Financial Statements & Accounting Transactions

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1. Financial & Managerial
Accounting
Lecture 02: Financial Statements &
Accounting Transactions
Masud Jahan
Department of Science and Humanities
Military Institute of Science and Technology
Chapter
1

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An entity’s financial statementsare the
end product of a process that starts with
transactionsbetween the entity and
other organizations and individuals.
Transactions
identifying, measuring,
recording, possessing and
communicates
Financial
Statements
Financial Statements

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Opening Date Closing DatePeriod of time
Income
Statement
Statement
of
Cash Flows
Statement
of Changes
in Owner’s
Equity
Beginning
Balance
Sheet
Ending
Balance
Sheet
Accounting Period (e.g. a month or a year)
Previewing Financial Statements

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Learning Objective
LO1
To explain the nature
and general purpose of
financial statements.

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ABC COMPANY
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity
Cash 22,500$ Liabilities:
Notes receivable 10,000 Notes payable 41,000$
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities80,000$
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total Assets 300,000$ Total Liab. & O/Equity300,000$
A balance sheetpresents assets, liabilities and owner's
equity at a specific date.
A Starting Point: Balance Sheet

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ABC COMPANY
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity
Cash 22,500$ Liabilities:
Notes receivable 10,000 Notes payable 41,000$
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities80,000$
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000$ Total 300,000$
Assetsare
economic resources
that are owned or
controlled by the
business and are
expected to benefit
future operations.
Assets

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ABC COMPANY
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity
Cash 22,500$ Liabilities:
Notes receivable 10,000 Notes payable 41,000$
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities80,000$
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000$ Total 300,000$
Liabilities
Liabilitiesare
debts owed to
creditors that
represent negative
future cash flows
for the business.

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ABC COMPANY
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity
Cash 22,500$ Liabilities:
Notes receivable 10,000 Notes payable 41,000$
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities80,000$
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000$ Total 300,000$
Owners’ Equity
Owners’ equity
represents the
owners’ claims on
the assets of the
business.

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Income Statement
Revenuesare inflows
of assets resulting
from the sale of
products or the
rendering of services
to customers.
Expensesare the
costs of assets and
services used up in
the process of earning
revenue.
An income statementpresents revenues and expenses
and resulting net income or loss for a period of time.
ABC COMPANY
Income Statement
For Year ended Dec 31, 2009
Revenues 95,000.0$
Expenses (70,000.0)
Net income 25,000.0$
•Revenues > Expenses
Net Income
•Revenues < Expenses
Net Loss

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ABC COMPANY
Statement of Changes in Owners' Equity
For Year ended Dec 31, 2009
Equity, Jan 1, 2009 210,000.0$
Add: Net Income 25,000.0
Less: Withdrawals (Dividends)(15,000.0)
Equity, Dec 31, 2009 220,000.0$
A statement of changes in owners’ equity shows all
changes in owner's equity for a period of time.
Statement of Changes in Owners’ Equity

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Owners’ Equity
Changes in Owners’
Equity
•Owners’
Investments
•Net Income
•Withdrawals
by Owners
•Net Loss

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Learning Objective
LO2
To analysis business
transactions

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What are claims?
All assets of a company
have their resource
providers who are said to
have claims on the assets.
Basic Accounting Equation

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Assets=Claims
Claims are divided into two categories:
Creditors' claims that are called liabilities
Owners' claims that are called equity
Assets=Liabilities + Owners‘ Equity
Basic Accounting Equation

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The accounting equation can be expressed
in 3 ways:
If you know any two of the amounts you
can calculate the third.
Assets = Liabilities + Owners' Equity
Liabilities = Assets -Owners' Equity
Owners' Equity = Assets -Liabilities
If you know any two of the amounts
you can calculate the third.
The Expressions

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Expansion of Basic Equation
The Expanded Accounting Equationbreaks out
the Owner’s Equitysection into some components:
1.Capital = amount invested by owner in business
2.Revenues = discussed earlier
3.Expenses = discussed earlier
4.Drawings = amount withdrawn by owner from business

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Owners’ Equity
Effects of Revenues/Expenses on
Owners’ Equity
Revenues Expenses

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Liability EquityAsset
= +
Owner’s
Capital
Revenues Expenses
Owner’s
Withdrawals
+ – –
Expansion of Basic Equation

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Basic:
Assets = Liabilities+ Owner's Equity
Expanded:
Assets= Liabilities + (Owner's Capital
+ Revenues –Expenses –Drawings)
Expanded Accounting Equation

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A business transactionis an economic event that
directly changes financial condition of a business
or directly affects its results of operations.
What is a business transaction?

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Effects of Business Transactions
Business transactions result in changes to
the three elements of the basic accounting
equation in either of 3 ways.
1.A transaction that increases total
assets must also increase total
liabilities or owner's equity.

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Effects of Business Transactions
Business transactions result in changes to
the three elements of the basic accounting
equation in either of 3 ways.
2.A transaction that decreases total
assets must also decrease total
liabilities or owner's equity.

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Effects of Business Transactions
Business transactions result in changes to
the three elements of the basic accounting
equation in either of 3 ways.
3.Some transactions may increase one
account and decrease another on the
same side of the equation i.e. one
asset increases and another
decreases.

