1. Define “transaction” and provide common examples.
2. Define “transaction analysis” and explain its importance to the accounting process.
3. Identify the account changes created by the purchase of inventory, the payment of a salary, and the borrowing of money.
4. Understand that accounting systems can be programmed to automatically record expenses such as salary as it accrues.
Question: Information provided by a set of financial statements is essential to any individual analyzing a business
or other organization. The availability of a fair representation of a company’s financial position, operations, and
cash flows is invaluable for a wide array of decision makers. However, the sheer volume of data that a company
such as General Mills, McDonald’s, or PepsiCo must gather in order to prepare these statements has to be
astronomical. Even a small enterprise—a local convenience store, for example—generates a significant quantity
of information virtually every day. How does an accountant begin the process of accumulating all the necessary
data so that financial statements can eventually be produced?
Answer: The accounting process starts by analyzing the effect of transactions—any event that has a financial
impact on a company. Large organizations participate in literally millions of transactions each year that must be
gathered, sorted, classified, and turned into a set of financial statements that cover a mere four or five pages.
Over the decades, accountants have had to become very efficient to fulfill this seemingly impossible assignment.
Despite the volume of transactions, the goal remains the same: to prepare financial statements that are presented
fairly because they contain no material misstatements according to U.S. generally accepted accounting principles (U.S. GAAP).