Study Objective 1 - Analyze the Effect of Business Transactions on the Basic
that must be recorded in the financial statements.
can be divided into two types:
occur between the company and some outside party.
an exchange of assets, liabilities, or stockholders' equity between a company and
an outside party
it is a
and must be recorded.
are economic events that occur entirely within one company.
are considered transactions
if the event results in a financial impact that you can measure
- the process of considering the transaction or event that has taken place and identifying
how the transaction is going to impact the balance sheet equation.
Consider the following Facts:
Owner invests $10,000 cash in the business, in exchange for $10,000 of Sierra Corporation common
Both Cash and Common Stock would increase by $10,000
Common Stock @ 1$ par
Owner invests cash in business in return for C/S
rded at the number of shares issued x par value
Sierra issued a 3-month, 12%, $5,000 note payable to Castle Bank.
This transaction results in an
equal increase in assets and liabilities:
Cash (an asset) increases $5,000 and Notes Payable (a
liability) increases $5,000
Issued a 3-month 12% note payable to Castle Bank
Sierra acquired office equipment by paying $5,000 cash to Superior Sales Co.
An equal increase and
decrease in Sierra’s assets occur.
Cash would decrease by $5,000 and Office Equipment would
increase by $5,000.
On October 2 Sierra received a $1,200 cash advance from R. Knox, a client, for advertising services
that are expected to be completed by December 31.
Both Cash and Unearned Service Revenue, a
liability, would increase by $1,200.
Unearned Service Revenue
Sierra received $10,000 cash from Copa Company for advertising services performed.
Sierra received an
asset (cash) in exchange for services (revenue). Revenue increases stockholders' equity.
Both assets and
stockholders' equity would increase.
Cash is increased $10,000 and Service Revenue (which will be