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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Recording Business Transactions Financial Statement Preparation Chapter 2 MBA Prep Course

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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

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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.

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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.

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Summary of Accounting Equation Assets = Liabilities + Equity . Office Note Capital Retained Cash Equipment Supplies Payable Stock Earnings +150,000 + 150,000 0 -10,000 +60,000 +50,000 -2,000 +2,000 - 3,000 -3,000 rent exp - 1,500 -1,500 ins. exp - 3,500 -3,500 misc exp +35,000 35,000 revenue - 5,000 -5,000 dividend \$160,000 60,000 2,000 \$50,000 \$150,000 \$22,000 The next step is to prepare financial statements.
Order of Financial Statement Preparation 1. Income Statement: Revenues – Expenses = Net Income Assets = Liabilities + Equity . Office Note Capital Retained Cash Equipment Supplies Payable Stock Earnings +150,000 + 150,000 0 -10,000 +60,000 +50,000 -2,000 +2,000 - 3,000 -3,000 rent exp - 1,500 -1,500 ins. exp - 3,500 -3,500 misc exp +35,000 35,000 revenue - 5,000 -5,000 dividend \$160,000 60,000 2,000 \$50,000 \$150,000 \$22,000 The next step is to prepare financial statements.

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Name of Company Income Statement For the month ending June 30, 2008 Revenues: Fees Earned Revenue \$35,000 Less: Operating Expenses: Rent Expense \$3,000 Insurance Expense 1,500 Miscellaneous Expense 3,500 Total Expenses (8,000) Net Income \$27,000
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