Lecture Notes Week 2 Accounting for Transactions – Fundamentals Part 1

Required Readings: HEM: Chapter 3 Pages 68-81 All required readings must be completed before attending class

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THE ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY This equation must ALWAYS balance. Effects of transactions on the Accounting Equation Transactions are business events which are given accounting recognition, and are inputs to the accounting system. Transactions usually involve a flow of resources. Examples:

Every transaction will result in changes to an entity’s assets, liabilities or equity, and

After each transaction is recorded, Transaction Analysis  First step in the recording process  Involves analysing the effects of transactions on the accounting equation: *Identify the items affected: *Determine effect: Note that Revenues and Expenses are treated as a subset of Equity:  Revenues  Expenses

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Lecture Problem 1: Murphy’s Law Firm began operations on 1 January. The following transactions occurred during the month of January: Jan 1. The owner contributed cash of $15,000 to start the business Jan 2. Paid $1,200 for rent for January Jan 3. A computer was purchased for $2,200 cash Jan 5. Office furniture was purchased on credit for $4,000 Jan 10. Cash of $500 was received for services performed Jan 22. Billed customers for services provided, $2,500 Jan 24. Paid for the office furniture purchased on Jan 5. Jan 30. Received cash of $2,500 from customers on account for the services billed on Jan 22. Jan 31. Murphy withdrew cash of $750 for personal expenses.

Required: Perform a transaction analysis and prepare journal entries for the above transactions.

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LECTURE PROBLEM 1: TRANSACTION ANALYSIS ASSETS = LIABILITIES + EQUITY

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Recording Transactions: Step 1: Perform Transaction Analysis  Identify the  Determine whether the account needs to be Commonly used accounts: Assets: Liabilities: Owners’ Equity: Income: Expenses:

    

Step 2 : Journal Entries Transactions are recorded as Journal Entries in the General Journal. The General Journal is a detailed record of all transactions in Journal Entry: Date Dr Account Name $ Cr Account Name $ (Narration - brief explanation) The terms debit (dr) and credit (cr) are used as a code for recording transactions. DEBIT CREDIT RULES: DR  CR 

A

CR  = DR 

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CR  + DR 

E

Note: when recording transactions: * at least 2 accounts * the sum of the debits must always equal the sum of the credits for every journal entry. This ensures that the equality * Always put debit first
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Lecture Problem 1: General Journal
Date Details Debit Credit

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Lecture Problem 2: The following transactions occurred in the business of Murphy’s Law Firm during the month of February. Feb 1. Obtained a loan from the bank for $100,000 Feb 2. Paid 6 months rent in advance, $7,200 Feb 9. Purchased a motor vehicle costing $25,000. $5,000 has been paid as a deposit, and the remaining $20,000 is due to be paid within 14 days. Feb 12. Paid wages of $12,000 Feb 15. Invoiced client for services performed, $18,000 Feb 21. Sent a cheque for $20,000 in payment for the motor vehicle purchased on Feb 9 Feb 22. Received a cheque for $18,000 from customers on account (customers were invoiced on Feb 15.) Feb 27. Paid interest expense on bank loan $1,500 Feb 28. Received $2,000 in advance from customers for services to be provided in April. (Hint: revenue has not been earned yet, because the service has not yet been performed) Required: Perform a transaction analysis and prepare journal entries for the above transactions.
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LECTURE PROBLEM 2: TRANSACTION ANALYSIS ASSETS = LIABILITIES + EQUITY

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Lecture Problem 2: General Journal
Date Details Debit Credit

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Lecture Problem 3: The following transactions occurred in the business of Murphy’s Law Firm during the month of March. Mar 1.Paid advertising expense for the month of March by cheque, $6,000 Mar 4. Purchased equipment costing $8,000 on credit . Mar 10. Services performed for a customer amounted to $2,000. Received cash of $500 and invoiced customer for the balance owing of $1,500. Mar 15 Paid supplier for the equipment purchased on March 4 Mar 20. Received a cheque for $1,500 for services provided on account on March 10. Mar 22. Paid the annual insurance premium of $1,800 Mar 27. Paid wages expense of $6,000 Mar 31. The owner withdrew cash of $1,000

Required: Perform a transaction analysis and prepare journal entries for the above transactions.
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LECTURE PROBLEM 3: TRANSACTION ANALYSIS ASSETS = LIABILITIES + EQUITY

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Lecture Problem 3: General Journal
Date Details Debit Credit

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