Transactions(Account)

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ing)C H A P T E R

3

Analyzing and Recording Transactions
Rethink Accounting!
Vancouver, BC—Rethink Advertising’s unique approach to marketing has attracted clients that include A&W, A&P, B.C. Automobile Association, Okanagan Springs Brewery, MJB Coffee, and Maclean’s. The owners—Grais, Shepansky, and Staples—established Rethink in 1999 and the company has since grown to 30 employees. When it comes to accounting, the owners agree that the hands-on approach they each learned in postsecondary studies has provided them with invaluable tools that have been critical to their understanding of how to grow the business. Tom Shepansky, a marketing grad, says that “The most important information for us as a small business relates to revenues, cost control, and obviously the impact on our equity. Initially, our balance sheet was irrelevant because we had no equity. A&W, our first big name account, asked us to provide them with our balance sheet. The CFO was amused by our lack of resources but was willing to give us our first big break. We’ve come a long way since then but we still take the approach to grow our company conservatively, out of profits.” Rethink lists two sources of revenue in its chart of accounts: Consulting Revenue related to strategy and creative development, and Production Revenue for the making of physical ads and signs. Expenses are detailed on a line item basis to help the owners monitor where to spend more and where to spend less. Tom Shepansky’s advice to business students, especially non-accountants, is to have a solid understanding of accounting. “You need to talk to your accountant about what is going on in the business. You have to be able to ask the tough questions and make the even tougher decisions. How can you do that without a solid understanding of the numbers? Accounting is the foundation of business and allows you to develop a sound and detailed financial plan to be able to grow revenues but, as important, manage expenses. Cash flow and poor money management have killed more companies than anything else. Pay attention to your receivables and take an active interest in the changes in all account balances. Learn to respect and value the numbers or they will come back to haunt you.” h t t p : / / w w w. r e t h i n k a d v e r t i s i n g . c o m

Learning Objectives
LO1 LO2 LO3 LO4 LO5 LO6 LO7
Explain the accounting cycle. Describe an account, its use, and its relationship to the ledger. Define debits and credits and explain their role in doubleentry accounting. Describe a chart of accounts and its relationship to the ledger. Analyze the impact of transactions on accounts. Record transactions in a journal and post entries to a ledger. Prepare and explain the use of a trial balance.

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Chapter 3

Analyzing and Recording Transactions

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We explained in Chapter 2 how the accounting equation P. 42 helps us understand and analyze transactions and events. Analyzing financial transactions is the first step in the accounting cycle. Chapters 3 through 5 continue to explain and demonstrate each of the steps in the accounting cycle. All accounting systems use steps similar to those described here. These procedures are important because they lead to financial statements P. 34. Financial statements—in particular the information contained in the income statement—are what Rethink in the opening article used to grow the business. We begin by providing an overview of the accounting cycle. We describe accounts and explain their purpose. Debits and credits are introduced, which enables us to describe the process of recording transactions in a journal and posting them to a ledger. We return to transactions of Finlay Interiors, first introduced in Chapter 2, to illustrate many of these procedures.

The Accounting Cycle
LO1
Explain the accounting cycle.

The accounting cycle refers to the steps in preparing financial statements for users. It is called a cycle because the steps are repeated...
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