Topic 2 recording transactions part 1 PDF

TOPIC RECORDING TRANSACTIONS PART 1- RECORDING TRANSACTIONS USING THE ACCOUNTING EQUATION Learning Objectives Topic Part 1- Recording transactions using the accounting equation On completion of this session, you should be able to: Describe the basic accounting equation Analyse the effect of accounting transactions and events on the basic accounting equation Accounting is an INFORMATION SYSTEM that ………… IDENTIFICATION • Observing economic events to determine which need to be recorded as transactions MEASUREMENT • Quantifying the transactions in monetary terms e.g the dollar RECORDING COMMUNICATION • Classification into categories & summarizing the transactions • Preparing the financial reports from the accounts for analysis & interpretation | THE ACCOUNTING SYSTEM Use the accounting equation to record transactions Assets = Liabilities + Equity Each transaction must be analysed to determine:  Which accounts are affected, by categorising?  Assets, Liabilities, Equity (Income & Expense)  By how much each entry must be increased or decreased?  All transactions have at least entries (hence the name double entry bookkeeping)  The accounting equation must always remain in balance! | THE ACCOUNTING SYSTEM Use the accounting equation to record transactions Assets = Liabilities + Equity Kelly Cook eTravel Pty Ltd Transactions for the month of May 2017 Date Transaction 01-May-2017 Kelly Cook invests $30,000 to begin Kelly Cook’s eTravel P/L 02-May-2017 Kelly Cook eTravel P/L purchases Office Furniture & Equipment paying $10,000 in cash 15-May-2017 Kelly Cook eTravel P/L provides services and collects $5,500 in Revenue 20-May-2017 Kelly Cook eTravel P/L provides services, and the client agrees to pay $3,000 within one month 21-May-2017 Kelly Cook eTravel P/L pays cash expenses of $600 for Printing & Stationery 21-May-2017 Kelly Cook eTravel P/L pays cash expenses of $1,100 for Rent 21-May-2017 Kelly Cook eTravel P/L pays cash expenses of 1,200 for Salaries & Wages 21-May-2017 Kelly Cook eTravel P/L pays cash expenses of $400 for Electricity 25-May-2017 Kelly Cook eTravel P/L purchases some online Advertising, agreeing to pay $500 in 30 days 26-May-2017 Kelly Cook renovated her bathroom at her personal residence 30-May-2017 Kelly Cook eTravel P/L collected $1,000 from the client of 20th May 31-May-2017 Kelly Cook eTravel P/L pays $300 to the supplier from which she purchased $500 worth of Advertising 31-May-2017 Kelly Cook eTravel P/L pays $2,000 cash Dividends to Kelly Cook | Kelly Cook eTravel Pty Ltd Transactions for the month of May 2017 Date Transaction 01-May-2017 Kelly Cook invests $30,000 to begin Kelly Cook’s eTravel P/L 02-May-2017 Kelly Cook eTravel P/L purchases Office Furniture & Equipment paying $10,000 in cash 15-May-2017 Kelly Cook eTravel P/L provides services and collects $5,500 in Revenue 20-May-2017 Kelly Cook eTravel P/L provides services, and the client agrees to pay $3,000 within one month 21-May-2017 Kelly Cook eTravel P/L pays cash expenses of $600 for Printing & Stationery 21-May-2017 Kelly Cook eTravel P/L pays cash expenses of $1,100 for Rent 21-May-2017 Kelly Cook eTravel P/L pays cash expenses of 1,200 for Salaries & Wages 21-May-2017 Kelly Cook eTravel P/L pays cash expenses of $400 for Electricity 25-May-2017 Kelly Cook eTravel P/L purchases some online Advertising, agreeing to pay $500 in 30 days 26-May-2017 Kelly Cook renovated her bathroom at her personal residence 30-May-2017 Kelly Cook eTravel P/L collected $1,000 from the client of 20th May 31-May-2017 Kelly Cook eTravel P/L pays $300 to the supplier from which she purchased $500 worth of Advertising 31-May-2017 Kelly Cook eTravel P/L pays $2,000 cash Dividends to Kelly Cook ASSETS Date Description Cash 1/5/17 Initial Investment 30,000 2/5/17 Purchase Office Furniture & Equipment -10,000 15/5/17 