BAF Chapter 3 & 4 (1) PDF

©P 58 Chapter 3 n Chapter 2, you learned how to calculate the financial position of a com­ I pany and to present it using a balance sheet. You found that assets, liabilities, and equity were constantly ch...

©P 58 Chapter 3 n Chapter 2, you learned how to calculate the financial position of a com­ I pany and to present it using a balance sheet. You found that assets, liabilities, and equity were constantly changing. In this chapter, you will begin a process to track these changes. 3. 1.,.. Business Transactions On any given day, many events occur that cause the financial position of a busi­ ness to change. Each of these events is called a business transaction which may be defined as a financial event that causes a change in financial position. For example, suppose the business buys a truck for which it pays $20 000 cash. This event is a transaction because it causes the financial position of the business to change. There would be an increase in assets of $20 000 in the item Trucks. There would also be a decrease of $20 000 in the asset Cash. Suppose that the business owes $7000 to City Finance and makes a pay­ ment of $ 1 000 against the debt. This event is also a transaction that causes the financial position to change. The amount in liabilities owed to City Finance would be reduced by $ 1 000. In assets, the cash on hand would be reduced by $ 1000. On the other hand, suppose that the city plumbing inspector inspects the building and leaves a letter suggesting some improvements. This is not a busi­ ness transaction because no assets or liabilities have changed as a result of the activity. Source Docu ments When an asset, liability, or equity item is recorded for accounting purposes, a business paper or document is required to verify the dollar amount. The business paper is called a source document. It is the original record of the. transaction-which is why it is called the source-and it provides accounting personnel with the information they need to process the transaction properly. Examples of source documents include hydro bills, telephone bills, cheque copies, store receipts, cash register summaries, and credit card slips. They pro­ vide proof of payment, proof of purchase, and reference. Depending on the size of the business, source documents may move from person to person and from department to department. They are eventually filed because owners, manag­ ers, auditors, and others may want to ask questions. In Chapter 6, a full discus­ sion is devoted to source documents, with illustrations. For now, remember 1. accounting entries are made from business papers known as source documents 2. source documents are kept on file for reference purposes and are proof of transactions Accounting Standards-The Objectivity Pri nciple Objectivity is a long-standing accounting principle related to source documents. The objectivity principle requires that a business's accounting be recorded on the basis of clear, verifiable evidence. This principle means that different people looking at the evidence will arrive at the same values for the transaction. Sim­ ply put, this means that transactions will be recorded on fact, not on personal opinion or feelings. ©P  Section 3.1 59 The source document for a transaction is almost always the best objective evidence available. For example, the best objective evidence for the purchase of a new desk used in the business is the bill received from the retailer. The source document shows the amount agreed to by the buyer and the seller, who are usu­ ally independent of each other. Revi ew Questions Section 3.1 I. What i s a business transaction? 2. Give an example of a transaction other than the ones noted in this section. 3. Give an example of an event in a business that is not a transaction. (Your example must be different than the one noted in this section.) 4. What is a source document? 5. Give several examples of source documents. 6. What happens to source documents after the accounting entries have been completed? 