Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 2 Basic Accounting Concepts 57

Balance Sheet

Assets  Liabilities  Stockholders’ Equity

Cash Capital Stock

6,000 6,000

Statement of Cash Flows

a. Financing 6,000

Statement of

Cash Flows

Income

Statement

a. Investment by Dr. Landry

transaction or group of similar transactions during September, the first

month of operations. We then illustrate how Exhibit 1 can be used to

analyze, record, and summarize the effects of these transactions on the

financial statements. We begin with Dr. Landry’s investment to estab-

lish the business.

Transaction a. Dr. Landry deposits $6,000 in a bank account in the

name of Family Health Care, P.C., in return for shares of stock in the

corporation. We refer to stock issued to owners (stockholders) such as

Lee Landry as capital stock. The effect of this transaction is to increase

cash from financing activities by $6,000 under the statement of cash flows column.

Increases are recorded as positive numbers, while decreases are recorded as negative

numbers. In addition, the transaction increases assets (cash) in the left side of the ac-

counting equation under the balance sheet column by $6,000. To balance the equation,

the stockholders’ equity (capital stock) on the right side of the equation is increased by

the same amount. Since no revenues or expenses are affected, there are no entries un-

der the income statement column. The effect of this transaction on Family Health

Care’s financial statements is shown below:

Note that the equation relates only to the business, Family Health Care, P.C. Lee

Landry’s personal assets (such as a home or a personal bank account) and personal

liabilities are excluded from the equation. The business is treated as a separate entity,

with cash of $6,000 and stockholders’ equity of $6,000.

Transaction b. Family Health Care’s next transaction is to borrow $10,000 from

First National Bank to finance its operations. To borrow the $10,000, Lee Landry signed

a note payable in the name of Family Health Care. The note payable is a liability or a

claim on assets that Family Health Care must satisfy (pay) in the future. In addition,

the note payable requires the payment of interest of $100 per month until the note is

due in full on September 30, 2012. At the end of September, we will record the pay-

ment of $100 of interest.

The effect of this transaction is to increase cash from financing activities by $10,000

under the statement of cash flows column. In addition, cash is increased and liabilities

(notes payable) are increased under the balance sheet columns. Observe how this

transaction changed the mix of assets and liabilities on the balance sheet but did

not change Family Health Care’s stockholders’ equity. That is, assets minus liabili-

ties still equals stockholders’ equity of $6,000 on the balance sheet. Since no rev-

enues or expenses are affected, no entries are made under the income statement

column. The effect of this transaction on Family Health Care’s financial statements

follows.

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