A business enterprise comprises numerous complicated transactions involving investments, revenues, withdrawals and regular expenses. Flow of fund is not limited to buying materials and selling them at a higher margin. Analysis of transactions homework answers intricate detail of all the fund flow process taking place in a business enterprise.
The fund movement including investment, generating revenue, purchases bills, cash expenses, depreciation calculation is termed as transaction in simple accounting terms. You must record each transaction and keep a record to enable you prepare P&L account and Balance Sheet at end of financial year.
Analysis of transactions homework answers categorizes transactions into
- Internal transaction taking place inside a company among employees. Best example that can be cited in this regard is when the firm pays salaries to employees.
In a firm which has a single proprietor as owner as well as worker, his drawings from the
firmâ€™s account is considered as internal transaction.
- External transaction in which transaction takes place between the firm and an outside entity.
For example, company selling its goods to customers, borrowing from a financial institution, paying premium for employee insurance.
Accountancy strictly deals with fund flow. Any other transaction like hiring an employee or meeting with vendors is not considered as transactions. Any transaction that involves money inflow or outflow has significance in accountancy.
Taking out vendors for a lunch involves accounts department sanction on bill in case bill is charged to company. However, meeting with same vendors at office without monitory dealing does not require any sanction of accounts department.
Understanding balance sheet
Balance sheet is effect or impact of transactions on the firmâ€™s financial health represented by certain specified data.
Cash inflow increases with sale of a product. Similarly, cash flows out of company with purchase of a manufacturing part, say a machine or paying salary to an employee. Both transactions increase and decrease firmâ€™s account to tune of the amount of inflow or outflow.
Analysis of transactions homework answers equation found in accountancy based on cash impact
Assets = Liabilities + Ownerâ€™s equity
You must balance equation at any point in time.
The asset increases with increase in cash and capital of company increases with increase in ownerâ€™s equity.
In a reverse situation, asset decrease with decrease in cash, however, some other element of equation increases.
We can study this in detail as we get into complete balance sheet equations and their elements.
Asset is owned by the company and following account heads are treated as assets
Cash: Physical currency, money in bank, check from customer are all part of asset of a company. Accounts receivable which is amount to be recovered from the client is considered as an asset as well.
Supplies: Company owned furniture, mobile phone, telephones are part of supplies and forms asset of company
Equipment: Computers, printers, coffee machines in pantry are part of asset that belongs to the company.
Liabilities that appear on right side of the balance sheet is what company owns to its employees and outsiders. The below account heads form liability section of a firm.
- Accounts payable is amount of money company owes to a vendor or financial institution in lieu of a purchase or borrowing of fund.
- Note payable is part of the loan firm is liable to pay
Ownerâ€™s equity is equivalent to asset â€“ liabilities; we term this as capital of the company.
Analysis of transactions homework answers reveals how based on type of transaction, we put amount under required account head and deduce value of capital at the end of financial year.
- If the firm or company receives money against sale of goods or service, amount is put in this account with a positive (+) sign.
- Receiving loan enters cash account with + sign.
- Promises of payment in future do not however appear in cash account.
- A withdrawal of cash from companyâ€™s account comes under cash account with a negative (-) sign.
- Salaries to employees on a particular date enter cash account with (-) sign.
- Purchase of heavy machinery for production is accounted under equipment head with (+) sign.
- This implies there is an addition in equipment account.
- If entire payment, say X amount is made through cash or check, cash account is debited to denote cash outflow
The equation is written as
Equipment a/c dr.Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $X
Â Â Â Â Â Â Â Â Â Â Â To cash Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $X
In case part of X amount i.e. Y is paid in cash and (X-Y) is funded through loan borrowed from bank, balance amount (X-Y) goes to accounts payable and equation looks like
Equipment a/c dr.Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $X
Â Â Â Â Â Â Â Â Â Â Â To cashÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $Y
Â Â Â Â Â Â Â Â Â Â Â To a/c payableÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $(X-Y)
- This is treated quite similar to that of equipment account
- Supplies like stationeries, telephone connection etc account enters this account with (+) sign and cash account or accounts payable account is debited with (-) sign to tune of amount.
- Analysis of transactions homework answers states how this is related to cash flow of the company.
- Money promised to be paid to company in a future date enters accounts receivable with a (+) sign.
- For example, the company sells its goods to a client who has negotiated for a three month credit period.
- There is no immediate fund inflow to cash account right at point of sale however company expects to get the payment after three months.
The equation looks like
Sale a/c dr.Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $X
Â Â Â Â Â Â Â Â Â Â Â To a/c receivableÂ Â Â Â Â Â Â $X
- As explained earlier, amount owed by company or firm to an external agent or vendor enters accounts payable with a (+) sign.
- Telephone bills, internet bills enter accounts payable with (+) sign.
- The company owes amount to service provider on due date.
- The budget at starting point of a business is capital account and not a cash account.
- Cash inflow or outflow during course of business is again a cash account and not a capital account.
- These two accounts cannot be confused.
Analysis of transactions homework answers the sum total of various account heads. The total is tallied and put into the equation of balance sheet to identify the financial health of the company.