Earning of service revenue - cash 20/5/17 Earning of service revenue - credit 21/5/17 Paid cash expenses - Printing & Stationery Accounts Receivable PPE = LIABILITIES + EQUITY = Accounts Payable = 10,000 30,000 = = 5,500 = 3,000 -600 = -600 Paid cash expenses - Rent -1,100 = -1,100 21/5/17 Paid cash expenses - Wages & Salaries -1,200 = -1,200 21/5/17 Paid cash expenses - Electricity -400 = -400 21/5/17 25/5/17 5,500 Equity 3,000 Purchases Advertising on credit = 30/5/17 Collects cash from client (transaction 20/5) 1,000 -1,000 31/5/17 Paid part of account from supplier -300 = 31/5/17 Dividends Paid -2,000 = Balance 20,900 2,000 500 -500 = 10,000 32,900 = -300 -2,000 200 32,700 32,900 ASSETS Date Description Cash 1/5/17 Initial Investment 30,000 2/5/17 Purchase Office Furniture & Equipment -10,000 15/5/17 Earning of service revenue - cash 20/5/17 Earning of service revenue - credit 21/5/17 Paid cash expenses - Printing & Stationery 21/5/17 21/5/17 21/5/17 25/5/17 Accounts Receivable PPE = LIABILITIES + EQUITY = Accounts Payable = 10,000 5,500 3,000 Equity 30,000 = = 5,500 = 3,000 -600 = -600 Paid cash expenses - Rent -1,100 = -1,100 Paid cash expenses - Wages & Salaries -1,200 = -1,200 Paid cash expenses - Electricity -400 = Purchases Advertising on credit = 30/5/17 Collects cash from client (transaction 20/5) 1,000 31/5/17 Paid part of account from supplier -300 31/5/17 Dividends Paid -2,000 Balance 20,900 -1,000 -400 500 = = -300 = 2,000 -500 10,000 32,900 = -2,000 200 32,700 32,900 Kelly Cook eTravel Pty Ltd Statement of Profit or Loss for the month of May 2017 Revenue Service Revenue Expenses Advertising Electricity Printing & Stationery Rent Wages & Salaries Total Expenses Profit 8,500 500 400 600 1,100 1,200 3,800 4,700 ASSETS Date Description Cash 1/5/17 Initial Investment 30,000 2/5/17 Purchase Office Furniture & Equipment -10,000 15/5/17 Earning of service revenue - cash 20/5/17 Earning of service revenue - credit 21/5/17 Paid cash expenses - Printing & Stationery 21/5/17 21/5/17 21/5/17 25/5/17 PPE = LIABILITIES + EQUITY = Accounts Payable = 10,000 5,500 3,000 Equity 30,000 = = 5,500 = 3,000 -600 = -600 Paid cash expenses - Rent -1,100 = -1,100 Paid cash expenses - Wages & Salaries -1,200 = -1,200 Paid cash expenses - Electricity -400 = Purchases Advertising on credit = 30/5/17 Collects cash from client (transaction 20/5) 1,000 31/5/17 Paid part of account from supplier -300 31/5/17 Dividends Paid -2,000 Balance 20,900 Assets Cash Accounts Receivable Property, Plant & Equipment Total Assets Accounts Receivable -1,000 10,000 32,900 = 200 2,000 32,900 -300 = 2,000 -500 = = Kelly Cook eTravel Pty Ltd Statement of Financial Position as at 31 May 2017 Liabilites Accounts Payable 20,900 10,000 -400 500 Equity Capital Retained Earnings Total Equity 30,000 2,700 Total Liabilties & Equity 32,900 32,700 -2,000 200 32,700 32,900 Kelly Cook eTravel Pty Ltd Statement of Changes in Equity for the month of May 2017 Equity as at May 2017 Share Capital invested Add Profit for month Less Dividends Retained Earnings as at 31 May 2017 30,000 4,700 -2,000 2,700 Total Equity 31 May 2017 32,700 ASSETS Date Description Cash 1/5/17 Initial Investment 30,000 2/5/17 Purchase Office Furniture & Equipment -10,000 15/5/17 Earning of service revenue - cash 20/5/17 Earning of service revenue - credit 21/5/17 Paid cash expenses - Printing & Stationery 21/5/17 21/5/17 21/5/17 25/5/17 Accounts Receivable PPE = LIABILITIES + EQUITY = Accounts Payable = 10,000 5,500 3,000 Equity 30,000 = = 5,500 = 3,000 -600 = -600 Paid cash expenses - Rent -1,100 = -1,100 Paid cash expenses - Wages & Salaries -1,200 = -1,200 Paid cash expenses - Electricity -400 = Purchases Advertising on credit = 30/5/17 Collects cash from client (transaction 20/5) 1,000 31/5/17 Paid part of account from supplier -300 31/5/17 Dividends Paid -2,000 Balance 20,900 -1,000 -400 500 = = -300 = 2,000 -500 10,000 32,900 = -2,000 200 32,700 32,900 Kelly Cook eTravel Pty Ltd Statement of Cash Flows for the month of May 2017 Cash flows from operating activities: Receipts from customers -2,400 Payments to suppliers Payments to employees -1,200 Net cashflow from operating activites Cash flows from investing activities: Purchase of Property, Plant & Equipment Net cashflow from investing activites Cash Flows from financing activities: Issue of shares Dividends Net cashflow from financing activites Net increase in cash Cash at beginning of period May 2017 Cash at end of period 31 May 2017 6,500 2,900 -10,000 -10,000 30,000 -2,000 28,000 20,900 20,900 Kelly Cook eTravel Pty Ltd Statement of Profit or Loss for the month of May 2017 Revenue Service Revenue Expenses Advertising Electricity Printing & Stationery Rent Wages & Salaries Total Expenses Profit 8,500 500 400 600 1,100 1,200 3,800 4,700 Kelly Cook eTravel Pty Ltd Statement of Financial Position as at 31 May 2017 Assets Liabilites Cash 20,900 Accounts Payable Accounts Receivable 2,000 Property, Plant & 10,000 Equipment Equity Capital Retained Earnings Total Equity Total Assets 32,900 Total Liabilties & Equity 200 30,000 2,700 32,700 Kelly Cook eTravel Pty Ltd Statement of Cash Flows for the month of May 2017 Cash flows from operating activities: Receipts from customers Payments to suppliers Payments to employees Net cashflow from operating activites Cash flows from investing activities: Purchase of Property, Plant & Equipment Net cashflow from investing activites 6,500 -2,400 -1,200 2,900 -10,000 -10,000 32,900 Cash Flows from financing activities: Issue of shares Dividends Net cashflow from financing activites Kelly Cook eTravel Pty Ltd Statement of Changes in Equity for the month of May 2017 Equity as at May 2017 Share Capital invested Add Profit for month Less Dividends Retained Earnings as at 31 May 2017 30,000 4,700 -2,000 2,700 Total Equity 31 May 2017 32,700 Net increase in cash Cash at beginning of period May 2017 Cash at end of period 31 May 2017 30,000 -2,000 28,000 20,900 20,900 TOPIC RECORDING TRANSACTIONS PART – INTRODUCTION TO FINANCIAL STATEMENT ANALYSIS TOPIC PART LEARNING OBJECTIVES Describe the ratio analysis tools and techniques used for financial statement analysis Calculate and interpret ratios for analysing a business’ profitability, liquidity, and solvency Accounting is an INFORMATION SYSTEM that identifies, measures, records & communicates information to both internal and external decision makers The primary function of accounting is to provide relevant & reliable (faithfully represented) information for decision making Accounting information about a business' financial performance and position is communicated to users via four key financial statements how users of accounting information evaluate it to make decisions???? | 13 ANALYSING FINANCIAL STATEMENTS FOR DECISION MAKING Financial Statement Analysis uses various tool and techniques to analyse an entity’s financial statements to identify financial strengths and weaknesses and aid decision making Ratio Analysis is one such tool • A ratio is the mathematical relationship between two different quantities • The calculation of a ratio simply involves dividing the dollar amount of one item with the dollar amount of another • Expressed in terms of percentages or proportions | 14 ANALYSING FINANCIAL STATEMENTS FOR DECISION MAKING PROFITABILITY RATIOS measuring financial performance – that is the business’s effectiveness in earning profits & providing a return on shareholders’ investments Return on assets Indicates amount of net profit generated by each dollar invested in assets Kelly Cook eTravel Pty Ltd Statement of Profit or Loss for the month of May 2017 Profit margin Measures percentage each sales dollar that results in profit Revenue Service Revenue Expenses Advertising