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 Dr $15,000 Cash Account Capital +Revenue
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:
Equipment Dr $7,000 Date Assets = Liabilities + Owner’s Equity
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:
Cash Dr $1,500 Date Assets = Liabilities + Owner’s Equity
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
Cash Account Payable C+R-E-D
Account Receivable Cr. $600 Receivable
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.
September 2, 2017: Softbyte purchases computer equipment for $7,000 cash.
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
September 8, 2017: Softbyte receives $1,200 cash from customers for app development services
it has performed.
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.
1. 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.
2. September 11, 2017: Softbyte pays the following expenses in cash for September: Office
rent $600 , Salaries and wages of employees $900, and utilities $200.
3. September 15, 2017: Softbyte pays its Daily News bill in cash.
4. September 20, 2017: Softbyte receives $600 in cash from customer who had been billed for
services.
5. 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. Cash Dr $15,000 A+
Owner’s Capital Cr $15,000 OE+
2. Equipment Dr $7,000 A+
Cash Cr $7,000 A-
3. Supplies Dr $1,600 A+
Account Payable Cr $1,600 L+
4. Cash Dr $1,200 A+
Services performed Cr $1,200 OE+
5. Advertisement Dr $250 OE-
Account Payable Cr $250 L+

6. 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. Office Rent Dr. $600 OE-
Salaries and wages Dr. $900 OE-
Utilities Dr. $200 OE-
Cash Cr. $1,700 A-
8. Account Payable Dr. $250 L-
Cash Cr. $250 A-
9. Cash Dr. $600 A+
Account Receivable Cr. $600 A-
10. Owner’s Drawing Dr. $1,300 OE-
Cash Cr. $1,300 A-
Date Assets = Liabilities + Owner’s Equity

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

Receivable Payable
1
2
3
4
5
6
7
8
9

10
Problem-1
E1-6 Selected transactions for Green Valley Lawn Care Company are listed below.
1. Made cash investment to start business.
2. Paid monthly rent.
3. Purchased equipment on account.
4. Billed customers for services performed.
5. Withdrew cash for owner’s personal use.
6. Received cash from customers billed in (4).
7. Incurred advertising expense on account.
8. Purchased additional equipment for cash.
9. Received cash from customers when service was performed.
Instructions: 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.
Problem 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.
Problem-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
Problem-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
(a) Prepare a tabular analysis of the August transactions beginning with July 31 balances.

Practice All Problems of This Book