Chapter3: The Expanded Transaction Analysis Model Flashcards
What are the five elements included in the complete transaction model?
The complete transaction model includes assets, liabilities, shareholders’ equity, revenues, and expenses.
How does the retained earnings account change when net earnings are realized or when a loss occurs?
The retained earnings account increases when net earnings are realized and decreases when a loss occurs.
It represents the accumulation of all past revenues and expenses, minus any earnings distributed as dividends to shareholders.
What symbols are used to represent an increase in accounts on the left side of the accounting equation and accounts on the right side of the accounting equation?
For accounts on the left side of the accounting equation, the increase symbol (+) is written on the left side of the T-account.
For accounts on the right side of the accounting equation, the increase symbol (+) is written on the right side of the T-account, except for expenses, which increase on the left side of the T-account.
How are debits and credits represented in the transaction analysis model?
Debits (DR) are written on the left side of each T-account, and credits (CR) are written on the right side of the T-account.
How does recording a revenue or expense affect other accounts?
Recording a revenue increases net earnings, retained earnings, and shareholders’ equity, so revenues have credit balances.
Recording an expense decreases net earnings and retained earnings, so expenses have debit balances.
When revenues are recorded, an asset may increase or a liability may decrease. When expenses are recorded, an asset may decrease or a liability may increase.
What happens to retained earnings and shareholders’ equity when revenues exceed expenses, and when expenses exceed revenues?
When revenues exceed expenses, the company reports net earnings, which increase retained earnings and shareholders’ equity. However, when expenses exceed revenues, a net loss occurs, decreasing retained earnings and shareholders’ equity.
Expanded Transaction Analysis Model
Effects of Revenues and Expenses
What are the modified steps for analyzing transactions when determining the effects of earning revenues and incurring expenses?
The modified steps for analyzing transactions related to earning revenues and incurring expenses involve asking two questions:
Was a revenue earned or an expense incurred?
Is the accounting equation in balance based on the analysis?
These questions help determine the impact of transactions on a company’s financial statements.
Transaction Analysis Steps
