3.1pps t/a carnegie et al; accounting: financial and organisational decision making © 1999...
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3.1PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
ACCOUNTINGACCOUNTINGFinancial and Organisational Financial and Organisational
Decision MakingDecision Making
Chapter 3
Classification and analysis of transactions
Slides written and designed by
Tony Van Eekelen
3.2
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Learning ObjectivesLearning Objectives
• In this chapter you will be introduced to – transaction analysis, in terms of the effects of
transactions on the accounting equation– net profit/loss and profit and loss statement– the accounting equation and simple balance
sheet– the difference between assets and expenses
3.3
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Learning ObjectivesLearning Objectives– which portion of costs
incurred by an entity constitutes expenses and which are assets
– the difference between the cash flow statement and other financial statements
3.4
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Classification precedes summarisationClassification precedes summarisation
• Good communication is to compress the events into a summary that gives a clear picture of the overall events
• To summaries the events reliably a form of classification is needed
• In accounting the aim is to summarise financial transactions, thus the $ amount and financial statement classification is a starting point
3.5
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Classification in accounting reportsClassification in accounting reports
• Transaction can be classified in the basic financial statements - transaction analysis
• From the balance sheet
Assets Equities=
Assets Liabilities Owner’s Equities= +
3.6
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
AssetsAssets• Assets are resources owned or controlled for the
purpose of providing benefits to that entity– generally physical objects– any future benefit to the entity
• eg cash, motor vehicle, building– may not be in physical form
• eg rent paid in advance, prepaid wages, rights to intellectual property
– ownership is not necessary but must have control
3.7
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
AssetsAssets
• In balance sheet the order of the assets is based upon liquidity
• cash at bank• accounts receivable• prepayment• inventory• motor vehicles• plant and machinery• buildings
3.8
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
LiabilitiesLiabilities• Liabilities represents future obligations or
sacrifices and are usually settled using cash– Represents the debts of the entity to non-owners
• Non-owners (outside parties) include suppliers, banks, other companies, employees, taxation office
– Generally repaid in cash– Order in balance sheet based upon earliest due
payment • Wages payable, accounts payable, unearned revenue,
mortgage
3.9
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Owners’ equityOwners’ equity
• Owners’ equity represents the owners’ claim or net worth in the assets of the entity
• Includes– capital
– withdrawals
– revenue
– expenses
3.10
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Transaction analysisTransaction analysis
• Record the transactions into an accounting equation table
• Note: after each transaction the accounting equation must remain in balance
3.11
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Example 1Example 1
• Owner contributes $10,000
• Assets = Liabilities + Owners’ equity
+$10,000 +$10,000
Classification Change Items affected
Asset Increase Cash
Owners’Equity
Increase Capital
3.12
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Example 2Example 2
• Purchased petrol of $50 cash
• Assets = Liabilities + Owners’ equity
-$50 -$50
Classification Change Items affected
Asset Decrease Cash
Owners’Equity
Increase Petrolexpense
3.13
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Example 3Example 3
• Billed customers for services, $4000
• Assets = Liabilities + Owners’ equity
+$4,000 +$4,000
Classification Change Items affected
Asset Increase Accountsreceivable
Owners’Equity
Increase Fees revenue
3.14
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Example 4Example 4
• Owner withdraws $300 cash
• Assets = Liabilities + Owners’ equity
-$300 -$300
Classification Change Items affected
Asset Decrease Cash
Owners’Equity
Increase Drawings
3.15
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Example 5Example 5
• Received $2500 from customer above
• Assets = Liabilities + Owners’ equity +$2,500 -$2,500
Classification Change Items affected
Asset Increase Cash
Asset Decrease AccountsReceivable
3.16
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Example 6 Example 6 • Purchased $7000 car paid $1000 and borrow the rest
• Assets = Liabilities + Owners’ equity +$7,000+$6,000 -$1,000
Classification Change Items affected
Asset Increase MotorVehicle
Asset Decrease Cash
Liabilities Increase Loan
3.17
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Net affectNet affectAssets = Liabilities + Owners’ equity
1 +$10,000 +$10,000
2 -$50 -$50
3 +$4,000 +$4,000
4 -$300 -$300
5 +$2,500
-$2,500
6 +$7,000 +$6,000
-$1,000
$19,650 = $6,000 + $13,650
3.18
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Financial StatementsFinancial Statements
• Profit and Loss Statement for the week ending 6th XX
• Fees Revenue $4,000
• Less expenses– petrol $50
• Net Profit $3,950
3.19
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Financial StatementsFinancial Statements
AssetsCash at bank
$11,150
Accounts receivable $1,500
Car $7,000
$19,650
LiabilitiesLoan $6,000
Owners’ equityCapital $10,000
Drawings -$300
+Profit $3,950 $13,650
$19,650
Balance Sheet as at 6th XX
3.20
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Relationship between financial statementsRelationship between financial statements
Assets Liabilities Owner’s Equities= +
RevenueOwner’s Contributions
ExpensesOwner’s Withdrawals
+
-
3.21
Chapter 3: Classification and analysis of transactions
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Cash flowsCash flows
• Another statement which is useful for decision making is the cash flows statement
• It shows the cash effects of business transactions for the period
• This is important as cash is the backbone of the business