7. Explain the objectivity principle. Give an example. Exercises Section 3. I I. Given that a transaction is a financial event that requires chang­ ing the statement of financial position, decide whether or not each of the following (on this page and the next) is a transaction. The business is Best Consultants of Kenora, Ontario. A. The business pays $800 to Mercury Finance to reduce the amount owed to them. B. The owner, P. Dufour, withdraws $900 from the business for her per­ sonal use. C. A new employee is needed in the payroll department. P. Dufour inter­ views Stan Martin for the job. D. A $700 consulting service is provided for Rita Bertoli on credit. E. The business pays the rent for the month, $3500. F. The employee in statement C above is hired to start work next Monday at $800 per week. G. The business purchases a new computer for cash at the price of $3000. H. The computer in statement G above is defective and is replaced at no cost to the business. 2. Given that a transaction is a financial event that requires changing the statement of financial position, decide whether or not each of the following (on this page and the next) is a transaction. You are working for Ace Collection Agency of Cornwall, Ontario, owned by Ingrid Lencz. A. Gasoline for the company automobile was purchased for $ 1 00 cash. B. Ingrid Lencz paid $ 1 5 out of her own pocket for lunch. C. Ingrid's personal car was damaged and needed a $500 repair job. D. A $250 service was performed for a customer who paid cash. E. A leased computer broke down and needed to be replaced at no cost to the business. The man who brought the replacement said that the new machine was a $2500 model. F. A customer who owed the business $ 1 200 made a partial payment of $300. ©P 60 Chapter 3 G. The business bank loan was reduced by a direct payment to the bank of $ 1000. H. A burglar broke into the office and stole the leased computer. The busi­ ness has 100% replacement insurance to cover breaking and entering and theft. 3. Examine the source document below and answer the questions that follow, using what you know so far. CAMPBELL Suite 40 I 00 University Avenue, Toronto, Ontario MSJ 2K4 & ASSOCIATES Smokey Valley Ski Club R.R. #1, Horseshoe Valley, ON July 22, 20- L3V 3BO Our fee for professional s ervices rendered, auditing the records of the club for the year ended April 15, 20-, preparing financial s tatements as at that date, and reporting thereon: $1 600.00 HST 208.00 $1 808.00 A. Who issued the bill? B. Who received the bill? C. When was the bill issued? D. For what service was the bill issued? E. Does the bill represent good objective evidence? Why? 4. Examine the source document below and answer the questions that follow, using what you know so far. Box 500, Horseshoe Valley, Ontario L3V 380 THE DAVEY COMPANY TROPHIES GIFTWARE ENGRAVERS Sold to: Smokey Valley Ski R.R. #1 Club Horseshoe Valley, L3V 3BO Dec. 5, 20- ON Date I I I PURCH. DELIVERY ORDER NO. DATE TERMS SHIP VIA 6506 I 12/5 I 30 days I CPX 35 Name tags 148.00 HST 19.24 167.24 ©P  Section 3.2 61 A. Who issued the bill? B. Who received the bill? C. When was the bill issued? D. When were the goods delivered? How were they delivered? E. When is this bill due for payment? F. Why was this bill issued? G. Was this a cash sale transaction? H. Why does the bill represent good objective evidence? 5. The accountant for a business received a memorandum from the owner. The memorandum stated that a new office desk recently installed in the owner's office was acquired at a cost of $2500 and that it was paid for in cash by the owner personally. A. Why is the memorandum not objective evidence? B. What is the best objective evidence in this case? Equation Analysis Sheet.... 3.2 Your next step in the study of accounting is to learn how various business trans­ actions affect and change the financial position. To begin, look at Figure 3.1, the simplified balance sheet of Metropolitan Movers of Windsor, Ontario. Figure 3. 