Transaction Analysis

TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to

start a smartphone app development company which he names
Softbyte. On September 1, 2017, he invests $15,000 cash in
the business. This transaction results in an equal increase in
assets and owner’s equity.
Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies + Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000

Illustration 1-8
Tabular summary
of Softbyte
transactions

1-1 LO 4
 TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH
Softbyte Inc. purchases computer equipment for $7,000 cash.
Illustration 1-
8
Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies + Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 +$1,600 + $7,000 = $1,600 +
$15,000 +$4,700 - -
$1,950 $1,300
1-2 LO 4
 TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT
Softbyte Inc. purchases for $1,600 headsets and other accessories
expected to last several months. The supplier allows Softbyte to
pay this
Illustration 1- bill in Assets
October. = Liabilities + Owner's Equity
8
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies + Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 +$1,600 + $7,000 = $1,600 +
$15,000 +$4,700 - -
$1,950 $1,300
1-3 LO 4
 TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte
Inc. receives $1,200 cash from customers for app development
services it has performed. Illustration 1-
8
Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies + Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 +$1,600 + $7,000 = $1,600 +
$15,000 +$4,700 - -
$1,950 $1,300
1-4 LO 4
 TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT
Softbyte Inc. receives a bill for $250 from the Daily News for
advertising on its online website but postpones payment until a 1-
Illustration
later date. Assets = Liabilities + Owner's Equity
8

Trans- Accounts Accounts Owner's Owner's

Cash + + Supplies + Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 +$1,600 + $7,000 = $1,600 +
$15,000 +$4,700 - -
$1,950 $1,300
1-5 LO 4
 TRANSACTION 6. SERVICES PERFORMED FOR CASH AND
CREDIT. Softbyte performs $3,500 of services. The company
receives cash of $1,500 from customers, and it bills the balance
of $2,000
Illustration 1- on account.
Assets = Liabilities + Owner's Equity
8
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies + Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 +$1,600 + $7,000 = $1,600 +
$15,000 +$4,700 - -
$1,950 $1,300
1-6 LO 4
 TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays
the following expenses in cash for September: office rent $600,
salaries and wages of employees $900, and utilities $200.Illustration 1-
8
Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies + Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 +$1,600 + $7,000 = $1,600 +
$15,000 +$4,700 - -
$1,950 $1,300
1-7 LO 4
 TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte
Inc. pays its $250 Daily News bill in cash. The company
previously (in Transaction 5) recorded the bill as an increase in
Accounts
Illustration 1- Payable.
Assets = Liabilities + Owner's Equity
8
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies + Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 +$1,600 + $7,000 = $1,600 +
$15,000 +$4,700 - -
$1,950 $1,300
1-8 LO 4
 TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte
Inc. receives $600 in cash from customers who had been billed
for services (in Transaction 6). Illustration 1-
8
Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies + Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 +$1,600 + $7,000 = $1,600 +
$15,000 +$4,700 - -
$1,950 $1,300
1-9 LO 4
 TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray
Neal withdraws $1,300 in cash in cash from the business for his
personal
Illustration 1- use. Assets = Liabilities + Owner's Equity
8
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies + Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 +$1,600 + $7,000 = $1,600 +
$15,000 +$1,300 - -
$4,700 $1,950

1-10 $18,050 $18,050 LO 4

 Summary of Transactions

1. Each transaction is analyzed in terms of its

effect on:
a. The three components of the basic
accounting equation.

b. Specific of items within each component.

2. The two sides of the equation must always be

equal.

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 Tabular Analysis

Transactions made by Virmari & Co., a public accounting

firm, for the month of August are shown below. Prepare a
tabular analysis which shows the effects of these
transactions on the expanded accounting equation, similar
to that shown in Illustration 1-8.
1. The owner invested $25,000 cash in the business.
2. The company purchased $7,000 of office equipment on
credit.
3. The company received $8,000 cash in exchange for
services performed.
4. The company paid $850 for this month’s rent.

