Ch 2 Recording Business Transactions and Financial Statement Preparation adapted from MBA

Ch 2 Recording Business Transactions and Financial Statement Preparation adapted from MBA

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Unformatted text preview: Recording Business Transactions Financial Statement Preparation Chapter 2 MBA Prep Course Explain how business transactions can be stated in terms of the resulting changes in the basic elements of the accounting equation. Business Transaction #1 You own proprietary technology and wish to start a new business with it. You convince a venture capitalist to invest $100,000 and have $50,000 of your own money to begin. You file the necessary paper work to incorporate and deposit $150,000 in a separate checking account in the name of the business in exchange for stock of the newly formed corporation on June 1 st 2008. Show this transaction in the books of the new business. Assets = Liabilities + Equity Cash Capital Stock $150,000 $150,000 Business Transaction #2 The business purchases $60,000 worth of equipment paying $10,000 in cash and signing a note (liability) for the remainder. Assets = Liabilities + Equity . Cash Equipment Note Payable Capital Stock $150,000 $150,000 (10,000) 60,000 $50,000 . $140,000 + 60,000 = $50,000 + $150,000 Both Sides of the Accounting Equation equal $200,000. After every business transaction, total Assets must = total Liabilities + total Equity Business Transaction #3 The Business purchases office supplies for $2,000 for cash. Assets = Liabilities + Equity Cash Equipment Office Supplies Note Payable Capital Stock $140,000 60,000 = $50,000 $150,000-2,000 + 2,000 = . $138,000 60,000 2,000 = $50,000 $150,000 Total on both sides = $200,000 Business Transaction #4 The business pays several expenses with cash: Rent expense $3,000 Insurance expense $1,500 Miscellaneous expenses $3,500 Total: $8,000 Assets = Liabilities + Equity . Office Note Capital Retained Cash Equipment Supplies Payable Stock Earnings $138,000 60,000 2,000 $50,000 $150,000 - 3,000 rent exp- 1,500 insur exp-8,000 -3,500 misc exp $130,000 60,000 2,000 $50,000 $150,000 (8,000) Total on both sides = $192,000 Expenses always decrease Retained Earnings and Revenues increase it. Business Transaction #5 The business provided services for $35,000 and the customer paid in cash. Assets = Liabilities + Equity . Office Note Capital Retained Cash Equipment Supplies Payable Stock Earnings $130,000 60,000 2,000 $50,000 $150,000 (8,000) 35,000 35,000 revenue $165,000 60,000 2,000 $50,000 $150,000 27,000 Total = $227,000 on both sides Notice that revenues increase Retained Earnings. Business Transactions #6 The company paid 5,000 in Cash Dividends to Shareholders. Assets = Liabilities + Equity . Office Note Capital Retained Cash Equipment Supplies Payable Stock Earnings $165,000 60,000 2,000 $50,000 $150,000 27,000-5,000 -5,000dividends $160,000 60,000 2,000 $50,000 $150,000 22,000 Total = $222,000 on both sides Notice that dividends reduces Retained Earnings, but dividends are not considered an Expense. Summary of Accounting Equation Assets = Liabilities + Equity ....
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This note was uploaded on 02/09/2011 for the course ACCT 200 taught by Professor Valades during the Spring '11 term at University of Tennessee.

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Ch 2 Recording Business Transactions and Financial Statement Preparation adapted from MBA

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