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Describe and analyze the effects of business transactions

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Respond to the following questions with your thoughts, ideas, and comments.

Describe and analyze the effects of business transactions (both in terms of increases and decreases, and debits and credits) on the basic accounting elements: assets, liabilities, owners' equity, revenues, and expenses. Prepare a set of financial statements.

The general manager of a business encounters many different types of business transactions. For each of the following, provide an example of a transaction that would describe the effect on the accounting equation. Each situation is independent of the other situations.

1. The transaction would increase an asset account and increase a liability account.
2. The transaction would decrease an asset account and decrease the owner's equity account.
3. The transaction would increase an asset account and increase the owner's equity account.
4. The transaction would decrease an asset account and decrease a liability account.
5. The transaction would increase one asset account and decrease another asset account.
6. The transaction would decrease one liability account and increase another liability account.

Solution Preview

Dear student,
Solution is provided in two parts as follows in the attached file and down below.
1 Analysis of transactions with complete set of financial statements in three sheets in the attached excel file.
2 Complete comprehensive and point to point explanation of concepts and procedure of preparing financial statements below.

After transactions are identified, recorded, and summarized, and Trial balance prepared, the following four financial statements are prepared.

1 INCOME STATEMENT

2 STATEMENT OF OWNER'S EQUITY

3 BALANCE SHEET

4 CASH FLOW STATEMENT

1 Generally we prepare four financial statements mentioned above as a composite financial statement set from the given Trial balance and additional information regarding various adjustments such as accrued revenue, Expenses payable, Unearned income, Amortization, Prepaid expenses etc.

2 It is more convenient to prepare Income statement and balance sheet with the help of a 10 column work sheet. A specimen 10 column work sheet is provided in the excel file attached herewith just for your information. The steps are summarized as under.

3 Assets should be entered in Dr column of Balance sheet section of work sheet as they are debit balances.
2 Accumulated amortization is the outcome of accumulated amortization at 1st January plus current year's depreciation as under.

Accumulated amortization 1st April (say) $3000
Add: Current year (2008) Depreciation 1000
Total accumulated amortization $4000

It is a contra asset which should be shown as deduction from cost of the asset i.e.

4 All liabilities should be entered in the credit column of Balance sheet section of work sheet and then carried to the Balance sheet with ...

Solution Summary

A description and analysis for the effects of business transactions are given.

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