Chapter 3 - Common Transactions and Their Impact on the
After studying Chapter 3, you should
Understand the concept of “double-entry bookkeeping”
Know how to account for the common transactions covered in this chapter
Understand how to prepare basic financial statements
Understand how accrual accounting is applied in the accounting records
Companies have many of the same types of transactions and in this course, we are going to look at how to account for
these common transactions and the impact they have on the financial statements.
The first transaction a corporation typically has is selling its stock to those who will become owners, or stockholders. For
example, assume that potential stockholders of a corporation agree to pay a total of $20,000 to buy corporate stock. To
record this transaction, the account “common stock” on the Balance Sheet is increased by $20,000. Recall that in double-
entry bookkeeping, there is always a need for at least two entries. In this case the other side of this entry is to increase cash
by $20,000. The Balance Sheet is still in balance because we have $20,000 in assets (cash) and $20,000 in stockholders’
equity (common stock).
Assume now that the company decides to borrow $10,000 from the bank. For accounting purposes, this loan is called a
”. Now the company has a liability (a debt) called “note payable” of $10,000 on its Balance Sheet, and cash
has increased again, now to $30,000. The Balance Sheet is still in balance with total assets (cash) of $30,000, and liabilities
of $10,000 plus stockholder’s equity of $20,000. Nothing has impacted the Income Statement yet—both of these
transactions were recorded only the Balance Sheet. To keep things simple in this example, we are assuming there is no
interest on the loan. In actuality, you can assume there would always be interest, and we will deal with that fact of life in
our in-class examples.