Principles of Accounting

Lecture 3
Accounting Transaction Analysis

The accounting transaction analysis is the process of translating the business

activities and events that have a measurable effect on the accounting equation
into the accounting language and writing it in the accounting books. This is the
first stage in the accounting cycle, which is the foundation of accounting,
regardless of the accounting type you are interested in. Businesses analyze to
ensure that the balance sheet equation stays in balance after each transaction is
completed.
Six Steps of Accounting Transaction Analysis
1. Determine if the event is an accounting transaction

You first need to determine whether this transaction is a business

nature transaction. An accounting also transaction has to involve a
monetary amount. So if the company signed a rental contract, there is
no accounting transaction. However, if it makes a payment under this
contract, it will be an accounting transaction because it has a monetary
amount that the company will need to record. Other examples include
a purchase of equipment, sale of products, and salary payments.
2. Identify what accounts it affects

Your next step is to identify which accounts the transaction will affect. For example,
Ellen invested $38,000 in cash and a used truck with a market value of $8,500 in the
business in exchange for the company’s common stock. The cash and truck invested
will be assets for that business, recorded under Cash account and Truck account. In
exchange for that investment, Ellen will get common stock, so it will also affect the
Common Stock account.

3. Determine what type of accounts they are

Every transaction leads to a measurable change in the accounting equation.

Knowing whether the account belongs to assets, liabilities, or equity will allow you
to determine whether the account will have a debit or credit normal balance. In the
example above, we already decided that two accounts will be Asset accounts, and
the Common Stock account is the Owner’s Equity type account.
4. Determine which accounts are going up or down

A business records a transaction with an entry that has a debit and credit effect. This double-
entry procedure keeps the accounting equation in balance. So, when Ellen invested cash, the
cash and truck accounts will increase because the company will now have more money, and it
now has a truck. The Common Stock account will also increase.

5. Apply the rules of debits and credits to these accounts

One has to record each business transaction in two or more related but opposite accounts. We
debit one account and credit the other Account in the same transaction amount. Accounts on
the left side increase with a debit entry and decrease with a credit entry while accounts on the
rise in the right side with a credit entry and decrease with a debit. So, if the Cash and Truck
accounts will increase, and it is an asset account, the business will debit it. The Common Stock
account is the Equity account, which increases with a credit entry.

6. Find the transaction amount to be entered into each account

Your final step would be to determine the amount of the transaction from the business
records, such as receipts, invoices, and bank statements.
Transaction Analysis
TRANSACTION 1. INVESTMENT BY OWNER:
Ray Neal decides to start a smartphone app development company which he names Softbyte. On
September 1, 2017, he invests $15,000 cash in the business. This transaction results in an equal
increase in assets and owner’s equity.

Journal: Assets = Liabilities + Owner’s Equity

Date Cash Account Capital +Revenue -
Cash Dr $15,000 Payable Expense - Drawing
Owner’s Capital Cr $15,000 1 $15,000 $15,000

TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH

Softbyte Inc. Purchases computer equipment for $7,000 cash.

Journal:
Date Assets = Liabilities + Owner’s Equity
Equipment Dr $7,000 Cash Equipment Account Payable C+R-E-D
Cash Cr $7,000 2 ($7,000) $7,000
Transaction Analysis
TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT
Softbyte Inc. Purchases for $1,600 headsets and other accessories expected to last several months. The
supplier allows Softbyte to pay this bill in October.

Journal: Date Assets = Liabilities + Owner’s Equity

Supplies Dr $1,600 Supplies Account Payable C+R-E-D
Account Payable Cr $1,600 3 $1,600 $1,600

TRANSACTION 4. SERVICES PERFORMED FOR CASH

Softbyte Inc. Receives $1,200 cash from customers for app development services it has performed.

Journal:
Date Assets Liabilities + Owner’s Equity
Cash Dr $1,200 Cash Account Payable C+R-E-D
Services performed Cr $1,200 4 $1,200 $1,200
 Transaction Analysis
TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT
Softbyte Inc. Receives a bill for $250 from the Daily News for advertising on its online website but postpones
payment until a later date.
Journal:
Date Assets = Liabilities + Owner’s Equity
Advertisement Dr $250 Cash Account Payable C+R-E-D
Account Payable Cr $250 5 $250 ($250)

TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT.

