Chapter

Financial Accounting 1
Lecture 02: Financial Statements &
Accounting Transactions

Masud Jahan
Department of Science and Humanities
Military Institute of Science and Technology
Financial Statements
Transactions
identifying, measuring,
recording, possessing and
communicates

Financial
Statements
An entitys financial statements are the
end product of a process that starts with
transactions between the entity and
other organizations and individuals.
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Previewing Financial Statements
Income
Statement

Statement
of Ending
Beginning
Cash Flows Balance
Balance
Sheet Sheet
Statement
of Changes
in Owners
Equity

Opening Date Period of time Closing Date

Accounting Period (e.g. a month or a year)

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Learning Objective

To explain the nature

and general purpose of
financial statements.

LO1
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 A Starting Point: Balance Sheet
ABC COMPANY
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total Assets $ 300,000 Total Liab. & O/Equity $ 300,000

A balance sheet presents assets, liabilities and owner's

equity at a specific date.
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 Assets

ABC COMPANY
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity
Cash Assets are
$ 22,500 Liabilities:
Notes receivable
Accounts receivable
10,000
60,500
economic resources
Notes payable
Accounts payable
$ 41,000
36,000
Supplies 2,000 that are owned or
Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building
controlled by the
90,000 Owners' Equity:
Office equipment 15,000 business and are
Capital stock 150,000
Retained earnings 70,000
Total
expected to benefit
$ 300,000 Total $ 300,000
future operations.
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 Liabilities

ABC COMPANY
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity
Liabilities are
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
debts owed to
Accounts receivable 60,500 Accounts payable 36,000
creditors that
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
represent negative
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
future cash flows Retained earnings 70,000
for the business.
Total $ 300,000 Total $ 300,000

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 Owners Equity

ABC COMPANY
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity
Owners equity
Cash $ 22,500 Liabilities:
represents the
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
owners claims on
Supplies 2,000 Salaries payable 3,000
the assets of the
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity:
business.
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
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 Income Statement
An income statement presents revenues and expenses
and resulting net income or loss for a period of time.
Revenues are inflows
of assets resulting ABC COMPANY
from the sale of Income Statement
products or the For Year ended Dec 31, 2009
rendering of services
to customers. Revenues $ 95,000.0
Expenses (70,000.0)
Net income $ 25,000.0
Expenses are the
costs of assets and
services used up in Revenues > Expenses
the process of earning Net Income
revenue. Revenues < Expenses
Net Loss
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 Statement of Changes in Owners Equity

ABC COMPANY
Statement of Changes in Owners' Equity
For Year ended Dec 31, 2009
Equity, Jan 1, 2009 $210,000.0
Add: Net Income 25,000.0
Less: Withdrawals (Dividends) (15,000.0)
Equity, Dec 31, 2009 $220,000.0

A statement of changes in owners equity shows all

changes in owner's equity for a period of time.

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Owners Equity

Changes in Owners
Equity

Owners Withdrawals
Investments by Owners
Net Income Net Loss

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Learning Objective

To analysis business
transactions

LO2
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Basic Accounting Equation

What are claims?

All assets of a company

have their resource
providers who are said to
have claims on the assets.
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Basic Accounting Equation

Assets = Claims
Claims are divided into two categories:
Creditors' claims that are called liabilities
Owners' claims that are called equity

Assets = Liabilities + Owners Equity

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The Expressions
The accounting equation can be expressed
in 3 ways:

Assets = Liabilities + Owners' Equity

If Liabilities
you know any two of- the
= Assets amounts
Owners' you
Equity
can calculate the third.
Owners' Equity = Assets - Liabilities

If you know any two of the amounts

you can calculate the third.
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Expansion of Basic Equation

The Expanded Accounting Equation breaks out

the Owners Equity section into some components:

1. Capital = amount invested by owner in business

2. Revenues = discussed earlier
3. Expenses = discussed earlier
4. Drawings = amount withdrawn by owner from business

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Owners Equity
Effects of Revenues/Expenses on
Owners Equity

Revenues Expenses

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Expansion of Basic Equation

Asset = Liability + Equity

Owners Owners
Capital + Revenues Expenses Withdrawals

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Expanded Accounting Equation

Basic:
Assets = Liabilities + Owner's Equity

Expanded:
Assets = Liabilities + (Owner's Capital
+ Revenues Expenses Drawings)

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What is a business transaction?

A business transaction is an economic event that

directly changes financial condition of a business
or directly affects its results of operations.

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Effects of Business Transactions
Business transactions result in changes to
the three elements of the basic accounting
equation in either of 3 ways.

1. A transaction that increases total

assets must also increase total
liabilities or owner's equity.

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Effects of Business Transactions
Business transactions result in changes to
the three elements of the basic accounting
equation in either of 3 ways.

2. A transaction that decreases total

assets must also decrease total
liabilities or owner's equity.

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Effects of Business Transactions
Business transactions result in changes to
the three elements of the basic accounting
equation in either of 3 ways.

3. Some transactions may increase one

account and decrease another on the
same side of the equation i.e. one
asset increases and another
decreases.

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Transaction Analysis

Transaction Analysis is the process of

reconciling the differences made to each
side of the equation with each business
transaction occurs.
Lets look at some sample transactions
to get a better understanding of how the
analysis and equation work.

