{"id":70,"date":"2024-09-06T16:46:08","date_gmt":"2024-09-06T16:46:08","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/transactions-and-the-accounting-equation\/"},"modified":"2024-09-11T17:20:57","modified_gmt":"2024-09-11T17:20:57","slug":"transactions-and-the-accounting-equation","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/transactions-and-the-accounting-equation\/","title":{"raw":"Transactions and the Accounting Equation","rendered":"Transactions and the Accounting Equation"},"content":{"raw":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\r\n<ul>\r\n \t<li>Explain the effect of various transactions on the accounting equation<\/li>\r\n<\/ul>\r\n<\/section>&nbsp;\r\n\r\nAccounting is the process of analyzing, classifying, recording, summarizing, and interpreting business transactions. One of the key aspects of the process is keeping running totals of things. Examples of items a business might keep track of include the following:\r\n<ul>\r\n \t<li>The amount of cash the business currently has<\/li>\r\n \t<li>What a company has paid for utilities for the month<\/li>\r\n \t<li>The amount of money it owes<\/li>\r\n \t<li>A company's income for the entire year<\/li>\r\n \t<li>The total cost of all the equipment it has purchased<\/li>\r\n<\/ul>\r\nIt's important that businesses keep these running totals up to date so they are readily available when the information is needed.\r\n\r\nWe will now refer to these running totals as <strong>balances<\/strong> and these items as <strong>accounts<\/strong>. Any item that a business needs to keep track of in terms of a running dollar balance is set up as an account. With these accounts, businesses can easily check in to determine \u201chow much of X do we have right now?\u201d or \u201chow much of X have we sold so far?\u201d\r\n\r\nThe first step in accounting is to do basic bookkeeping in order to capture the data that we will eventually turn into reports and statements. We do this by recording transactions. An accounting transaction is any business event that has a monetary impact on the financial statements of a business, and there is usually some kind of supporting paper or electronic documentation. For instance, a cash deposit into the bank is a transaction, and the bank statement or deposit slip is the evidence.\r\n\r\n<section class=\"textbox example\" aria-label=\"Example\">\r\n<h3>NeatNiks<\/h3>\r\nLet\u2019s revisit Nick Frank\u2019s business that he started in October of this year. NeatNiks provides customized cleaning services to high-end homeowners in the Santa Fe area of New Mexico.\r\n\r\n<img class=\"aligncenter size-large wp-image-2822\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/08\/10203740\/zahir-namane-iQ0ou3Bztzk-unsplash-1-1024x280.jpg\" alt=\"Photograph of a Black man wearing professional blazer, who is looking to the left\" width=\"1024\" height=\"280\" \/>\r\n\r\nAs a reminder, these are the transactions that Nick has recorded for the month of October:\r\n<ul>\r\n \t<li>Oct 1: The owner, Nick Frank, opened a bank account in the name of NeatNiks using $20,000 of his own money from his personal account.<\/li>\r\n \t<li>Oct 4: Nick rented a truck for $12,000 cash for October through March (6 months).<\/li>\r\n \t<li>Oct 7: Purchased $2,600 of supplies on account from Cleaning Supplies, Inc.<\/li>\r\n \t<li>Oct 15: Received $1,500 cash for services performed.<\/li>\r\n \t<li>Oct 20: Billed customers for $7,250 worth of work done in October.<\/li>\r\n \t<li>Oct 25: Paid in cash: $1,500 for insurance &amp; $1,100 for independent contractors' work.<\/li>\r\n \t<li>Oct 26: Paid $1,000 to Cleaning Supplies, Inc. on account.<\/li>\r\n \t<li>Oct 30: Collected $1,600 from customers on account.<\/li>\r\n \t<li>Oct 31: Withdrew $4,000 cash for personal use.<\/li>\r\n \t<li>Oct 31: Nick owes independent contractors $1,200 for work done in October\u2014he'll pay it in November.<\/li>\r\n \t<li>Oct 31: Nick had $1,000 of supplies leftover at the end of the month.<\/li>\r\n<\/ul>\r\nNick has now hired you as the outsourced bookkeeper\/accountant for his company, so let\u2019s walk through some of these transactions and see what it would look like for Nick to try to keep track of them\u2014for example, in a spreadsheet.\u00a0For now, let's just worry about the cash transactions, and we'll look at the non-cash transactions later.\r\n\r\nClick through the interactive activity below and we'll help you figure this out:\r\n<h2>What is NeatNiks's Status?