1 METROPOLITAN MOVERS The balance sheet of BALANCE SHEET Metropolitan Movers SEPTEMBER 29, 20- Assets Uabilities Cash $ 1 3 500 Accounts Payable Accounts Receivable - Central Supply $ I 750 - B. Cava I 300 Bank Loan 1 8 370 - K. Lincoln 2 500 Total Liabilities $20 1 20 Equipment II 500 Trucks 24 500 Owner's Equity J. Hafner, Capital 33 1 80 Total Assets $53 300 Total Liabilities and Equity $53 300 --- The balance sheet of Metropolitan Movers shows the values of the assets, liabilities, and equity at the end of the business day on September 29th. As business transactions occur on September 30th, there will be changes in the values of assets, liabilities, and equity. The balance sheet is not a suitable type of record on which to record these changes. Therefore, let us arrange the balance sheet items in a different manner. We will transfer the assets, liabilities, and capital from the balance sheet onto what we will call an equation analysis sheet. An equation analysis sheet is a tool for displaying individual transactions and the new financial position resulting from each transaction. At this stage of your accounting studies, the equation analysis sheet is ideal for analyzing and recording changes in financial position. In Chapter 4, you will modify your recording methods. ©P 1---------' 1 Chapter 3 Figure 3.2 shows the balance sheet items for Metropolitan Movers entered on an equation analysis sheet. Note that this arrangement is in the form of the fundamental accounting equation. OWNER'S ASSETS L IABILITIES + EQUITY AlP METROPOLITAN AiR Ai R Central Bank J. Hafner, MOVERS Cash B. Cava K. Lincoln Equipment Trucks Supply Loan Capital Sep 29 Balances 13 500 I 300 2 500 II 500 24 500 I 750 18 370 33 180 Figure 3.2 Equation analysis sheet for Metropolitan Movers Updating the Equation Analysis S heet Accounts Receivable and Let us now examine how transactions affect financial position. Accounts Payable may be abbreviated AiR and AlP TRANSAC T I O N I: Metropolitan Movers pays $ 1 200 cash to reduce for now. You will learn the the Bank Loan. standard format for listing these terms in Chapter 8. Mter this payment is made, the financial position shown in Figure 3.2 will no longer be correct. Two changes are necessary: Cash must be reduced by $1200 and the amount owed to the bank must also be reduced by $1200. These changes are recorded on the equation analysis sheet shown in Figure 3.3 below. OWNER 'S ASSETS L IABIL ITIES + EQUITY AlP METROPOLITAN Ai R AiR Central Bank J. Hafner, MOVERS Cash B. Cava K. Lincoln Equipment Trucks Supply Loan Capital Sep 29 Balances 13 500 I 300 2 500 II 500 24 500 I 750 18 370 33 180 Transaction I -1 200 -1 200 New Balances 12 300 I 300 2 500 I 100 24 500 I 750 17 170 33 180 Figure 3.3 Equation analysis sheet after Transaction I In analyzing Transaction 1, observe that 1. The amounts for Cash and Bank Loan are updated: Cash is decreased by $1200 and the debt owed to the Bank is decreased by $1200. 2. The amounts for the other items remain unchanged. 3. Mter the changes are recorded and the new totals determined, the accounting equation is still in balance because both Total Assets and Total Liabilities decreased by $1200. You can check this on your calculator ($52 100 $18 920 + $33 1 80). = ©P  Section 3.2 T R A N S A C T I O N 2: K. Lincoln, who owes Metropolitan Movers $2500, pays $1100 in partial payment of the debt. Can you figure out the changes to be made on the equation analysis sheet? Try to do this mentally before looking at Figure 3.4 below. OWNER'S ASSETS L IABIL ITIES + EQUITY AlP METROPOLITAN AIR AIR Central Bank J. Hafner, MOVERS Cash B. Cava K. Lincoln Equipment Trucks Supply Loan Capital Sep 29 Balances 13 500 I 300 2 500 I I 500 24 500 I 750 1 8 370 33 180 Transaction I -1 200 - 1 200 New Balances 1 2 300 I 300 2 500 I 100 24 500 I 750 1 7 1 70 33 180 Transaction 2 I 100 -1 1 00 New Balances 1 3 400 I 300 I 400 II 500 24 500 I 750 1 7 1 70 33 180 Figure 3.4 Equation analysis sheet after Transaction 2 In analyzing Transaction 2, observe that 1. The figure for Cash is increased by the amount received, $1100. 