50 C H A P T E R 2 The Balance Sheet

EXHIBIT 2 . 3 Accounting for Business Activities Name whats exchanged Noodlecake

Picture the documented activity Analyze the financial effects Picture what is described in words.

This step is easily overlooked but is vital to succeeding in the next step. Building on the previous step, assign names to what your business has received and given.

Building on the last step, show how the costs cause elements of the accounting equation to increase and/or decrease. A = L + SE

TRANSACTIONS AND OTHER ACTIVITIES Business activities that affect the basic accounting equation (A = L + SE) are called transactions. Transactions are of special importance because they are the only activities that enter the financial accounting system. Transactions include two types of events:

1. External exchanges: These are exchanges involving assets, liabilities, and/or stockhold- ers equity between the company and someone else. When Starbucks sells you a Frappuccino, it is exchanging an icy taste of heaven for your cash, so Starbucks would record this in its accounting system.

2. Internal events: These events do not involve exchanges with others outside the business, but rather occur within the company itself. For example, when the company Red Bull combines sugar, water, taurine, and caffeine, something magical happens: These ingredients turn into Red Bull Energy Drink. This internal event is a transaction because it has a direct financial effect whereby some assets (supplies of sugar, etc.) are used up to create a different asset (an inventory of Red Bull drinks).

Some important activities that occur will not be captured by the accounting system because they are not transactions. For example, during the first month of business, Jordan signed a contract on behalf of Noodlecake to rent office space the following month. This activity was not a transaction because no assets or services were exchanged at that time. The landlord exchanged a promise to rent the building for Noodlecakes promise to pay rent, but an exchange of only promises is not an accounting transaction. For this same reason, Noodlecakes accounting system did not capture other activities such as placing orders with suppliers or promising to hire employees. Documents were created to indi- cate these activities occurred, but they were appropriately excluded from the accounting

YOU SHOULD KNOW Transaction: An exchange or an event that has a direct economic effect on the assets, liabilities, or stockholders equity of a business. Final PDF to printer

Picture the documented activity Picture what is described in words. This step is easily overlooked but is vital to succeeding in the next step. Name what's exchanged Building on the previous step, assign names to what your business has received and given. nalyze the financial effects Building on the last step, show how the costs cause elements of the accounting equation to inerease and/or decrease. Picture the documented activity Picture what is described in words. This step is easily overlooked but is vital to succeeding in the next step. Name what's exchanged Building on the previous step, assign names to what your business has received and given. nalyze the financial effects Building on the last step, show how the costs cause elements of the accounting equation to inerease and/or decrease