3.0: Prelude to Analyzing and Recording Transactions

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Chapter Outline

3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements

3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions

3.3 Define and Describe the Initial Steps in the Accounting Cycle

3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements

3.5 Use Journal Entries to Record Transactions and Post to T-Accounts

3.6 Prepare a Trial Balance

View of interior of dry-cleaning business. On the left are racks of clothes covered in plastic. On the right are shelves holding boxes. — Figure 3.1 Dry-Cleaning Organization. Small businesses need an organized approach to recording daily business activities. (credit: modification of “Dry cleaned clothes Unsplash” by “m0851”/Wikimedia Commons, CC0)

Mark Summers wants to start his own dry-cleaning business upon finishing college. He has chosen to name his business Supreme Cleaners. Before he embarks on this journey, Mark must establish what the new business will require. He needs to determine if he wants to have anyone invest in his company. He also needs to consider any loans that he might need to take out from his bank to fund the initial start-up. There are daily business activities that Mark will need to keep track of, such as sales, purchasing equipment, paying bills, collecting money from customers, and paying back investors, among other things. This process utilizes a standard accounting framework so that the financial operations are comparable to other company’s financial operations.

He knows it is important for him to keep thorough documentation of these business activities to give his investors and creditors, and himself, a clear and accurate picture of operations. Without this, he may find it difficult to stay in business. He will maintain an organized record of all of Supreme Cleaners’ financial activities from their inception, using an accounting process meant to result in accurate financial statement preparation.