Softbyte performs $3,500 of services. The company receives cash of $1,500 from customers, and it bills the
balance of $2,000 on account.
Journal:
Date Assets = Liabilities + Owner’s Equity
Cash Dr $1,500
Cash Account Receivable Account Payable C+R-E-D
Account Receivable Dr $2,000
6 $1,500 $2,000 $3,500
Services Performed Cr $3,500
 Transaction Analysis
TRANSACTION 7. PAYMENT OF EXPENSES
Softbyte Inc. Pays the following expenses in cash for September: office rent $600, salaries and wages of
employees $900, and utilities $200. Assets = Liabilities + Owner’s Equity
Journal: Date Cash Account Payable C+R-E-D
Office Rent Dr. $600
Salaries and wages Dr. $900 7 ($1,700) ($600)
Utilities Dr. $200 ($900)
Cash Cr. $1,700 ($200)
TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE
Softbyte Inc. Pays its $250 Daily News bill in cash. The company previously (in Transaction 5) recorded the
bill as an increase in Accounts Payable. Assets = Liabilities + Owner’s Equity
Journal: Date Cash Account Payable C+R-E-D
Account Payable Dr. $250
Cash Cr. $250 8 ($250) ($250)
TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT
Softbyte Inc. Receives $600 in cash from customers who had been billed for services (in Transaction 6).
Journal:
Date Assets + Liabilities + Owner’s Equity
Cash Dr. $600
Account Receivable Cr. $600 Cash Account Receivable Payable C+R-E-D
9 $600 ($600)
Transaction Analysis
TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER
Ray Neal withdraws $1,300 in cash in cash from the business for his personal use.
Journal:
Owner’s Drawing Dr. $1,300
Cash Cr. $1,300

Assets = Liabilities + Owner’s Equity

Date Cash Account Payable C+R-E-D
10 ($1,300) ($1,300)
Transaction Analysis
Ray Neal starst a smartphone app development company which he names Softbyte. On
September 1, 2017, he invests $15,000 cash in the business.
1. September 2, 2017: Softbyte purchases computer equipment for $7,000 cash.
2. September 5, 2017: Softbyte purchases for $1,600 from Mobile Solutions headsets and
other computer accessories expected to last several months. Mobile Solutions agrees to
allow Softbyte to pay the bill in October
3. September 8, 2017: Softbyte receives $1,200 cash from customers for app development
services it has performed.
4. September 9, 2017: Softbyte receives a bill for $250 from the Daily News for advertising
on its online website but postpones payment until a later date.
5. September 10, 2017: Softbyte performs $3,500 of app development services for the
customers. The company receives cash of $1,500 from customers, and it bills the balance
on account.
6. September 11, 2017: Softbyte pays the following expenses in cash for September:
Office rent $600 , Salaries and wages of employees $900, and utilities $200.
7. September 15, 2017: Softbyte pays its Daily News bill in cash.
8. September 20, 2017: Softbyte receives $600 in cash from customer who had been billed
for services.
9. September 30, 2017: Ray Neal withdraws $1,300 in cash from the business for his personal
use.
Instructions:
1. List the numbers of the Transactions and describe the effect of each
transaction on the accounting Equation.
2. Prepare a tabular summary of the Transactions.
Effects On Accountnting Eqution
Date Description Effect on Accounting
Equation (A= L+ E)
1. September 1, 2017 Cash Dr $15,000 A+
Owner’s Capital Cr $15,000 OE+
2. September 2, 2017 Equipment Dr $7,000 A+
Cash Cr $7,000 A-
3. September 5, 2017 Supplies Dr $1,600 A+
Account Payable Cr $1,600 L+
4. September 8, 2017 Cash Dr $1,200 A+
Services performed Cr $1,200 OE+
5. September 9, 2017 Advertisement Dr $250 OE-
Account Payable Cr $250 L+

6. September 10, 2017 Cash Dr $1,500 A+

Account Receivable Dr $2,000 A+
Services Performed Cr $3,500 OE-
Effects On Accountnting Eqution
Date Description Effect on Accounting
Equation (A= L+ E)
7. September 11, 2017 Office Rent Dr. $600 OE-
Salaries and wages Dr. $900 OE-
Utilities Dr. $200 OE-
Cash Cr. $1,700 A-
8. September 15, 2017 Account Payable Dr. $250 L-
Cash Cr. $250 A-
9. September 20, 2017 Cash Dr. $600 A+
Account Receivable Cr. $600 A-
10. September 30, 2017 Owner’s Drawing Dr. $1,300 OE-
Cash Cr. $1,300 A-
 Tabular Summary
Date Assets = Liabilities + Owner’s Equity