2. The figure for Accounts Receivable-K. Lincoln is decreased by $1100. The row showing new balances reveals that $1400 is still owing on the debt. 3. Mter the changes are recorded, the accounting equation is still in balance. One asset was exchanged for another asset of equal value. Total Assets remains unchanged at $52 100. No changes occurred on the right side of the equation. T R A N S A C T I O N 3: Equipment costing $1950 is purchased for cash. Again, try to make the changes mentally before looking at the entries recorded in Figure 3.5 below. OWNER'S ASSETS L IABIL ITIES + EQUITY AlP ME TROPOLITAN AIR AIR Central Bank J. Hafner, MOVERS Cash B. Cava K. Lincoln Equipment Trucks Supply Loan Capital Sep 29 Balances 1 3 500 I 300 2 500 II 500 24 500 I 750 18 370 33 180 Transaction I -1 200 -1 200 New Balances 1 2 300 I 300 2 500 I 100 24 500 I 750 17 170 33 180 Transaction 2 I 100 -1 1 00 New Balances 1 3 400 I 300 I 400 II 500 24 500 I 750 17 170 33 180 Transaction 3 -1 950 I 950 New Balances II 450 I 300 I 400 13 450 24 500 I 750 17 170 33 180 Figure 3.5 Equation analysis sheet after Transaction 3 In analyzing Transaction 3, observe that 1. Cash is decreased by the amount paid, $1 950. 2. Equipment is increased by the cost of the equipment acquired, $1 950. 3. Mter the changes are recorded, the equation is still in balance. One asset was exchanged for another asset of equal value. Total Assets remains unchanged at $52 100. No changes occurred on the right side of the equation. ©P  641 1-------- Chapter 3 TR A N S A C T I O N 4: A pick-up truck is purchased at a cost of $ 1 8 000. Metropolitan Movers pays $10 000 cash and arranges a loan from its bank to cover the balance of the purchase price. (Note: This is considered to be a single transaction. The bank will pay $8000 directly to the truck dealer, who will be paid in full.) Again, try to work out the changes mentally before looking at the equation analysis sheet in Figure 3.6. OW N ER'S ASSETS L IABILITIES + EQUITY AlP METROPOLITAN AiR AiR Central Bank J. Hofner, MOVERS Cash B. Cava K. Lincoln Equipment Trucks Supply Loan Capital Sep 29 Balances 1 3 500 I 300 2 500 II 500 24 500 I 750 1 8 370 33 180 Transaction I -1 200 -1 200 New Balances 1 2 300 I 300 2 500 I 100 24 500 I 750 1 7 1 70 33 180 Transaction 2 I 100 -1 1 00 New Balances 1 3 400 I 300 I 400 I I 500 24 500 I 750 1 7 1 70 33 1 80 Transaction 3 -1 950 I 950 New Balances II 450 I 300 I 400 13 450 24 500 I 750 1 7 1 70 33 180 Transaction 4 -1 0 000 18 000 8 000 New Balances I 450 I 300 I 400 1 3 450 42 500 I 750 25 1 70 33 1 80 Figure 3.6 Equation analysis sheet after Transaction 4 In analyzing Transaction 4, observe that 1. Cash is decreased by the amount paid, $10 000. 2. Trucks is increased by the cost of the new truck, $18 000. 3. The liability to the bank is increased by the additional amount borrowed, $8000. 4. Mter the changes are recorded, the accounting equation is still in balance. One asset (Cash) was exchanged for another asset of greater value (Trucks). Total Assets increased by $8000 as a result, but the claims of the creditors increased by the same amount. T R A N S A C T I O N 5: Metropolitan Movers completes a storage service for B. Cava at a price of $ 1 500. A bill is sent to Cava to indicate the additional amount that is owed. Work out the changes necessary and compare them with the equation analysis sheet in Figure 3. 7 (on the next page). ©P  Section 3.2 65 OWNER'S ASSETS L IABIL ITIES + EQUITY AlP ME TROPOLITAN AIR AIR Central Bank j. Hafner, MOVERS Cash B. Cava K. Lincoln Equipment Trucks Supply Loan Capital Sep 29 Balances 1 3 500 I 300 2 500 I I 500 24 soo I 750 1 8 370 33 180 Transaction I I 200 -1 200 New Balances 1 2 300 I 300 2 500 I 100 24 500 I 750 1 7 1 70 33 180 Transaction 2 I 100 -1 1 00 New Balances 1 3 400 I 300 I 400 I I 500 24 500 I 750 1 7 1 70 33 180 Transaction 3 -1 950 I 950 New Balances II 450 I 300 I 400 13 450 24 500 I 750 17 170 33 180 Transaction 4 -1 0 000 1 8 000 8 000 New Balances I 450 I 300 I 400 1 3 450 42 500 I 750 25 170 33 180 Transaction 5 I 500 I 500 New Balances I 450 2 800 I 400 1 3 450 42 500 I 7SO 25 170 34 680 Figure 3.7 Equation analysis sheet after Transaction 5 Understanding changes like the ones in Transaction 5 is vital to becoming a good accountant. Transaction 5 may be analyzed as follows: 1. B. Cava owes $1 500 more to Metropolitan Movers. Therefore the figure for Accounts Receivable-B. Cava is increased by $1 500. 2. No other asset or liability is affected. 