Quiz 2: Analyzing Business Transactions
Part: 1 Books of Accounts or financial Statements plays a critical role in a business because they keep records of various assets which a firm has to sue upon and also all the liabilities for which the firm can be sued at any time. a) Body builder fitness Centre Income statement period ending December 31 b) During the first Two Months the Fitness Centre of James Mitchell earns a good amount of Revenue from the customers who attend the gym for exercise however he fails to break even during the initial two months of operations. Heavy Capital Expenditure has gone into the Gym by way of purchase of exercise equipment. Since the gym is new it will take some time before the business takes off and it begins to earn profit. Furthermore it is advisable that James should collect fees from customers in advance and on monthly basis to avoid non recovery of fees. c) Maintenance of books of accounts plays a crucial role in the smooth running of the business. It records all the business transactions occurring from time to time which involves assets, owner's capital and other debts of the firm. James does not maintain his books of accounts in a proper manner. His system of accounting is not commendable. James should record his daily transaction in proper book. Since business is new he can maintain transactions records manually however the sooner he switches to computer based accounting the better it is. Furthermore he should get his accounts verified by a professional accountant on a regular basis and get the following financial statements prepared: 1. Income Statement. 2. Statement of Owner's Equity. 3. Balance Sheet. This will enable him to judge his profitability and help in determining his financial position.
Fundamental accounting equation: • The fundamental accounting equation is as following: • Here the assets refer the sum of the liabilities and Capital. • It shows the relationship between assets and liabilities with owner's equity. • Based on the fundamental accounting equation, analyzing, recording and reporting business transactions have to be done. • Owner's equity is increased by Revenues. • Owner's equity is decreased by Expenses.
Determine the totals that would appear in the firm's fundamental accounting equation: • In accounting terms the firm's assets must equal the total of its liabilities and owner's equity. • The relationship between assets and liabilities and owners' equity is called the fundamental accounting equation. Assets= Liabilities + Owners Equity • In this question we have to determine the total that would appear in the firms' fundamental accounting equation.