Electricity Printing & Stationery Rent Wages & Salaries Total Expenses Profit Current Assets Cash Accounts Receivable 8,500 -500 -400 -600 -1,100 -1,200 -3,800 4,700 Kelly Cook eTravel Pty Ltd Statement of Financial Position as at 31 May 2017 Liabilites Accounts Payable 20,900 2,000 22,900 Non-current Assets Property, Plant & Equipment 10,000 Total Assets 32,900 200 Equity Capital 30,000 Retained Earnings Total Equity 2,700 32,700 Total Liabilties & Equity 32,900 | 15 ANALYSING FINANCIAL STATEMENTS FOR DECISION MAKING Kelly Cook eTravel Pty Ltd Statement of Profit or Loss for the month of May 2017 Revenue Service Revenue Expenses Advertising Electricity Printing & Stationery Rent Wages & Salaries Total Expenses Profit Current Assets Cash 8,500 -500 -400 -600 -1,100 -1,200 -3,800 4,700 Kelly Cook eTravel Pty Ltd Statement of Financial Position as at 31 May 2017 Liabilites 20,900 Accounts Payable Accounts Receivable RATIO Return on Assets Profit margin 2,000 22,900 Non-current Assets Property, Plant & Equipment 10,000 Total Assets 32,900 FORMULA $ Profit 4,700 Average Total Assets 32,900 Profit 4,700 Net Sales 8,500 200 Equity Capital 30,000 Retained Earnings Total Equity 2,700 32,700 Total Liabilties & Equity 32,900 Kelly Cook Flight Central 14.3% 12.5% 55.3% 42% | 16 ANALYSING FINANCIAL STATEMENTS FOR DECISION MAKING LIQUIDITY RATIOS measuring the business’s short-term ability to pay its maturing obligations and to meet unexpected needs for cash Working Capital is the resources available for dayto-day operations of a business, calculated simply current assets minus current liabilities Current Ratio Measures short ability to meet current obligations Current cash debt coverage indicates the entity’s ability to generate sufficient cash to meet short term needs Current Assets Cash Accounts Receivable Kelly Cook eTravel Pty Ltd Statement of Financial Position as at 31 May 2017 Liabilites 20,900 Accounts Payable 2,000 22,900 Non-current Assets Property, Plant & Equipment 10,000 Total Assets 32,900 200 Equity Capital 30,000 Retained Earnings Total Equity 2,700 32,700 Total Liabilties & Equity 32,900 Kelly Cook eTravel Pty Ltd Statement of Cash Flows for the month of May 2017 Cash flows from operating activities: Receipts from customers Payments to suppliers Payments to employees Net cashflow from operating activites Cash flows from investing activities: Purchase of Property, Plant & Equipment 6,500 -2,400 -1,200 2,900 -10,000 Net cashflow from investing activites -10,000 Cash Flows from financing activities: Issue of shares Dividends Net cashflow from financing activites Net increase in cash Cash at beginning of period May 2017 Cash at end of period 31 May 2017 30,000 -2,000 28,000 | 20,900 20,900 17 ANALYSING FINANCIAL STATEMENTS FOR DECISION MAKING Kelly Cook eTravel Pty Ltd Statement of Cash Flows for the month of May 2017 Cash flows from operating activities: Receipts from customers Payments to suppliers Payments to employees Net cashflow from operating activites Cash flows from investing activities: Purchase of Property, Plant & Equipment 6,500 -2,400 -1,200 2,900 Accounts Receivable -10,000 Net cashflow from investing activites -10,000 Cash Flows from financing activities: Issue of shares Dividends Net cashflow from financing activites Net increase in cash Cash at beginning of period May 2017 Cash at end of period 31 May 2017 RATIO Current Ratio Current cash debt coverage Current Assets Cash Kelly Cook eTravel Pty Ltd Statement of Financial Position as at 31 May 2017 Liabilites 20,900 Accounts Payable 2,000 22,900 Non-current Assets Property, Plant & Equipment 10,000 Total Assets 32,900 30,000 -2,000 200 Equity Capital 30,000 Retained Earnings Total Equity 2,700 32,700 Total Liabilties & Equity 32,900 28,000 20,900 20,900 FORMULA $ Kelly Cook Flight Central Current Assets 22,900 Current Liabilities Net Cash from Operating