Cash Accounts Supplies Equipment Accounts Payable Capital + Revenue- Expense -Drawing
Receivable
1 +15,000 +15,000
2 -7,000 +7,000
3 +1,600 +1,600
4 +1,200 +1,200
5 +250 -250
6 +1500 +2,000 +3,500
7 -1,700 -600
-900
-200

8 -250 -250
9 +600 -600
10 -1,300 -1,300
$8,050 $1,400 $1,600 $7,000 = $1,600 $15,000 $4,700 -$1,950 -$1,300
$18,050 $18,050
Practice-1
E1-6 Selected transactions for Green Valley Lawn Care Company are listed below.
1. Made cash investment to start business $20,000.
2. Paid monthly rent $500.
3. Purchased equipment on account $8,000.
4. Billed customers for services performed $300.
5. Withdrew cash for owner’s personal use $1,400
6. Received cash from customers billed in (4).
7. Incurred advertising expense on account $400
8. Purchased additional equipment for cash $3,500
9. Received $2,000 cash from customers when service was performed.
Instructions:
1.List the numbers of the above transactions and describe the effect of each transaction on
assets, liabilities, and owner’s equity. For example, the first answer is: (1) Increase in assets
and increase in owner’s equity.
2. Make a tabular summary.
Effects On Accountnting Eqution
Date Description Effect on Accounting
Equation (A= L+ E)
Effects On Accountnting Eqution
Date Description Effect on Accounting
Equation (A= L+ E)
Date Assets = Liabilities + Owner’s Equity

Cash Accounts Supplies Equipment Accounts Capital + Revenue- Expense -Drawing

Receivable Payable

=
Practice 2
Gordon Beckham started his own delivery service, Beckham Deliveries, on June 1, 2012.
The following transactions occurred during the month of June.
June 1. Gordon invested $10,000 cash in the business.
2. Purchased a used van for deliveries for $12,000. Gordon paid $2,000 cash and signed
a note payable for the remaining balance.
3. Paid $500 for office rent for the month.
5. Performed $4,400 of services on account.
9. Withdrew $200 cash for personal use.
12. Purchased supplies for $150 on account.
15. Received a cash payment of $1,250 for services provided on June 5.
17. Purchased gasoline for $200 on account.
20. Received a cash payment of $1,300 for services provided.
Practice-2 Continue
23. Made a cash payment of $600 on the note payable.
26. Paid $250 for utilities.
29. Paid for the gasoline purchased on account on June 17.
30. Paid $1,000 for employee salaries.
Instructions
(a) Show the effects of the transactions on the accounting equation.
(b) Prepare a tabular analysis with the above Transactions.
Effects On Accountnting Eqution
Date Description Effect on Accounting
Equation (A= L+ E)
Effects On Accountnting Eqution
Date Description Effect on Accounting
Equation (A= L+ E)
 Tabular Summary
Date Assets = Liabilities + Owner’s Equity

Cash Accounts Supplies Delivery Accounts Payable Capital + Revenue- Expense -Drawing
Receivable Van

=
Practice-3
Juanita Pierre opened a law office, on July 1, 2012. On July 31, the balance sheet showed
Cash $5,000, Accounts Receivable $1,500, Supplies $500, Equipment $6,000, Accounts
Payable $4,200, and Owner’s Capital $8,800. During August, the following transactions
occurred.
1. Collected $1,200 of accounts receivable.
2. Paid $2,800 cash on accounts payable.
3. Earned revenue of $7,500 of which $3,000 is collected in cash and the balance is due in
September.
4. Purchased additional office equipment for $2,000, paying $400 in cash and the balance on
account.
5. Paid salaries $2,500, rent for August $900, and advertising expenses $400.
6. Withdrew $700 in cash for personal use.
Problem-3 Continue
7. Received $2,000 from Standard Federal Bank—money borrowed on a note payable.
8. Incurred utility expenses for month on account $270.
Instructions
1. Show the effects of the transactions on the accounting equation.
2. Prepare a tabular analysis with the above Transactions.

Practice All Problems of This Book

Effects On Accountnting Eqution
Date Description Effect on Accounting
Equation (A= L+ E)
Effects On Accountnting Eqution
Date Description Effect on Accounting
Equation (A= L+ E)
 Tabular Summary
Date Assets = Liabilities + Owner’s Equity
Cash Accounts Equipment Others Accounts Capital + Revenue- Expense -Drawing
Receivable Payable