3. J. Hofner's capital is increased by $1 500, as explained below. There are two ways to explain this increase in capital. First, be aware that Metropolitan Movers is in the business of providing a service to earn profit. When the service to B. Cava has been completed, the $1 500 is legally owed and a gain has been made. Metropolitan Movers has earned this money. This gain is recorded by increasing the capital of the owner, J. Hofner. Second, in Section 2.3 you learned that equity is a residual claim. In other words, the owner gets to claim the "leftovers." Mathematically, the Total Assets figure has increased by $1 500. Since there are no additional liabilities, the owner claims this extra $ 1500, keeping the accounting equation in balance. ©P  1 1------- Chapter 3 TRANSACTI O N 6: J. Hofner, the owner, withdraws $500 for personal use. Work out the necessary changes and then check your work against the equation analysis sheet in Figure 3.8 below. OWNER 'S ASSETS L IABIL ITIES + EQUITY AlP ME TROPOLITAN AIR AIR Central Bank j. Hafner, MOVERS Cash B. Cava K. Lincoln Equipment Trucks Supply Loan Capital Sep 29 Balances 13 500 I 300 2 500 I I 500 24 500 I 750 1 8 370 33 1 80 Transaction I -1 200 -1 200 New Balances 12 300 I 300 2 500 I 1 00 24 500 I 750 1 7 170 33 1 80 Transaction 2 I 100 -1 1 00 New Balances 13 400 I 300 I 400 II 500 24 500 I 750 1 7 170 33 1 80 Transaction 3 -1 950 I 950 New Balances I I 450 I 300 I 400 1 3 450 24 500 I 750 17 170 33 1 80 Transaction 4 -10 000 1 8 000 8 000 New Balances I 450 I 300 I 400 1 3 450 42 500 I 750 25 170 33 1 80 Transaction 5 I 500 I 500 New Balances I 450 2 800 I 400 1 3 450 42 500 I 750 25 170 34 680 Transaction 6 -500 -500 New Balances 950 2 800 I 400 1 3 450 42 500 I 750 25 170 34 1 80 Figure 3.8 Equation analysis sheet after Transaction 6 In analyzing Transaction 6, observe that 1. Cash is decreased by $500, the amount withdrawn. 2. No other asset or liability is affected. 3. Capital is decreased by $500. Assets have been withdrawn from the busi­ ness. There is less to claim. Obviously, the creditors' claims are unaffected by the drop in assets. The owner must assume a smaller claim, leaving the accounting equation in balance. ©P  Section 3.2 67 T R AN S A C T I ON 7: One of the trucks requires an engine adjust­ ment costing $375. The repair is paid for in cash when the truck is picked up. Work out the necessary changes and then check your work against the equation analysis sheet in Figure 3.9 below. OWNER'S ASSETS L IABILITIES + EQUITY NP METROPOLITAN NR NR Central Bank J. Hofner, MOVERS Cash B. Cava K. Lincoln Equipment Trucks Supply Loan Capital Sep 29 Balances 13 500 I 300 2 500 II 500 24 500 I 750 18 370 33 180 Transaction I -1 200 -1 200 New Balances 12 300 I 300 2 500 I 1 00 24 500 I 750 17 170 33 180 Transaction 2 I 1 00 -1 1 00 New Balances 13 400 I 300 I 400 I I 500 24 500 I 750 17 170 33 180 Transaction 3 -1 950 I 950 New Balances II 450 I 300 I 400 1 3 450 24 500 I 750 17 170 33 180 Transaction 4 -10 000 18 000 8 000 New Balances I 450 I 300 I 400 13 450 42 500 I 750 25 170 33 180 Transaction 5 I 500 I 500 New Balances I 450 2 800 I 400 13 450 42 500 I 750 25 170 34 680 Transaction 6 -500 -500 New Balances 950 2 800 I 400 13 450 42 500 I 750 25 170 34 180 Transaction 7 -375 -375 New Balances 575 2 800 I 400 13 450 42 500 I 750 25 170 33 805 Figure 3.9 Equation analysis sheet after Transaction 7 In analyzing Transaction 7, observe that 1. Cash is decreased by $375, the amount paid for the repair. For an online demonstration of how 2. No other asset or liability is affected. The value of the truck on the equation to record transactions analysis sheet is not increased because the engine received a tune-up. on the equation 3. Capital is decreased by $375. Cash paid has decreased the amount of Total analysis sheet, visit the Accounting I website Assets. Since there is a smaller amount of assets to claim, and the creditors' and follow the links. claims are unaffected, the owner's claim must decrease in response to the reduction of assets. 4. Mter the changes are recorded, the accounting equation is still in balance. ©P 1------___j \ Chapter 3 Updat i ng the Balance S heet The figures for an updated balance sheet for Metropolitan Movers are taken from the last line of the equation analysis sheet. Figure 3. 1 0 below shows the new balance sheet. Figure 3. 