<\/h2>\r\nOkay, we've finished our spreadsheet that lets us enter and categorize all of the cash-related October transactions. How many of these questions can we answer now?\r\n\r\nAt the end of October:\r\n\r\n<strong>Question 1:<\/strong> How much money did Nick make or lose during his first month in business?\r\n\r\n[reveal-answer q=\"727492\"]Show Answer[\/reveal-answer]\r\n[hidden-answer a=\"727492\"]We can't answer this yet since all we're tracking so far are cash-based transactions.\u00a0 To understand how much money Nick made (or lost), we will need to account for all of the transactions that we have ignored.[\/hidden-answer]\r\n\r\n<strong>Question 2:<\/strong> Nick wants to buy another truck for $5,000 in order to keep up with demand\u2014does he have enough cash in the bank to do that right now?\r\n\r\n[reveal-answer q=\"664769\"]Show Answer[\/reveal-answer]\r\n[hidden-answer a=\"664769\"]We can answer this one now!\u00a0 As shown in the Checking Account column of our spreadsheet, Nick has $3,500 in the bank at the end of October.\u00a0 Unfortunately for Nick, he'll have to wait a bit before buying that second truck.[\/hidden-answer]\r\n\r\n<strong>Question 3:<\/strong> How much do customers owe Nick?\r\n\r\n[reveal-answer q=\"250173\"]Show Answer[\/reveal-answer]\r\n[hidden-answer a=\"250173\"]Our cash-based spreadsheet doesn't allow us to answer this question.\u00a0 We'll need to learn how to track the money that Nick is owed.[\/hidden-answer]\r\n\r\n<strong>Question 4:<\/strong> How much does Nick owe to his suppliers?\r\n[reveal-answer q=\"391258\"]Show Answer[\/reveal-answer]\r\n[hidden-answer a=\"391258\"]Our cash-based spreadsheet doesn't allow us to answer this question either.\u00a0 We will need to learn how to track the money that Nick owes to his suppliers.[\/hidden-answer]\r\n\r\n<strong>Question 5:<\/strong> What is Nick's equity in his business at the end of October?\r\n[reveal-answer q=\"73230\"]Show Answer[\/reveal-answer]\r\n[hidden-answer a=\"73230\"]We can't answer this one yet either, because we've ignored some of the non-cash transactions that we'll need to account for before being able to figure Nick's equity.[\/hidden-answer]\r\n\r\nSo it looks like our spreadsheet only allows us to answer one question so far!\r\n\r\n<\/section><section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25099[\/ohm2_question]\r\n[ohm_question hide_question_numbers=1]210836[\/ohm_question]<\/section>","rendered":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\n<ul>\n<li>Explain the effect of various transactions on the accounting equation<\/li>\n<\/ul>\n<\/section>\n<p>&nbsp;<\/p>\n<p>Accounting is the process of analyzing, classifying, recording, summarizing, and interpreting business transactions. One of the key aspects of the process is keeping running totals of things. Examples of items a business might keep track of include the following:<\/p>\n<ul>\n<li>The amount of cash the business currently has<\/li>\n<li>What a company has paid for utilities for the month<\/li>\n<li>The amount of money it owes<\/li>\n<li>A company&#8217;s income for the entire year<\/li>\n<li>The total cost of all the equipment it has purchased<\/li>\n<\/ul>\n<p>It&#8217;s important that businesses keep these running totals up to date so they are readily available when the information is needed.<\/p>\n<p>We will now refer to these running totals as <strong>balances<\/strong> and these items as <strong>accounts<\/strong>. Any item that a business needs to keep track of in terms of a running dollar balance is set up as an account. With these accounts, businesses can easily check in to determine \u201chow much of X do we have right now?\u201d or \u201chow much of X have we sold so far?\u201d<\/p>\n<p>The first step in accounting is to do basic bookkeeping in order to capture the data that we will eventually turn into reports and statements. We do this by recording transactions. An accounting transaction is any business event that has a monetary impact on the financial statements of a business, and there is usually some kind of supporting paper or electronic documentation. For instance, a cash deposit into the bank is a transaction, and the bank statement or deposit slip is the evidence.<\/p>\n<section class=\"textbox example\" aria-label=\"Example\">\n<h3>NeatNiks<\/h3>\n<p>Let\u2019s revisit Nick Frank\u2019s business that he started in October of this year. NeatNiks provides customized cleaning services to high-end homeowners in the Santa Fe area of New Mexico.