Analyzing Business Transactions

Business Transaction Analysis

Analyzing and Processing Transactions










































Source documents invoices, receipts, checks, or contracts usually support the
details of a transaction.
For each transaction, we follow these steps:
1. State the transaction.
2. Analyze the transaction to determine which accounts are affected.
3. Apply the rules of double-entry accounting by using T-accounts to show how the
transaction affects the accounting equation. It is important to note that this step
is not part of the accounting records but is undertaken before recording a
transaction in order to understand the effects of the transaction on the
accounts.
4. Show the transaction in journal form.
The journal form is a way of recording a transaction with the date, debit account, and debit
amount shown on one line, and the credit account (indented) and credit amount on the next
line.
The amounts are shown in their respective debit and credit columns.
This step represents the initial recording of a transaction in the records and takes the following
form:




A series of transactions in this form results in a chronological record of the transactions called a
general journal (book of original entry).
Periodically, each debit and credit in an entry is transferred to its appropriate account in a list of
accounts called the general ledger (book of final entry).
5. Provide a short description of each journal entry that will help explain the nature
of the transaction.
Presently, this practice has become optional for experienced accountants.
Sample:
Economic events for the first month operation of a small firm named Miller Design Studio.
July 1: Joan Miller invests $40,000 in cash to form Miller Design Studio.
July 2: Orders office supplies, $5,200.
July 3: Rents an office; pays two months rent in advance, $3,200.
July 5: Receives office supplies ordered on July 2 and an invoice for $5,200.
July 6: Purchases office equipment, $16,320; pays $13,320 in cash and agrees to pay the rest
next month.
July 9: Makes a partial payment of the amount owed for the office supplies received on July 5,
$2,600.
July 10: Performs a service for an investment advisor by designing a series of brochures and
collects a fee in cash, $2,800.
July 15: Performs a service for a department store by designing a TV commercial; bills for the
fee now but will collect the fee later, $9,600.
July 19: Accepts an advance fee as a deposit on a series of brochures to be designed, $1,400.
July 22: Receives cash from customer previously billed on July 15, $5,000.
July 26: Pays employees four weeks wages, $4,800.
July 30: Receives, but does not pay, the utility bill that is due next month, $680.
July 31: Withdraws $2,800 in cash.

Solution:
July 1: Joan Miller invests $40,000 in cash to form Miller Design Studio.
Analysis:
An owners investment in the business increases the asset account Cash with a debit and
increases the owners equity account J. Miller, Capital with a credit.








July 2: Orders office supplies, $5,200.
Analysis:
When an economic event does not constitute a business transaction, no entry is made.
In this case, there is no confirmation that the supplies have been shipped or that title has passed.

July 3: Rents an office; pays two months rent in advance, $3,200.
Analysis: The prepayment of office rent in cash increases the asset account Prepaid Rent
with a debit and decreases the asset account Cash with a credit.










Note:
A prepaid expense is an asset because the expenditure will benefit future operations.
This transaction does not affect the totals of assets or liabilities and owners equity because it simply
trades one asset for another asset.
If the company had paid only Julys rent, the owners equity account Rent Expense would be debited
because the total benefit of the expenditure would be used up in the current month.

July 5: Receives office supplies ordered on July 2 and an invoice for $5,200.
Analysis:
The purchase of office supplies on credit increases the asset account Office Supplies with a
debit and increases the liability account Accounts Payable with a credit.











Note:
Office supplies are considered an asset (prepaid expense) because they will not be used up in the
current month and thus will benefit future periods.
Accounts Payable is used when there is a delay between the time of the purchase and the time of
payment.

July 6: Purchases office equipment, $16,320; pays $13,320 in cash and agrees to pay the
rest next month.
Analysis:
The purchase of office equipment in cash and on credit increases the asset account Office
Equipment with a debit, decreases the asset account Cash with a credit, and increases the
liability account Accounts Payable with a credit.








Note: As this transaction illustrates, assets may be paid for partly in cash and partly on
credit. When more than two accounts are involved in a journal entry, as they are in this
one, it is called a compound entry.
July 9: Makes a partial payment of the amount owed for the office supplies received on
July 5, $2,600.
Analysis:
A payment of a liability decreases the liability account Accounts Payable with a debit and
decreases the asset account Cash with a credit.








Note:The office supplies were recorded when they were purchased on July 5.

July 10: Performs a service for an investment advisor by designing a series of brochures
and collects a fee in cash, $2,800.
Analysis:
Revenue received in cash increases the asset account Cash with a debit and increases the
owners equity account Design Revenue with a credit.








Note:
For this transaction, revenue is recognized when the service is provided and the cash is received.
July 15: Performs a service for a department store by designing a TV commercial; bills
for the fee now but will collect the fee later, $9,600.
Analysis:
A revenue billed to a customer increases the asset account Accounts Receivable with a debit
and increases the owners equity account Design Revenue with a credit.
Accounts Receivable is used to indicate the companys right to collect the money in the future.








Note: In this case, there is a delay between the time revenue is earned and the time the
cash is received. Revenues are recorded at the time they are earned and billed
regardless of when cash is received.
July 19: Accepts an advance fee as a deposit on a series of brochures to be designed,
$1,400.
Analysis:
Revenue received in advance increases the asset account Cash with a debit and increases the
liability account Unearned Design Revenue with a credit.









July 22: Receives cash from customer previously billed on July 15, $5,000.
Analysis:
Collection of an account receivable from a customer previously billed increases the asset
account Cash with a debit and decreases the asset account Accounts Receivable with a credit.









Note:
The revenue related to this transaction was recorded on July 15. Thus, no revenue is recorded
at this time.
July 26: Pays employees four weeks wages, $4,800.
Analysis:
This cash expense increases the owners equity account Wages Expense with a debit and
decreases the asset account Cash with a credit.








July 30: Receives, but does not pay, the utility bill that is due next month, $680.
Analysis:
This cash expense increases the owners equity account Utilities Expense with a debit and
increases the liability account Accounts Payable with a credit.









Note: The expense is recorded if the benefit has been received and the amount is owed,
even if the cash is not to be paid until later. Note that the increase in Utilities Expense
will decrease owners equity.
July 31: Withdraws $2,800 in cash.
Analysis:
A cash withdrawal increases the owners equity account Withdrawals with a debit and
decreases the asset account Cash with a credit.








T-ACCOUNT