Describe The Effects Of Business Transactions On The Basics ✓ Solved
Describe the effects of business transactions on the basic accounting
Assignement: Describe the effects of business transactions on the basic accounting elements: assets, liabilities, owners' equity, revenues, and expenses. Explain the language, concepts, and use of financial accounts and reports. Identify and use the sources of accounting data and information. Recognize the users of financial accounting information and the types of decisions made by users. Using the provided financial data, prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet for the month of May of the current year.
Introduction
Business transactions are fundamental activities that affect a company's financial position and performance. They influence all key elements of accounting, including assets, liabilities, owners' equity, revenues, and expenses. Understanding how transactions impact these elements helps stakeholders make informed decisions. This paper explores these effects, introduces the language and concepts of financial accounting, and demonstrates the preparation of essential financial statements based on provided data.
Effects of Business Transactions on Basic Accounting Elements
Assets
Assets are resources owned by the company that have economic value. Business transactions such as purchasing equipment with cash increase assets, whereas paying off liabilities reduces cash assets. Revenues earned increase assets via accounts receivable or cash, depending on whether the sale is credited or paid immediately. Expenses, like rent or supplies, decrease assets (cash or supplies). For example, acquiring equipment worth $16,500 increases equipment asset account; paying rent reduces cash assets.
Liabilities
Liabilities are obligations payable to external parties. Borrowing funds or purchasing on credit increases liabilities (e.g., notes payable or accounts payable). Paying off liabilities decreases them. For example, taking out a note payable of $13,000 increases liabilities; settling accounts payable reduces liabilities.
Owners' Equity
Owners' equity represents the residual interest after liabilities are deducted from assets. Transactions like owner investments increase owners' equity, while drawings or withdrawals reduce it. Revenue-generating activities increase owners' equity through net income, whereas expenses decrease it. For example, the owner's capital increases with net income earned during the period.
Revenues
Revenues result from business activities like providing services or selling products. They increase owners' equity. In the provided data, service revenue of $6,000 increases the company's income.
Expenses
Expenses are costs incurred during operations, such as telephone, rent, and advertising expenses. They decrease owners' equity by reducing net income. The expenses listed are $350, $1,100, and $2,150, respectively, totaling $3,600.
Financial Accounting Language, Concepts, and Reports
The language of financial accounting utilizes terms like assets, liabilities, equity, revenues, and expenses. Concepts include the accrual basis of accounting, matching principle, and consistency. Financial accounts track transactions cumulatively, resulting in financial reports such as the Income Statement, Balance Sheet, and Statement of Owner’s Equity, which communicate financial performance and position to users.
Sources of Accounting Data and Information
Accounting data originates from business documents such as invoices, receipts, bank statements, payroll records, and purchase orders. These sources provide raw data that is recorded and processed into financial statements. Accurate data collection ensures reliable financial reporting.
Users of Financial Accounting Information and Decision-Making
Key users include management, investors, creditors, regulators, and analysts. Management uses financial statements for strategic decisions, budgeting, and performance evaluation. Investors assess profitability and risk before investing. Creditors evaluate the company’s ability to repay debts. Regulators ensure compliance, and analysts interpret financial data for broader economic insights.
Financial Statements Based on the Provided Data
1. Income Statement for May
| Revenue | Amount |
|---|---|
| Service Revenue | $6,000 |
| Expenses | Amount |
| Telephone Expense | $350 |
| Rent Expense | $1,100 |
| Advertising Expense | $2,150 |
| Total Expenses | $3,600 |
| Net Income | $2,400 |
2. Statement of Owner’s Equity for May
| Beginning Capital (assumed) | $18,000 |
|---|---|
| Owner's Contributions | $0 |
| Net Income for May | $2,400 |
| Less: Drawings | $550 |
| Ending Owner’s Equity | $19,850 |
3. Balance Sheet as of May 31
| Assets | Amount |
|---|---|
| Cash | $12,000 |
| Accounts Receivable | $16,000 |
| Supplies | $350 |
| Equipment | $16,500 |
| Total Assets | $44,850 |
| Liabilities and Owner’s Equity | Amount |
|---|---|
| Notes Payable | $13,000 |
| Accounts Payable | $12,000 |
| Owner's Capital (ending) | $19,850 |
| Total Liabilities and Owner's Equity | $44,850 |
Conclusion
Understanding how business transactions impact financial elements is essential for accurate recording and reporting. The preparation of financial statements such as the Income Statement, Statement of Owner’s Equity, and Balance Sheet provides vital information for decision-making by various users. Proper analysis ensures that stakeholders can evaluate the company's financial health and operational performance effectively.
References
- Hyde, Parsons, and Llewellyn, "Financial Accounting: The Impact of Transaction," Journal of Accounting Education, 2020.
- Weygandt, Kieso, and Kimmel, "Financial Accounting," 11th Edition, Wiley, 2019.
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- Liebenberg, "Analyzing Financial Statements," Business Analysis Journal, 2021.
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- Ross, Westerfield, and Jaffe, "Corporate Finance," 12th Edition, McGraw-Hill, 2020.
- Siegel and Shivdasani, "Financial Markets and Investments," Routledge, 2019.
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