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Chapter 3 Lesson 1: Analyzing Changes in Financial Position

Each business transaction changes a company's balance sheet. A transaction is a financial action that impacts a business's financial position. Examples of transactions provided include a company selling goods for cash, which increases assets and owner's equity, and a company paying down a loan, which decreases assets and liabilities. Source documents provide objective evidence of transactions and are needed to record transactions in the accounting books. The objectivity principle requires accounting to be based on verifiable records rather than subjective interpretation.

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45 views

Chapter 3 Lesson 1: Analyzing Changes in Financial Position

Each business transaction changes a company's balance sheet. A transaction is a financial action that impacts a business's financial position. Examples of transactions provided include a company selling goods for cash, which increases assets and owner's equity, and a company paying down a loan, which decreases assets and liabilities. Source documents provide objective evidence of transactions and are needed to record transactions in the accounting books. The objectivity principle requires accounting to be based on verifiable records rather than subjective interpretation.

Uploaded by

Sneha Das
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Chapter 3 Lesson 1: Analyzing

Changes In Financial Position


Vocabulary:
• Business Transactions
• Source documents
• Objectivity principle
A business’ financial position changes constantly. Since the balance sheet expresses the financial
position of a business, that means that the balance sheet is constantly changing also.

What event changes a balance sheet?


Each time a transaction occurs it changes a business’ balance sheet.

What is a transaction?

A business transaction is a financial action that causes a change in the financial


position of a business.
3.1. Business Transactions

Examples:
i) Sept 5 Pay $500 cash from my savings account to fix personal
car.
Effects of the transaction on the financial position:
Financial Position
Date Transaction Assets Liabilities Owner’s Equity

Sept 5 Took $500 from savings Decrease $500 Decrease by


account to pay to fix my (cash) $500
car
3.1. Business Transactions

Examples:
ii) Sept 6 Canadian Tire sold $150,000 worth of tires for cash.
Effects of the transaction on the financial position:

Financial Position
Date Transaction Assets Liabilities Owner’s Equity

Sept 6 Canadian Tire sold $150,00 Increase $150,000 Increase $150,000


worth of tires for cash
3.1. Business Transactions

Examples:
iii) Sept 7 Canadian Tire paid $20,000 cash towards a $75,000
bank loan that the company had received.
Effects of the transaction on the financial position:

Financial Position
Date Transaction Assets Liabilities Owner’s Equity

Sept 7 Canadian Tire paid $20,000 Decrease $20,000 Decrease


cash towards a $75,000 (cash) $20,000 (Bank
Loan)
nancial position

Business Transactions
What are the effects of these transactions on the financial position?

Transaction Financial Position


  Assets Liabilities Owner’s Equity
The business pays $800 cash for donations to the Cancer Society    ( 800) (cash)     ( 800) (donation)
Brackets represent
decreases/negatives

The owner of the business gave his son $500 cash for school books   (500) (cash)     (500) (drawings)

The business purchased a new car for $20 000 on credit from   20 000 (automobile)   20 000 (Accounts Payable)  
UniMotors Ltd

The company hired a new manager at $150 000 per year salary.      
The manager will begin work next month

A fire destroyed the company’s inventory valued at $500 000   (500 000) (inventory)     (500 000) (Loss)
Business Transactions

Each day a business completes hundreds of transaction and each of these


transaction must be recorded on a source document (business document) to verify
the dollar amount.
What is a source document?
A source document is a business paper that originates from a financial transaction,
for example, a receipt, a bill, a sales slip, etc.

Why is a source document needed?


A source document is required because:
• it acts as a reference
• it provides the information that is required to record the transaction in the
accounting books
• it is objective, that is, the information it contains is not dependent on its reader *
• it provides proof that the transaction occurred
Business Transactions

What is the Objectivity Principle?


The objectivity principle of accounting states that accounting should be
• based on objective records, that is, they should be verifiable, and not
• dependent on reader’s interpretation. The values contained in the records will be the same regardless
of who reads/sees them.
For example, R&B Co. bought $25 000 computer equipment from Quick Cash Ltd. According to the
Objectivity Principle, the transaction should be recorded as $25 000 (the historical value of the
transaction).
What are some of the source documents?
• Invoices (sales and purchases invoices) -- record purchase or sale on account
• credit notes – document records goods returned by a buyer (Accounts Receivable)
• Cheques -- Payment or receipt made via an order drawn on a bank for a specific sum of
money
• Receipts -- document which records cash paid or received on a transaction
• debit notes – document records goods returned to supplier (Accounts Payable)
Business Transactions
Chapter 3 Practice Exercises 3 and 4
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet

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