Analyzing Business Transactions in Accounting

Summary:

The text provides an introduction to accounting with a focus on analyzing business transactions. It outlines five basic types of accounts: assets, liabilities, equity, revenues, and expenses. The fundamental accounting equation, Assets = Liabilities + Equity, and how to record transactions using this equation is discussed. The text then introduces the concept of financial statements, including the balance sheet, income statement, cash flow statements, and statements of shareholders’ equity. Each financial statement’s purpose and format are explained in detail.

The text serves as a primer on accounting fundamentals, covering various aspects like transaction analysis, financial statements, and the fundamental accounting equation.

Excerpt:

Analyzing Business Transactions in Accounting

INTRODUCTION TO ACCOUNTING

 Chapter 2: Analyzing Business Transactions

Business Transaction is a financial transaction between two or more parties that involves the exchange of goods, money or services.  A business transaction is a financial event that changes a firm’s resources. Examples of common business transactions include purchases, sales, payments, and cash receipts, among other things.

Five Basic Types of Accounts

Assets

• Properties or things of value owned by a business
  • Examples include cash, equipment, patents, land, supplies, etc.

Liabilities

• Debts or obligations
• Money that is owed to others
• Claims of creditors (i.e. someone who you owe money to) against the assets of a business

Equity

• The owners’ rights or claims to the assets of a business
• Synonymous with the terms “capital” and “net worth.”
• The owner’s investment (adjusted for other things you will learn about)

Revenues

• Amounts earned by a business
• Can be in the form of cash, credit card receipts, or credit sales to charge customers (who will pay for goods/services at a later time)
• GAAP says revenues should be recorded when earned, not necessarily when paid
• When businesses generate revenues, the owner’s equity increases

Expenses

• Costs of the business that relate to the earning of revenues
• Can be in the form of cash, or on account (that will be paid later)
• GAAP says expenses should be recorded when incurred, not necessarily when paid
• When businesses incur expenses, the owner’s equity decreases