Lecture 3 0130 - ORIE 350 Lecture#3 Transactions A business...

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    ORIE 350 Lecture #3 January 20, 2007
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    Transactions A business transaction is an economic event that affects the financial position of a business. It may or it may not involve an exchange (like money changing hands, etc.). We only create an accounting record of the event if it is a business transaction.
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    Which of the following are business  transactions?   Ziskey Corp. buys a new air compressor on account (they charge it, no cash changes hands). Winger Corp. lowers the price of all items it sells by 10%. Reitman Corp. records depreciation expense for a delivery truck.
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    Balance Business transactions are recorded in such a way that the accounting equation is always in balance. Example #1: You run a software company, and you sell some software to a customer for $20,000 cash. A = L + SE +20,000 +20,000 [cash] [sales revenue]
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    Balance Example #2: You hire a janitorial service to clean the building, and pay cash. A = L + SE (500) (500) [cash] [maint. expense] Note how the negative number is written using parentheses, a common accounting convention.
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    Balance Example #3: You hire a janitorial service to clean the building, and ask the service to bill you later. A = L + SE +500 (500) [accounts payable] [maint. expense] Note how the equation balances, but the assets are unchanged.
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    Tedious As you can see, it is somewhat tedious and awkward to keep writing out the accounting equation every time. As long as we follow a system that respects the accounting equation, we can come up with a simple solution that not only eases recording but also helps to eliminate errors.
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