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Transaction Analysisis the process of
reconciling the differences made to each
side of the equation with each business
transaction occurs.
Let’s look at some sample transactions
to get a better understanding of how the
analysis and equation work.
Transaction Analysis

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The owner of Techno Consultants contributed
$20,000 cash to start the business.
The accounts involved are:
(1) Cash (asset)
(2) Owner’s Capital (Equity)
Transaction Analysis

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(1) Owners of Techno Consultants contributed
$20,000 cash to start the business.
Transaction Analysis
Assets = Liabilities +Equity
Cash
Accounts
Receivable
SuppliesEquipment
Accounts
Payable
Notes
Payable
Owner's
Capital
'(1)20,000$ 20,000$
20,000$ -$ -$ -$ -$ -$ 20,000$
20,000$ = 20,000$

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Purchased supplies paying $1,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Transaction Analysis

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(2) Purchased supplies paying $1,000 cash.
Transaction Analysis
Assets = Liabilities +Equity
Cash
Accounts
Receivable
SuppliesEquipment
Accounts
Payable
Notes
Payable
Owner's
Capital
'(1)20,000$ 20,000$
(1,000) 1,000$
19,000$ -$ 1,000$ -$ -$ -$ 20,000$
20,000$ = 20,000$

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Purchased equipment for $15,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Transaction Analysis

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(3) Purchased equipment for $15,000 cash.
Transaction Analysis
Assets = Liabilities +Equity
Cash
Accounts
Receivable
SuppliesEquipment
Accounts
Payable
Notes
Payable
Owner's
Capital
'(1)20,000$ 20,000$
(1,000) 1,000$
(15,000) 15,000$
4,000$ -$ 1,000$ 15,000$ -$ -$ 20,000$
20,000$ = 20,000$

31. 31/43
Purchased supplies of $200 and
equipment of $1,000 on account.
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Transaction Analysis

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Transaction Analysis
(4) Purchased supplies of $200 and equipment
of $1,000 on account.
Assets = Liabilities +Equity
Cash
Accounts
Receivable
SuppliesEquipment
Accounts
Payable
Notes
Payable
Owner's
Capital
'(1)20,000$ 20,000$
(1,000) 1,000$
(15,000) 15,000$
200 1,000 1,200$
4,000$ -$ 1,200$ 16,000$ 1,200$ -$ 20,000$
21,200$ = 21,200$

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Rendered consulting services receiving
$3,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction Analysis

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(5) Rendered consulting services receiving
$3,000 cash.
Transaction Analysis
Assets = Liabilities +Equity
Cash
Accounts
Receivable
SuppliesEquipment
Accounts
Payable
Notes
Payable
Owner's
Capital
Bal. 4,000$ 1,200$ 16,000$ 1,200$ 20,000$
5 3,000 3,000
7,000$ -$ 1,200$ 16,000$ 1,200$ -$ 23,000$
24,200$ = 24,200$

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Paid salaries to employees, $800 cash.
The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Transaction Analysis

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Transaction Analysis
(6) Paid salaries to employees, $800 cash.
Assets = Liabilities +Equity
Cash
Accounts
Receivable
SuppliesEquipment
Accounts
Payable
Notes
Payable
Owner's
Capital
Bal. 4,000$ 1,200$ 16,000$ 1,200$ 20,000$
5 3,000 3,000
(800) (800)
6,200$ -$ 1,200$ 16,000$ 1,200$ -$ 22,200$
23,400$ = 23,400$

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Borrowed $4,000 from bank.
The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Transaction Analysis

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(7) Borrowed $4,000 from bank.
Transaction Analysis
Assets = Liabilities +Equity
Cash
Accounts
Receivable
SuppliesEquipment
Accounts
Payable
Notes
Payable
Owner's
Capital
Bal. 4,000$ 1,200$ 16,000$ 1,200$ 20,000$
5 3,000 3,000
(800) (800)
4,000 4,000$
10,200$ -$ 1,200$ 16,000$ 1,200$ 4,000$ 22,200$
27,400$ = 27,400$

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Rendered consulting services of $2,000 on
account.
The accounts involved are:
(1) Account Receivable (asset)
(2) Revenues (equity)
Transaction Analysis

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(8) Rendered consulting services of $2,000
on account.
Transaction Analysis
Assets = Liabilities +Equity
Cash
Accounts
Receivable
SuppliesEquipment
Accounts
Payable
Notes
Payable
Owner's
Capital
Bal.10,200$ 1,200$ 16,000$ 1,200$ 4000 22,200$
8 2,000 2,000
10,200$ 2,000$ 1,200$ 16,000$ 1,200$ 4,000$ 24,200$
29,400$ = 29,400$

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Received telephone bill of $200.
The accounts involved are:
(1) Account Payable (liability)
(2) Telephone Expenses (equity)
Transaction Analysis

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(9) Received telephone bill of $200.
Transaction Analysis
Assets = Liabilities +Equity
Cash
Accounts
Receivable
SuppliesEquipment
Accounts
Payable
Notes
Payable
Owner's
Capital
Bal.10,200$ 1,200$ 16,000$ 1,200$ 4000 22,200$
8 2,000 2,000
200 (200)
10,200$ 2,000$ 1,200$ 16,000$ 1,400$ 4,000$ 24,000$
29,400$ = 29,400$

43. End of Lecture 02
Thank you all …