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-large wp-image-2822\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/08\/10203740\/zahir-namane-iQ0ou3Bztzk-unsplash-1-1024x280.jpg\" alt=\"Photograph of a Black man wearing professional blazer, who is looking to the left\" width=\"1024\" height=\"280\" \/><\/p>\n<p>As a reminder, these are the transactions that Nick has recorded for the month of October:<\/p>\n<ul>\n<li>Oct 1: The owner, Nick Frank, opened a bank account in the name of NeatNiks using $20,000 of his own money from his personal account.<\/li>\n<li>Oct 4: Nick rented a truck for $12,000 cash for October through March (6 months).<\/li>\n<li>Oct 7: Purchased $2,600 of supplies on account from Cleaning Supplies, Inc.<\/li>\n<li>Oct 15: Received $1,500 cash for services performed.<\/li>\n<li>Oct 20: Billed customers for $7,250 worth of work done in October.<\/li>\n<li>Oct 25: Paid in cash: $1,500 for insurance &amp; $1,100 for independent contractors&#8217; work.<\/li>\n<li>Oct 26: Paid $1,000 to Cleaning Supplies, Inc. on account.<\/li>\n<li>Oct 30: Collected $1,600 from customers on account.<\/li>\n<li>Oct 31: Withdrew $4,000 cash for personal use.<\/li>\n<li>Oct 31: Nick owes independent contractors $1,200 for work done in October\u2014he&#8217;ll pay it in November.<\/li>\n<li>Oct 31: Nick had $1,000 of supplies leftover at the end of the month.<\/li>\n<\/ul>\n<p>Nick has now hired you as the outsourced bookkeeper\/accountant for his company, so let\u2019s walk through some of these transactions and see what it would look like for Nick to try to keep track of them\u2014for example, in a spreadsheet.\u00a0For now, let&#8217;s just worry about the cash transactions, and we&#8217;ll look at the non-cash transactions later.<\/p>\n<p>Click through the interactive activity below and we&#8217;ll help you figure this out:<\/p>\n<h2>What is NeatNiks&#8217;s Status?<\/h2>\n<p>Okay, we&#8217;ve finished our spreadsheet that lets us enter and categorize all of the cash-related October transactions. How many of these questions can we answer now?<\/p>\n<p>At the end of October:<\/p>\n<p><strong>Question 1:<\/strong> How much money did Nick make or lose during his first month in business?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q727492\">Show Answer<\/button><\/p>\n<div id=\"q727492\" class=\"hidden-answer\" style=\"display: none\">We can&#8217;t answer this yet since all we&#8217;re tracking so far are cash-based transactions.\u00a0 To understand how much money Nick made (or lost), we will need to account for all of the transactions that we have ignored.<\/div>\n<\/div>\n<p><strong>Question 2:<\/strong> Nick wants to buy another truck for $5,000 in order to keep up with demand\u2014does he have enough cash in the bank to do that right now?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q664769\">Show Answer<\/button><\/p>\n<div id=\"q664769\" class=\"hidden-answer\" style=\"display: none\">We can answer this one now!\u00a0 As shown in the Checking Account column of our spreadsheet, Nick has $3,500 in the bank at the end of October.\u00a0 Unfortunately for Nick, he&#8217;ll have to wait a bit before buying that second truck.<\/div>\n<\/div>\n<p><strong>Question 3:<\/strong> How much do customers owe Nick?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q250173\">Show Answer<\/button><\/p>\n<div id=\"q250173\" class=\"hidden-answer\" style=\"display: none\">Our cash-based spreadsheet doesn&#8217;t allow us to answer this question.\u00a0 We&#8217;ll need to learn how to track the money that Nick is owed.<\/div>\n<\/div>\n<p><strong>Question 4:<\/strong> How much does Nick owe to his suppliers?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q391258\">Show Answer<\/button><\/p>\n<div id=\"q391258\" class=\"hidden-answer\" style=\"display: none\">Our cash-based spreadsheet doesn&#8217;t allow us to answer this question either.\u00a0 We will need to learn how to track the money that Nick owes to his suppliers.<\/div>\n<\/div>\n<p><strong>Question 5:<\/strong> What is Nick&#8217;s equity in his business at the end of October?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q73230\">Show Answer<\/button><\/p>\n<div id=\"q73230\" class=\"hidden-answer\" style=\"display: none\">We can&#8217;t answer this one yet either, because we&#8217;ve ignored some of the non-cash transactions that we&#8217;ll need to account for before being able to figure Nick&#8217;s equity.<\/div>\n<\/div>\n<p>So it looks like our spreadsheet only allows us to answer one question so far!<\/p>\n<\/section>\n<section class=\"textbox tryIt\" 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