Video Transcript: Business Transactions

Hi and welcome back now we're going to talk to talk about business  transactions. The business transaction represents economic events that take  place during the course of the day to day, business operations. These events  must be able to be reliably recorded. Businesses conduct many activities that do not represent business transactions. The transactions are analyzed to determine if the events affect components of the accounting operations. So for instance,  one event is you purchase a computer. This is a recorded transaction that must  be documented. You have a meeting and you discuss potential customers. This  is not you do not document this. This is not a documented transaction. If you pay a rent for your building that is to record a business transaction, we have what's  called the accounting equation. And here you can see we have as assets equal  liabilities plus owner equity. So for instance, an investment by an owner, an  owner invests $15,000 cash into his business. What? What's being affected?  First you have you have cash, $15,000 cash. So your assets must equal your  liabilities and your owner's equity. So the cash is an asset and 15,000 you're  putting into your business. So it's an equity into your business. So you have 15  as an asset and 15,000 as an owner's equity. The second transaction that's  recordable is a purchase of equipment. So if you purchase a computer  equipment for $7,000 cash, what's being affected again, again, you have you're  going to take away the 7000 from the cash that you already have, and then you  also are buying a piece of equipment for for $7,000 okay? So you have, you  have two areas that affected your cash and your equipment, okay? And as you  can see, because the accounting equation must always be in balance, so you  have your assets at 15,000 and you have your owner's equity still at 15,000 your next transaction, you want to purchase some supplies on account, and you're  going to spend $16,000 $16,000 this is called credit, okay, so what's going to be  affected? So you're not spending cash, you're buying on account, so you're in  essence, extending some credit, or you're having a credit extended to you. So  you're going to what is your asset? Your supplies are your asset for $16,000 or  $1,600 I'm sorry. So you're adding that, you're adding a new account, which is  another asset account, which is supplies, and you're adding a new liability  account, which is your accounts payable for $1,600 and as you can see from the from the demonstration that your balance, your assets, your liabilities and  ordered equity are remaining equal. Once the transaction is complete, the fourth transaction, you're going to perform some services for cash. Okay, so now we  have a new account to add to the accounting equation. You have a revenue  account, which is part of the owner's equity. Okay, so for $1,200 you're going to  be paid for whatever services you do. So you're receiving the cash of 1200 and  then you're recording it as revenue on the other side of the equation. So and you still remain in balance with 17 eight on both sides of the equation. Your fifth  transaction, you're going to purchase advertising on credit. Again, credit. You're  not extending cash at this point. Okay? So you're going to receive a bill from 

your advertiser in the amount of $250 so what are you going to do with this?  How are you going to record this? We're going to add another account category  to the accounting equation, which is expense. Okay? So again, you are because you have credit instead of cash, you're going to put the 250 under the accounts  payable and advertising expense is an expense, so you add it to $250 on the  expense, and again, at the bottom, you're still remaining in balance with the 17  eight, the sixth transit. Action you're going to perform for cash and credit. Okay?  So you perform $3,500 worth of services, and the customer pays you 1500 in  cash, and the remainder you're going to bill to his account. Okay, so now we're  going to open a new account, which is called accounts receivable. This is money that is owed to you by one of your clients. Okay, so the first entry is going to be  1500 to cash. The second one is going to be 2000 to accounts receivable. And  then on the other side of the equation, you have revenue of $3,500 and again,  your equation is remaining in balance with 21 three on both sides. The seventh  transaction, you have some payment of expenses. The following expenses were paid with cash. 600 on your office rent, 900 to salaries and wages of your  employees, and 200 for utilities. So you're paying these out. So you're taking  $1,700 from your cash, and what are you doing with your cash? You're paying  600 for rent, 900 for salaries and wages, and 200 for utilities and expense. And  again, both sides of the equation must balance. So now you're at $19,600 with a balance on both sides of the equation, your eighth transaction, payment of  accounts payable, so you have a client. Okay? You, as an owner are going to  pay a bill worth $250 okay? So you deduct it from your cash and then your  accounts payable. Remember what you owe someone for something that they  have provided to you. So you're going to pay $250 at that. So that's going to  come off of there again, you have your assets and your liabilities and on both  sides of the equation still going to remain intact and balance for 19,350, the  night, the ninth transaction for the day, you're going to receive cash on account.  You're going to receive $600 from a customer who's paying for services, who  billed, who billed you for services. Okay? So you're going to receive the $600  and then you're going to take the $600 away from the money that they owe you,  which is your accounts receivable. Okay, so again, remember that you always  must be in balance, on the on the assets and the liabilities and owner's equity.  And as you can see, with those two transactions, you still remain intact at  19,350, okay, the 10th transaction, you're going to withdraw cash from the  owner. When a business is set up, you have an owner's equity. You have  Owner's Capital account, which is the money that was invested by the owner  into that account, and you have an owner's drawing account. The drawing  account is any money that the owner would take from his business. So in this  case, the owner is going to is going to withdraw $1,300 for personal reasons.  Okay, and that, and he can do that as long as it's documented. So he's going to  take $1,300 from cash, and we've created a new account under the owner's 

equity of the owner's drawing account, and it's going to take 13 or add $1,300 to that. Again, you're still remain intact and in balance at 18,050, so below, okay, is  the summary of all 10 transactions. Please note that during the recording of  these transactions both sides you must remain in balance, if not in balance,  something is wrong, okay? When evaluating a business transaction, they are  analyzed for the effect on the three components of the basic accounting  equation and the specific items within each component. Okay, so if you take a  look at what we have here, we have our assets, equals our liabilities plus our  owner equity. Within the owner equity, you have the owner's capital, the owner's  drawing, revenue and expenses. Now when you added the owner's capital and  the drawing and the revenue and expenses, and we call it with what's called an  expanded accounting equation. The excuse me, I'm sorry, the basic equation is  the assets equals liabilities plus owner's equity. Okay, so as you can see here,  we've started with transaction one. 10, and all the way through 10, and within  each transaction, you can prove your checks and balances, okay? And at the  bottom you can see that through all of the transactions, that you've remained in  balance with $18,050 .