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Transaction Analysis

The owner of Techno Consultants contributed

$20,000 cash to start the business.

The accounts involved are:

(1) Cash (asset)
(2) Owners Capital (Equity)

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 Transaction Analysis
(1) Owners of Techno Consultants contributed
$20,000 cash to start the business.

Assets = Liabilities + Equity

Accounts Accounts Notes Owner's
Cash Supplies Equipment
Receivable Payable Payable Capital
'(1) $ 20,000 $ 20,000

$ 20,000 $ - $ - $ - $ - $ - $ 20,000

$ 20,000 = $ 20,000

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Transaction Analysis

Purchased supplies paying $1,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Supplies (asset)

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 Transaction Analysis
(2) Purchased supplies paying $1,000 cash.

Assets = Liabilities + Equity

Accounts Accounts Notes Owner's
Cash Supplies Equipment
Receivable Payable Payable Capital
'(1) $ 20,000 $ 20,000
(1,000) $ 1,000

$ 19,000 $ - $ 1,000 $ - $ - $ - $ 20,000

$ 20,000 = $ 20,000

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Transaction Analysis
Purchased equipment for $15,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)

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 Transaction Analysis
(3) Purchased equipment for $15,000 cash.

Assets = Liabilities + Equity

Accounts Accounts Notes Owner's
Cash Supplies Equipment
Receivable Payable Payable Capital
'(1) $ 20,000 $ 20,000
(1,000) $ 1,000
(15,000) $ 15,000

$ 4,000 $ - $ 1,000 $ 15,000 $ - $ - $ 20,000

$ 20,000 = $ 20,000

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Transaction Analysis
Purchased supplies of $200 and
equipment of $1,000 on account.

The accounts involved are:

(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)

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 Transaction Analysis
(4) Purchased supplies of $200 and equipment
of $1,000 on account.

Assets = Liabilities + Equity

Accounts Accounts Notes Owner's
Cash Supplies Equipment
Receivable Payable Payable Capital
'(1) $ 20,000 $ 20,000
(1,000) $ 1,000
(15,000) $ 15,000
200 1,000 $ 1,200
$ 4,000 $ - $ 1,200 $ 16,000 $ 1,200 $ - $ 20,000

$ 21,200 = $ 21,200

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Transaction Analysis

Rendered consulting services receiving

$3,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

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 Transaction Analysis

(5) Rendered consulting services receiving

$3,000 cash.
Assets = Liabilities + Equity
Accounts Accounts Notes Owner's
Cash Supplies Equipment
Receivable Payable Payable Capital
Bal. $ 4,000 $ 1,200 $ 16,000 $ 1,200 $ 20,000
5 3,000 3,000

$ 7,000 $ - $ 1,200 $ 16,000 $ 1,200 $ - $ 23,000

$ 24,200 = $ 24,200

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Transaction Analysis
Paid salaries to employees, $800 cash.

The accounts involved are:

(1) Cash (asset)
(2) Salaries expense (equity)

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 Transaction Analysis
(6) Paid salaries to employees, $800 cash.

Assets = Liabilities + Equity

Accounts Accounts Notes Owner's
Cash Supplies Equipment
Receivable Payable Payable Capital
Bal. $ 4,000 $ 1,200 $ 16,000 $ 1,200 $ 20,000
5 3,000 3,000
(800) (800)

$ 6,200 $ - $ 1,200 $ 16,000 $ 1,200 $ - $ 22,200

$ 23,400 = $ 23,400

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Transaction Analysis
Borrowed $4,000 from bank.

The accounts involved are:

(1) Cash (asset)
(2) Notes payable (liability)

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 Transaction Analysis
(7) Borrowed $4,000 from bank.

Assets = Liabilities + Equity

Accounts Accounts Notes Owner's
Cash Supplies Equipment
Receivable Payable Payable Capital
Bal. $ 4,000 $ 1,200 $ 16,000 $ 1,200 $ 20,000
5 3,000 3,000
(800) (800)
4,000 $ 4,000
$ 10,200 $ - $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 22,200

$ 27,400 = $ 27,400

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Transaction Analysis
Rendered consulting services of $2,000 on
account.

The accounts involved are:

(1) Account Receivable (asset)
(2) Revenues (equity)

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 Transaction Analysis
(8) Rendered consulting services of $2,000
on account.

Assets = Liabilities + Equity

Accounts Accounts Notes Owner's
Cash Supplies Equipment
Receivable Payable Payable Capital
Bal. $ 10,200 $ 1,200 $ 16,000 $ 1,200 4000 $ 22,200
8 2,000 2,000

$ 10,200 $ 2,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 24,200

$ 29,400 = $ 29,400

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Transaction Analysis
Received telephone bill of $200.

The accounts involved are:

(1) Account Payable (liability)
(2) Telephone Expenses (equity)

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 Transaction Analysis
(9) Received telephone bill of $200.

Assets = Liabilities + Equity

Accounts Accounts Notes Owner's
Cash Supplies Equipment
Receivable Payable Payable Capital
Bal. $ 10,200 $ 1,200 $ 16,000 $ 1,200 4000 $ 22,200
8 2,000 2,000
200 (200)

$ 10,200 $ 2,000 $ 1,200 $ 16,000 $ 1,400 $ 4,000 $ 24,000

$ 29,400 = $ 29,400

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End of Lecture 02
Thank you all