Activities 200 114.5 or to 114.5 to 14.5 or to 14.5 to 0.80 Average Current Liabilities 2,900 200 | 18 ANALYSING FINANCIAL STATEMENTS FOR DECISION MAKING SOLVENCY RATIOS measures ability of entity to survive over a long period of time Cash debt coverage indicates entity’s ability to generate sufficient cash to meet long term needs Kelly Cook eTravel Pty Ltd Statement of Cash Flows for the month of May 2017 Cash flows from operating activities: Receipts from customers Payments to suppliers Payments to employees Net cashflow from operating activites Cash flows from investing activities: Purchase of Property, Plant & Equipment Net cashflow from investing activites Debt to total assets ratio measures percentage of assets financed by creditors rather than shareholders 6,500 -2,400 -1,200 2,900 -10,000 -10,000 Current Assets Cash Accounts Receivable Cash Flows from financing activities: Issue of shares Dividends Net cashflow from financing activites Net increase in cash Cash at beginning of period May 2017 Cash at end of period 31 May 2017 30,000 -2,000 28,000 20,900 20,900 Kelly Cook eTravel Pty Ltd Statement of Financial Position as at 31 May 2017 Liabilites 20,900 Accounts Payable 2,000 22,900 Non-current Assets Property, Plant & Equipment 10,000 Total Assets 32,900 200 Equity Capital 30,000 Retained Earnings Total Equity 2,700 32,700 Total Liabilties & Equity 32,900 | 19 ANALYSING FINANCIAL STATEMENTS FOR DECISION MAKING Current Assets Cash Accounts Receivable Non-current Assets Property, Plant & Equipment Total Assets Kelly Cook eTravel Pty Ltd Statement of Financial Position as at 31 May 2017 Liabilites 20,900 Accounts Payable 2,000 22,900 200 Equity Capital 30,000 Retained Earnings Total Equity 2,700 32,700 Total Liabilties & Equity 32,900 10,000 32,900 RATIO Debt to Assets Ratio Cash debt coverage Kelly Cook eTravel Pty Ltd Statement of Cash Flows for the month of May 2017 Cash flows from operating activities: Receipts from customers Payments to suppliers Payments to employees Net cashflow from operating activites Cash flows from investing activities: Purchase of Property, Plant & Equipment Net cashflow from investing activites Cash Flows from financing activities: Issue of shares Dividends Net cashflow from financing activites FORMULA 6,500 -2,400 -1,200 2,900 -10,000 -10,000 $ 30,000 Kelly Cook Total Liabilities 200 Total Assets 32,900 to 0.006 or 0.6% Net increase in cash Cash at beginning of period May 2017 Cash at end of period 31 May 2017 Net Cash from Operating Activities Average Total Liabilities 2,900 200 -2,000 14.5 or to 14.5 Flight Central 28,000 25% 20,900 20,900 to 0.50 | 20 ANALYSING FINANCIAL STATEMENTS FOR DECISION MAKING RATIO Return on Assets Profit margin Current Ratio Current cash debt coverage Debt to Assets Ratio Cash debt coverage FORMULA $ Profit 4,700 Average Total Assets 32,900 Profit 4,700 Net Sales 8,500 Current Assets 22,900 Current Liabilities Net Cash from Operating Activities Average Current Liabilities 200 2,900 Total Liabilities 200 Total Assets 32,900 Net Cash from Operating Activities Average Total Liabilities 200 2,900 200 Kelly Cook Flight Central 14.3% 12.5% 55.3% 42% 114.5 or to 114.5 to 14.5 or to 14.5 to 0.80 to 0.006 or 0.6% 25% 14.5 or to 14.5 to 0.50 | 21 ... Equipment -10 ,000 15 /5 /17 Earning of service revenue - cash 20 /5 /17 Earning of service revenue - credit 21 /5 /17 Paid cash expenses - Printing & Stationery 21 /5 /17 21 /5 /17 21 /5 /17 25 /5 /17 Accounts... Total Liabilities 20 0 2, 900 20 0 Kelly Cook Flight Central 14 .3% 12 . 5% 55.3% 42% 11 4.5 or to 11 4.5 to 14 .5 or to 14 .5 to 0.80 to 0.006 or 0.6% 25 % 14 .5 or to 14 .5 to 0.50 | 21 ... Earning of service revenue - cash 20 /5 /17 Earning of service revenue - credit 21 /5 /17 Paid cash expenses - Printing & Stationery 21 /5 /17 21 /5 /17 21 /5 /17 25 /5 /17 Accounts Receivable PPE = LIABILITIES