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? ATTACHMENT PREVIEW Download attachmentExample: Genie Car Wash, Inc. To illustrate the accounting for transactions, let’s return to Genie Car Wash, Inc. In Chapter1’s End-of-Chapter Problem, Kyle Nielson opened Genie Car Wash, Inc., in April 2012. We consider 11 events and analyzeeach in terms of its eFect 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 $50,000to open Genie Car Wash, and the business issues common stock to the stockholders. The eFect of this transaction on theaccounting equation of Genie Car Wash, Inc., is a receipt of cash and issuance of common stock, as follows: Everytransaction’s net amount on the left side of the equation must equal the net amount on the right side. The ±rst transactionincreases both the cash and the common stock of the business. To the right of the transaction we write “Issued stock” toshow the reason for the increase in stockholders’ equity. Every transaction aFects the ±nancial statements of the business,and we can prepare ±nancial statements after one, two, or any number of transactions. ²or example, Genie Car Wash couldreport the company’s balance sheet after its ±rst transaction, shown here. This balance sheet shows that the businessholds cash of $50,000 and owes no liabilities. The company’s equity (ownership) is denoted as Common Stock on thebalance sheet. A bank would look favorably on this balance sheet because the business has $50,000 cash and no debt—astrong ±nancial position. As a practical matter, most entities report their ±nancial statements at the end of the accountingperiod—not after each transaction. But an accounting system can produce statements whenever managers need to knowwhere the business stands. Transaction 2. Genie purchases land for a new location and pays cash of $40,000. The eFect ofthis transaction on the accounting equation is as follows: The purchase increases one asset (Land) and decreases anotherasset (Cash) by the same amount. After the transaction is completed, Genie has cash of $10,000, land of $40,000, and noliabilities. Stockholders’ equity is unchanged at $50,000. Note that total assets must always equal total liabilities plusequity. Transaction 3. The business buys supplies on account, agreeing to pay $3,700 within 30 days. This transactionincreases both the assets and the liabilities of the business. Its eFect on the accounting equation follows. The new asset isSupplies, and the liability is an Account Payable. Genie signs no formal promissory note, so the liability is an accountpayable, not a note payable. Transaction 4. Genie earns $7,000 of service revenue by providing services for customers. Thebusiness collects the cash. The eFect on the accounting equation is an increase in the asset Cash and an increase inRetained Earnings, as follows: To the right we record “Service revenue” to show where the $7,000 of increase in RetainedEarnings came from. Transaction 5. Genie performs service on account, which means that Genie lets some customers paylater. Genie earns revenue but doesn’t receive the cash immediately. In transaction 5, Genie cleans a ³eet of UPS deliverytrucks, and UPS promises to pay Genie $3,000 within one month. This promise is an account receivable—an asset—of GenieCar Wash. The transaction record follows. It’s performing the service that earns the revenue—not collecting the cash.Therefore, Genie records revenue when it performs the service—regardless 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 eFect on the accounting equation is as follows: The expenses decreaseGenie’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 storefrom which it purchased supplies in transaction 3. The transaction decreases Cash and also decreases Accounts Payable asfollows: Transaction 8. Kyle Nielson, the major stockholder of Genie Car Wash, paid $30,000 to remodel his home. Thisevent is a personal transaction of the Nielson family. It is not recorded by the Genie Car Wash business. We focus solely onthe business entity, not on its owners. This transaction illustrates the entity assumption from Chapter 1. Transaction 9. Intransaction 5, Genie performed services for UPS on account. The business now collects $1,000 from UPS. We say that Geniecollects the cash on account, which means that Genie will record an increase in Cash and a decrease in AccountsReceivable. This is not service revenue because Genie already recorded the revenue in transaction 5. The eFect ofcollecting cash on account is as follows: Transaction 10. Genie sells some land for $22,000, which is the same amount thatGenie paid for the land. Genie receives $22,000 cash, and the eFect on the accounting equation is as follows: Note that thecompany did not sell all its land; Genie still owns $18,000 worth of land. Transaction 11. Genie Car Wash declares adividend and pays the stockholders $2,100 cash. The eFect on the accounting equation is as follows: The dividenddecreases both the Cash and the Retained Earnings of the business. However, dividends are not an expense. Transactionsand ²inancial Statements Exhibit 2-1 summarizes the 11 preceding transactions. Panel A gives the details of thetransactions, and Panel B shows the transaction analysis. As you study the exhibit, note that every transaction maintainsthe equality: Exhibit 2-1 provides the data for Genie Car Wash’s ±nancial statements: EXHIBIT 2-1 Transaction Analysis:Genie Car Wash, Inc. ▶ Income statement data appear as revenues and expenses under Retained Earnings. The revenuesincrease retained earnings; the expenses decrease retained earnings. ▶ The balance sheet data are composed of theending balances of the assets, liabilities, and stockholders’ equities shown at the bottom of the exhibit. The accountingequation shows that total assets ($57,000) equal total liabilities plus stockholders’ equity ($57,000). ▶ The statement ofretained earnings repeats net income (or net loss) from the income statement. Dividends are subtracted. Ending retainedearnings is the ±nal result. ▶ Data for the statement of cash ³ows are aligned under the Cash account. Cash receiptsincrease cash, and cash payments decrease cash. Exhibit 2-2 shows the Genie Car Wash ±nancial statements at the end ofApril, the company’s ±rst month of operations. ²ollow the ³ow of data to observe the following: 1. The income statementreports 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 statementincludes only two types of accounts: revenues and expenses. 2. The statement of retained earnings starts with thebeginning balance of retained earnings (zero for a new business). Add net income for the period (arrow ①), subtractdividends, 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 ②). EXHIBIT 2-2 ²inancial Statements of Genie Car Wash, Inc.Let’s put into practice what you have learned thus far

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