:

• Cash +$10,000 (Asset)

• Common Stock +$10,000 (Equity)

Transaction 2: Trademark Investment

Noodlecake pays $300 for a logo creation:

• Received: Logo (Intangible Asset).

• Given up: $300 in cash (Asset decreases).

Account Impact:

• Cash -$300 (Asset)

• Logo +$300 (Intangible Asset)

Transaction 3: Loan Transaction

Noodlecake receives $20,000 cash from a bank loan:

• Received: $20,000 cash (Asset increases).

• Given up: Note promise to pay (Liability).

Account Impact:

• Cash +$20,000 (Asset)

• Notes Payable +$20,000 (Liability)

Transaction 4: Paying Suppliers

Noodlecake pays $5,000 to settle accounts:

• Given up: $5,000 cash (Asset decreases).

• Effect on Liability: Previous liability reduced.

Account Impact:

• Cash -$5,000 (Asset)

• Accounts Payable -$5,000 (Liability)

Transaction 5: Software Purchase

Noodlecake enters a transaction to purchase software:

• Paid: $4,000 and owes $5,000 later.

• Received: Software Asset.

Account Impact:

• Cash -$4,000 (Asset)

• Software +$9,000 (Asset)

• Accounts Payable +$5,000 (Liability)

Transaction 6: Supplies Purchase

The company purchases supplies worth $600 on credit:

• Received: Supplies (Asset).

• Given up: Accounts Payable (Liability).

Account Impact:

• Supplies +$600 (Asset)

• Accounts Payable +$600 (Liability)

Key Accounting Principles

Guidelines for Every Transaction:

• Every transaction must affect at least two accounts (due effect).

• The accounting equation (Assets = Liabilities + Equity) must always hold.

Journal Entry Preparation

Journal Entries:

Each transaction is recorded using at least one debit and one credit. Total debits must equal total credits to maintain balance.

Example Journal Entry Format:

• Equity Financing:

  • Debit: Cash $10,000

  • Credit: Common Stock $10,000

• Trademark Investment:

  • Debit: Logo $300

  • Credit: Cash $300

• Loan Transaction:

  • Debit: Cash $20,000

  • Credit: Notes Payable $20,000

Accounting Cycle Overview

• Start with transaction analysis.

• Record transactions in journal entries.

• Prepare trial balance and financial statements.

• Maintain proper separation between:

  • Current Assets (Cash, Supplies)

  • Non-current Assets (Equipment, Intangible assets)

  • Current Liabilities (Accounts Payable)

  • Long-term Liabilities (Notes Payable)

Conclusion

Repeated practice in analyzing transactions enhances understanding of accounting principles. Familiarity with key account names is crucial for success in assignments and exams.

Investing Activity Impact

Investing activity affects both assets and liabilities of a business.

Transaction Analysis

Transactions are fundamental business activities that involve exchanges between two parties.

• First Party: The business itself.

• Second Party: Can be vendors, suppliers, employees, or government entities.

Guidelines for Analyzing Transactions

• Dual Effect of Transactions: Every transaction must have a dual effect, meaning at least two accounts are affected in the company’s financial equation.

• Impact on Accounting Equation: Ensure that each transaction maintains the balance of the accounting equation (Assets = Liabilities + Equity).

Key Takeaways

• Understanding transaction analysis is essential for accurate financial reporting.

• Each transaction impacts not just the assets but can also influence liabilities or equity based on the nature of the transaction.