Chapter 3 Lesson 1: Analyzing
Changes In Financial Position
Vocabulary:
• Business Transactions
• Source documents
• Objectivity principle
A business’ financial position changes constantly. Since the balance sheet expresses the financial
position of a business, that means that the balance sheet is constantly changing also.
What event changes a balance sheet?
Each time a transaction occurs it changes a business’ balance sheet.
What is a transaction?
A business transaction is a financial action that causes a change in the financial
position of a business.
3.1. Business Transactions
Examples:
i) Sept 5 Pay $500 cash from my savings account to fix personal
car.
Effects of the transaction on the financial position:
Financial Position
Date Transaction Assets Liabilities Owner’s Equity
Sept 5 Took $500 from savings Decrease $500 Decrease by
account to pay to fix my (cash) $500
car
3.1. Business Transactions
Examples:
ii) Sept 6 Canadian Tire sold $150,000 worth of tires for cash.
Effects of the transaction on the financial position:
Financial Position
Date Transaction Assets Liabilities Owner’s Equity
Sept 6 Canadian Tire sold $150,00 Increase $150,000 Increase $150,000
worth of tires for cash
3.1. Business Transactions
Examples:
iii) Sept 7 Canadian Tire paid $20,000 cash towards a $75,000
bank loan that the company had received.
Effects of the transaction on the financial position:
Financial Position
Date Transaction Assets Liabilities Owner’s Equity
Sept 7 Canadian Tire paid $20,000 Decrease $20,000 Decrease
cash towards a $75,000 (cash) $20,000 (Bank
Loan)
nancial position
Business Transactions
What are the effects of these transactions on the financial position?
Transaction Financial Position
Assets Liabilities Owner’s Equity
The business pays $800 cash for donations to the Cancer Society ( 800) (cash) ( 800) (donation)
Brackets represent
decreases/negatives
The owner of the business gave his son $500 cash for school books (500) (cash) (500) (drawings)
The business purchased a new car for $20 000 on credit from 20 000 (automobile) 20 000 (Accounts Payable)
UniMotors Ltd
The company hired a new manager at $150 000 per year salary.
The manager will begin work next month
A fire destroyed the company’s inventory valued at $500 000 (500 000) (inventory) (500 000) (Loss)
Business Transactions
Each day a business completes hundreds of transaction and each of these
transaction must be recorded on a source document (business document) to verify
the dollar amount.
What is a source document?
A source document is a business paper that originates from a financial transaction,
for example, a receipt, a bill, a sales slip, etc.
Why is a source document needed?
A source document is required because:
• it acts as a reference
• it provides the information that is required to record the transaction in the
accounting books
• it is objective, that is, the information it contains is not dependent on its reader *
• it provides proof that the transaction occurred
Business Transactions
What is the Objectivity Principle?
The objectivity principle of accounting states that accounting should be
• based on objective records, that is, they should be verifiable, and not
• dependent on reader’s interpretation. The values contained in the records will be the same regardless
of who reads/sees them.
For example, R&B Co. bought $25 000 computer equipment from Quick Cash Ltd. According to the
Objectivity Principle, the transaction should be recorded as $25 000 (the historical value of the
transaction).
What are some of the source documents?
• Invoices (sales and purchases invoices) -- record purchase or sale on account
• credit notes – document records goods returned by a buyer (Accounts Receivable)
• Cheques -- Payment or receipt made via an order drawn on a bank for a specific sum of
money
• Receipts -- document which records cash paid or received on a transaction
• debit notes – document records goods returned to supplier (Accounts Payable)
Business Transactions
Chapter 3 Practice Exercises 3 and 4
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
The Equation Analysis Sheet
