Last week, we discussed "The Language of Business" and why the accounting information system is important in business. This week, we are going to look at the mechanics of how it all works. It might be a bit easier if we started with an example which would be the Genie Car Wash, Inc. in Chapter 2 of your textbook. Pick a transaction from Genie and let us know how it impacts the accounting equation. Make sure to identify the two accounts impacted. Why is it important to record your selected transaction?

Example: Genie Car Wash, Inc. To illustrate the accounting for transactions, let's return to Genie Car Wash, Inc. In Chapter 1's End-of-Chapter Problem, Kyle Nielson opened Genie Car Wash, Inc., in April 2012. We consider 11 events and analyze each in terms of its effect on Genie Car Wash. We begin by using the accounting equation. In the second half of the chapter, we record transactions using the journal and ledger of the business. Transaction 1. Nielson and a few friends invest $50,000 to open Genie Car Wash, and the business issues common stock to the stockholders. The effect of this transaction on the accounting equation of Genie Car Wash, Inc., is a receipt of cash and issuance of common stock, as follows: Every transaction's net amount on the left side of the equation must equal the net amount on the right side. The first transaction increases both the cash and the common stock of the business. To the right of the transaction we write \"Issued stock\" to show the reason for the increase in stockholders' equity. Every transaction affects the financial statements of the business, and we can prepare financial statements after one, two, or any number of transactions. For example, Genie Car Wash could report the company's balance sheet after its first transaction, shown here. This balance sheet shows that the business holds cash of $50,000 and owes no liabilities. The company's equity (ownership) is denoted as Common Stock on the balance sheet. A bank would look favorably on this balance sheet because the business has $50,000 cash and no debta strong financial position. As a practical matter, most entities report their financial statements at the end of the accounting periodnot after each transaction. But an accounting system can produce statements whenever managers need to know where the business stands. Transaction 2. Genie purchases land for a new location and pays cash of $40,000. The effect of this transaction on the accounting equation is as follows: The purchase increases one asset (Land) and decreases another asset (Cash) by the same amount. After the transaction is completed, Genie has cash of $10,000, land of $40,000, and no liabilities. Stockholders' equity is unchanged at $50,000. Note that total assets must always equal total liabilities plus equity. Transaction 3. The business buys supplies on account, agreeing to pay $3,700 within 30 days. This transaction increases both the assets and the liabilities of the business. Its effect on the accounting equation follows. The new asset is Supplies, and the liability is an Account Payable. Genie signs no formal promissory note, so the liability is an account payable, not a note payable. Transaction 4. Genie earns $7,000 of service revenue by providing services for customers. The business collects the cash. The effect on the accounting equation is an increase in the asset Cash and an increase in Retained Earnings, as follows: To the right we record \"Service revenue\" to show where the $7,000 of increase in Retained Earnings came from. Transaction 5. Genie performs service on account, which means that Genie lets some customers pay later. Genie earns revenue but doesn't receive the cash immediately. In transaction 5, Genie cleans a fleet of UPS delivery trucks, and UPS promises to pay Genie $3,000 within one month. This promise is an account receivablean assetof Genie Car Wash. The transaction record follows. It's performing the service that earns the revenuenot collecting the cash. Therefore, Genie records revenue when it performs the serviceregardless of whether Genie receives cash now or later. Transaction 6. During the month, Genie Car Wash pays $2,700 for the following expenses: equipment rent, $1,100; employee salaries, $1,200; and utilities, $400. The effect on the accounting equation is as follows: The expenses decrease Genie's Cash and Retained Earnings. List each expense separately to keep track of its amount. Transaction 7. Genie pays $1,900 on account, which means to make a payment toward an account payable. In this transaction Genie pays the store from which it purchased supplies in transaction 3. The transaction decreases Cash and also decreases Accounts Payable as follows: Transaction 8. Kyle Nielson, the major stockholder of Genie Car Wash, paid $30,000 to remodel his home. This event is a personal transaction of the Nielson family. It is not recorded by the Genie Car Wash business. We focus solely on the business entity, not on its owners. This transaction illustrates the entity assumption from Chapter 1. Transaction 9. In transaction 5, Genie performed services for UPS on account. The business now collects $1,000 from UPS. We say that Genie collects the cash on account, which means that Genie will record an increase in Cash and a decrease in Accounts Receivable. This is not service revenue because Genie already recorded the revenue in transaction 5. The effect of collecting cash on account is as follows: Transaction 10. Genie sells some land for $22,000, which is the same amount that Genie paid for the land. Genie receives $22,000 cash, and the effect on the accounting equation is as follows: Note that the company did not sell all its land; Genie still owns $18,000 worth of land. Transaction 11. Genie Car Wash declares a dividend and pays the stockholders $2,100 cash. The effect on the accounting equation is as follows: The dividend decreases both the Cash and the Retained Earnings of the business. However, dividends are not an expense. Transactions and Financial Statements Exhibit 2-1 summarizes the 11 preceding transactions. Panel A gives the details of the transactions, and Panel B shows the transaction analysis. As you study the exhibit, note that every transaction maintains the equality: Exhibit 2-1 provides the data for Genie Car Wash's financial statements: EXHIBIT 2-1 Transaction Analysis: Genie Car Wash, Inc. Income statement data appear as revenues and expenses under Retained Earnings. The revenues increase retained earnings; the expenses decrease retained earnings. The balance sheet data are composed of the ending balances of the assets, liabilities, and stockholders' equities shown at the bottom of the exhibit. The accounting equation shows that total assets ($57,000) equal total liabilities plus stockholders' equity ($57,000). The statement of retained earnings repeats net income (or net loss) from the income statement. Dividends are subtracted. Ending retained earnings is the final result. Data for the statement of cash flows are aligned under the Cash account. Cash receipts increase cash, and cash payments decrease cash. Exhibit 2-2 shows the Genie Car Wash financial statements at the end of April, the company's first month of operations. Follow the flow of data to observe the following: 1. The income statement reports revenues, expenses, and either a net income or a net loss for the period. During April, Genie earned net income of $7,300. Compare Genie's income statement with that of Apple, Inc., at the beginning of the chapter. The income statement includes only two types of accounts: revenues and expenses. 2. The statement of retained earnings starts with the beginning balance of retained earnings (zero for a new business). Add net income for the period (arrow ), subtract dividends, and compute the ending balance of retained earnings ($5,200). 3. The balance sheet lists the assets, liabilities, and stockholders' equity of the business at the end of the period. Included in stockholders' equity is retained earnings, which comes from the statement of retained earnings (arrow ). EXHIBIT 2-2 Financial Statements of Genie Car Wash, Inc. Let's put into practice what you have learned thus far