1 0 METROPOLITAN MOVERS The updated balance BALANCE SHEET sheet of Metropolitan SEPTEMBER 30, 20- Movers Assets Uabi/ities Cash $ 575 Accounts Payable Accounts Receivable - Central Supply $ I 750 - B. Cava 2 800 Bank Loan 25 1 70 - K. Lincoln I 400 Total Liabilities $26 920 Equipment 1 3 450 Trucks 42 500 Owner's Equity J. Hafner, Capital 33 805 Total Assets $ 60 725 Total Liabilities and Equity $60 725 - S u m mary of Steps in Analyzing a Transaction The following steps will help you to analyze any transaction: Step I Identify all asset and liability items that must be changed and make all necessary changes. When thinking about the transaction, try to be logical and use common sense. Carefully analyze the information given for any transaction. Classify each item affected as an asset or a liability. Decide whether each item affected is to be increased or decreased. Step 2 See if the owner's equity has changed. Remember the accounting equation. For example, if assets decrease and there is a corresponding liability decrease, the owner's equity will not change. However, if assets decrease and liabilities are unchanged, the equation must be balanced by a decrease in owner's equity. Eventually, you will come to recognize whether or not owner's equity has changed. Generally, if a business is better off after a transaction, owner's equity has increased. If a business is worse off after a transaction, owner's equity has decreased. Step 3 Make certain that at least two of the individual items have changed. It is possible for several items-assets, liabilities, or owner's equity-to change, but there can never be only one change. Step 4 Make sure that the equation is still in balance. The fundamental accounting equation must be respected: assets must equal liabilities plus owner's equity. Develop ing Good Work Habits The first step in the accounting process is to analyze a transaction to determine the financial changes that result from it. These changes must be recorded accu­ rately to ensure that financial records are correct and reliable. Obtaining a score of 80% on a test is considered good, but achieving the same result when analyz­ ing transactions means at least one out of every five of your figures is wrong. Business reports must be reliable. Therefore, you must be accurate. ©P  Section 3.2 69 You must also realize that the possible number of different transactions is very large. Do not think of trying to memorize all of the changes for all of the transactions. Good accountants use their memory, of course, but they also rely on common sense, clear thinking, and a thorough understanding of accounting theory. The four steps to analyzing a transaction is accounting theory that you will want to master. Revi ew Questions JR >JR Total loJP loJP Total A. Antonelli, Total lora 5 SERVICES Cool> Jone1Tr.vel F. Loonol &.opplles EQUipment Aaaota Best EolllldeNews Sari< Loon Uabll lea Copltol Equltv Proof 6 Beginning 275 300 350 700 1100 2 525 175 500 875 1850 1150 0 7 Tranuctlon 1 2 000 4525 875 1850 2000 8 Trlf'IN:ctlon 2 4525 875 1850 2000 9 Transaction 3 4525 175 1150 2000 10 Transaction 4 4525 175 1850 2000 11 Transaction 5 4525 175 1 150 2000 12 Tranaaction 6 4525 875 1850 2000 13 Tranaacdon 7 4525 175 1150 2000 14 Tronooction 8 4525 875 1 150 2000 15 Traructlon9 4525 875 1150 2000 16 Traneaction 10 4525 875 1850 2000 17 Tranaactlon11 IU25 875 1150 2000 18 Transaction 12 4525 875 1150 2000 19 Ending 2275 300 350 700 1100 4525 175 0 500 875 1150 1850 2000 20 FI.MldementalAc:cola'ltinoEQ!:!!!Ion Vermc.tlon 21. EQUI!l. Uahilltloo + 22 75. $4525 $8 + $1850 23 $4525 $2525 M· ,..,_-....- --· Figure 3. 1 4 Spreadsheet changes after the first value is entered-an increase of $2000 i n cash ©P  7 1------------' 4] Chapter 3 Many cells changed in response to your entering $2000 in the Cash column. For example, the numbers in the Total Assets column increased to $4525. Select cell H7 and look at the formula bar to find out why. You will quickly realize that the formula, = H6 + SUM(C7:G7), added the $2000 to the previous total at H6. Similar formulas are entered in the totals columns for liabilities and equity. Your spreadsheet model also generated warnings that your data entry caused the fundamental accounting equation to become out of balance. First, study the equation verification area that you just finished creating with the help of cell references. The left side of the equation is