1-12
5. The owner withdrew $1,000 cash for personal use. LO 4
 Tabular Analysis

1. The owner invested $25,000 cash in the business.

Assets = Liabilities + Owner's Equity

Trans- Accounts Owner's Owner's
Cash + Equipment = + + + Rev. - Exp.
action Payable Capital Drawings
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 +$8,000 - $850 -

$1,000

$18,050 $18,050
1-13 LO 4
 Tabular Analysis

2. The company purchased $7,000 of office equipment on

credit.
Assets = Liabilities + Owner's Equity
Trans- Accounts Owner's Owner's
Cash + Equipment = + + + Rev. - Exp.
action Payable Capital Drawings
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 +$8,000 - $850 -

$1,000

$18,050 $18,050
1-14 LO 4
 Tabular Analysis

3. The company received $8,000 cash in exchange for

services performed.
Assets = Liabilities + Owner's Equity
Trans- Accounts Owner's Owner's
Cash + Equipment = + + + Rev. - Exp.
action Payable Capital Drawings
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 +$8,000 - $850 -

$1,000

$18,050 $18,050
1-15 LO 4
 Tabular Analysis

4. The company paid $850 for this month’s rent.

Assets = Liabilities + Owner's Equity

Trans- Accounts Owner's Owner's
Cash + Equipment = + + + Rev. - Exp.
action Payable Capital Drawings
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 +$8,000 - $850 -

$1,000

$18,050 $18,050
1-16 LO 4
 Tabular Analysis

5. The owner withdrew $1,000 cash for personal use.

Assets = Liabilities + Owner's Equity

Trans- Accounts Owner's Owner's
Cash + Equipment = + + + Rev. - Exp.
action Payable Capital Drawings
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 +$1,000 +$8,000 - $850

$38,150 $38,150
1-17 LO 4
LEARNING Describe the four financial statements
OBJECTIVE and how they are prepared.

Companies prepare four financial statements

:

Owner’s
Income Statemen
Equity Balance
Statemen t of Cash
Statemen Sheet
t Flows
t

1-18 LO 5
 Financial Statements

Question
Net income will result during a time period when:

a. assets exceed liabilities.

b. assets exceed revenues.

c. expenses exceed revenues.

d. revenues exceed expenses.

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 Financial Statements
Net income is needed to determine
the ending balance in owner’s
equity.

SOFTBYTE
Income Statement
For the Month Ended September 30, 2017

Illustration 1-9
Financial statements
and
their
interrelationships

SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017

1-20 LO 5
 SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017

Illustration 1-9
The ending
balance in SOFTBYTE
owner’s Balance Sheet
equity is September 30, 2017
needed in
preparing the
balance sheet.

Illustration 1-9
Financial
statements and
their
interrelationships

1-21
Financial
SOFTBYTE
Balance Sheet
September 30, 2017

Statement
s
Balance sheet and
income statement
are needed to
prepare
statement of cash
flows. SOFTBYTE
Statement of Cash Flows
For the Month Ended September 30, 2017

Illustration 1-9
Financial
statements and
their
interrelationships

1-22
 Income Statement

u Reports the revenues and expenses for a specific

period of time.

u Lists revenues first, followed by expenses.

u Shows net income (or net loss).

u Does not include
investment and
withdrawal
transactions between
the owner and the
business in measuring
net income.
1-23 LO 5
 Owner’s Equity Statement

u Reports the changes in owner’s equity for a

specific period of time.

u The time period is the same as that covered by

the income statement.

1-24 LO 5
 Balance Sheet

u Reports the assets, liabilities, and owner's equity

at a specific date.

u Lists assets at the top, followed by liabilities and

owner’s equity.

u Total assets must equal total liabilities and

owner's equity.

u Is a snapshot of the company’s financial

condition at a specific moment in time (usually
the month-end or year-end).

1-25 LO 5
 Statement of Cash Flows

u Information on the cash receipts and payments

for a specific period of time.

u Answers the following:

► Where did cash come from?

► What was cash used for?

► What was the change in the

cash balance?

1-26 LO 5
 Financial Statements

Question
Which of the following financial statements is
prepared as of a specific date?

a. Balance sheet.

b. Income statement.

c. Owner's equity statement.

d. Statement of cash flows.

1-27 LO 5
 Financial Statement Items

Presented below is selected information related to Flanagan

Company at December 31, 2017. Flanagan reports financial
information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000

(a) Determine the total assets of at December 31, 2017.

(b) Determine the net income reported for December 2017.
(c) Determine the owner’s equity at December 31, 2017.

1-28 LO 5
 Financial Statement Items

Presented below is selected information related to Flanagan

Company at December 31, 2017. Flanagan reports financial
information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000

(a) Determine the total assets of at December 31, 2017.

The total assets are $27,000, comprised
of
• Cash $8,000,
• Accounts Receivable $9,000, and
• Equipment $10,000.
1-29 LO 5
 Financial Statement Items

Presented below is selected information related to Flanagan

Company at December 31, 2017. Flanagan reports financial
information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000

(b) Determine the net income reported for December 2017.

1-30 LO 5
 Financial Statement Items

Presented below is selected information related to Flanagan

Company at December 31, 2017. Flanagan reports financial
information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000

(c) Determine the owner’s equity at December 31, 2017.

1-31 LO 5