now greater than the right by $2000 (row 23). Also, examine the formulas in column 0, the Zero Proof column. For example, the formula on row 7 is = H 7 - (L7+ N7). This means that total liabilities and equity are being subtracted from total assets. If your transaction entries are in balance, the result should be zero. The warnings shown by your spreadsheet model are predictable. You know that a transaction can never affect just one item in the accounting equa­ tion. Finish the transaction by entering 2000 in the Bank Loan column on row 7. Your spreadsheet model will remove all warnings and assure you that your transaction is in balance. Negative numbers may be In the second transaction, the business bought computer equipment for displayed in brackets and $ 1 300 cash. Since cash is decreasing, enter - 1 300 at cell C8. (Negative signs in red on your monitor, may be entered by pressing the hyphen key or the negative sign on the number depending on selections pad.) Also, enter 1 300 in the Equipment column. Since one asset (cash) was made in your software's preferences. traded for another of equal value (equipment), the Zero Proof column of your model will display zeros, and your verification section will show a balanced equation. You are now ready to enter the remaining ten transactions for this business. They are listed in Section 3.3 Exercise 1 below and on the next page. Section 3.3..,. Review Questions I. What i s the purpose o f entering a cell reference into a cell? 2. The figure for total assets is calculated at cell D22. If you also want this figure to be displayed at cell E30, what would you type? (Include the prefix symbol.) 3. What do cell references have in common with formulas and functions? 4. The text refers to the "dynamic and responsive" nature of a spreadsheet model. Explain what this means. 5. How are negative numbers entered into a spreadsheet? Section 3. 3..,. Exe rcis es I. Using the spreadsheet file named anna.xls, complete the October accounting tasks for Antonelli's Accounting Services. A. Enter the remaining ten transactions. Make sure you have done the first two transactions that are described above. (These are the bank loan for $2000 and the cash purchase of equipment for $ 1 300.) TR A N S A C T I O N S October 3. Collected $200 from Jones Travel in partial payment of their debt. 4. Sold the old computer, originally valued at $900, for $ 1 50 cash. ©P  Section 3. 3 75 5. Sold accounting services to F. Leonel for $500. He has 30 days to pay. 6. Purchased printer paper and toner from Best Offices for $225. The bill is to be paid in 30 days. 7. Returned $50 of damaged supplies to Best Offices. Best Offices agreed to reduce the amount owed to them by $50. 8. Anna Antonelli withdrew $600 from the business for personal use. 9. Paid $225 to reduce the bank loan. 10. Sold $700 more of accounting services to Jones Travel. Jones Travel paid $200 now with the balance to be received in 30 days. 1 1. Paid $ 125 of the amount owed to Best Offices. 12. Placed an advertisement in a local newspaper called the Eastside News. The total bill amounted to $360 and is to be paid in 30 days. B. Check the Zero Proof column and equation verification area to ensure your work is in balance. S readsh eet Extensions Section 3.3 You may have noticed small tabs a t the lower left o f your spreadsheet file. These identify worksheets-or sheets, for short-contained in your file (also called a workbook). Even though any one worksheet is very large, users find it conve­ nient to organize sections of a workbook into separate sheets. While entering the above 12 transactions, you were working in a sheet named Equation Analysis Sheet. To the right of that sheet is one named Balance Sheet. Click that tab. Your monitor will look like the figure below. ANNA.xls C\. search In Sheet ! t\ Home Uyout T.lb C t Kl !:1 A B E H 1 Antonelli's Accounting Services 2 Balance Sheet 3 October 31, 20-- 4 5 Assets Liabilities 6 Cash Accounts Payable 7 Accounts Receivable - Best Offices 8 - Jones Travel - Eastside News 9 - F. Leone! Bank Loan 10 Supplies Total Liabilities $ 11 Equipment 12 Owner's Equity 13 A. Antonelli Capital 14 Total Assets $ Total Liabilities and Equity $........ [Quatton Anatysls ut ll.lanu Shtet + I. A few sum functions and labels for the balance sheet of Antonelli's Account­ ing Services have been prepared for you. Most of the labels were not typed on this sheet. Instead they appear as a result of cell references. Check out the cell contents of a few of the labels to verify this fact. ©P 76 Chapter 3 A. Cell references that point to a different sheet might look complex in the formula bar, but they are easy to create. Go to cell D6 and press the sign. Then click the Equation Analysis Sheet tab, followed by clicking = cell C 1 9 (the ending balance of Cash). You should see a result similar to the figure below..... $ _.... === ·- DO "' A 8 c D E F G 2 Balance Sheet 3 October 31, 20- 4 5 Assets Liabilities 6 Cash $ 575 Accounts Payable 7 Accounts Receivable - Best Offices 8 - Jones Travel - Eastside ews 9 - F. Leone! Bank Loan 10 Supplies Total Liabilities $ 11 Equipment 12 Owner's Equity 13 A. Antonelli Capital 14 Total Assets $ 575 Total Liabilities and Equity $ 15 16 The $575 duplicates the total found at cell C 1 9 in the equation anal­ ysis sheet. The cell reference in the formula bar created by typing the = sign and then clicking is Equation Analysis Sheet'!C 1 9. The only = difference between the contents of D6 and a regular cell reference is the notation used to identify the sheet containing the desired cell. Finish the balance sheet by entering cell references that point to the related totals in the equation analysis sheet. B. Assume a mistake was made with regard to Transaction 1 1. Instead of paying $ 1 25 to Best Offices, the actual amount of the cheque was $ 1 52. Make the necessary changes on the equation analysis sheet. C. Click the Balance Sheet tab. The balance sheet responded to your changes in the equation analysis sheet with instant, accurate updates. You should now see the power of a well-designed spreadsheet model. 2. After you save the anna.xls spreadsheet for the final time, save it again under the new name annaNov.xls. Use this file to record 11 transactions that occurred in November. Before you use the file for transactions, update the top row of numbers and erase the transaction data for October. A. To record November's beginning balances in row 6, copy October's end­ ing balances from row 19. There are two ways to do this. First, you can retype the asset, liability, and equity values (row 19 to row 6). ©P  Section 3.3 77 Second, you can use the Paste Special options of Excel. To do this for the asset items, a. highlight cells C 1 9 to G 1 9 b. right-click and choose Copy c. move the cell pointer to C6 d. right-click and choose Paste Special e. click the Values button and press Enter Repeat the above process for the liability and equity items. B. After the beginning values for November are entered, you need to erase October's transaction data. For assets, highlight the cells that contain values, right-click, and select Clear Contents. Repeat for lia­ bilities and equity. (Note: If you accidentally delete cells with formulas, either use the Undo command or copy and paste the required cells from anna.xls.) C. Enter the 11 transactions for November that follow: T R AN S A C T I ON S November 1. Sold accounting services to M. Lazardo for $250 cash. 2. Received $300 from Jones Travel in partial payment of the amount owed to the business. 3. Paid $20 of interest charges to the bank. (Note: This payment is for the cost of the loan and therefore does not reduce the amount owed to the bank.) 4. Purchased $ 1 1 0 of various office supplies from Best Offices on credit. The bill is to be paid within 30 days. 5. Received $350 from F. Leonel in partial payment of the amount he owed to the business. 6. Paid Eastside News the entire amount owed. 7. Paid Best Offices $198 of the amount owed. 8. Paid $600 of wages to part-time employees. (Payroll deductions are not considered.) 9. Received $ 1200 in cash from various other clients in November. 10. Paid a $400 utilities bill immediately after it arrived in the mail. 1 1. Placed another advertisement in Eastside News. The total bill amounted to $240 and is to be paid in 30 days. D. Click the Balance Sheet tab at the bottom left of your spreadsheet. Change the date to November 30, 20-. C o m m u n icate It