Level 2 assets are primarilysold “over-the-counter,” like corporate bonds, futures contracts,stock options, and others. Here the owner must report an estimatedprice based on prices of comparable assets that have tradedrecently. Level 3 assets are not bought https://www.bookstime.com/ and sold andtherefore do not have a market price. This includes more exoticinvestments like hedge funds and private equity. For Level 2 andLevel 3 assets, the owner must discount the reported asset value toaccount for uncertainty in that valuation.

Double Entry Bookkeeping

Another crucial set of accounting assumptions arearound depreciation. Depreciation is when an organizationexpenses a long-term asset. To deliver its services, Treehouse mustuse up some portion of its building, vehicles, audiology equipment,and other capital items.

Analyzing and Recording Transactions

Because the long-termobligation was to be forgiven, PASS would need to recognize thevalue of the forgiven loan as unrestricted revenue. Duncan expectedto receive payment on the balance of the loan as agreed. Unfortunately, pledges don’t alwaysmaterialize into contributions. Sometimes the donors’ financialsituation changes after making a pledge. Sometimes they have a bittoo much wine at a gala event and promise more than they can give.Sometimes they simply change their mind.

Which ledger accounts does the transaction affect?

She hired five part-time tutors at $15 perhour, for 80 hours each per month, from September 1 to May 31. Tokeep costs down, she decided she would continue accounting transaction analysis practice to tutor whilerunning the program. She also decided that the organization’s mostpressing need, particularly with new tutors on board, wastransportation.

Some state governments require non-profitsand governments to follow such a chart, but for the most part,public organizations are free to define their chart of accounts ontheir own. Since the one-year period will not be fully used at January 31 when financial statements are prepared, the insurance cost is considered to be an asset at the payment date. The type of account determines whether an increase or a decrease in a particular transaction is represented by a debit or credit. For financial transactions that affect assets, dividends, and expenses, increases are recorded by debits and decreases by credits. We now analyze each of these transactions, paying attention to how they impact the accounting equation and corresponding financial statements.

A credit increases aliability or net assets account, or decreases an asset or expenseaccount. Credits are always on the right of the account entry.Debits and credits must always balance. We can apply a similar logic on the revenue side.Imagine that Treehouse staff run a day-long outreach program at alocal school. This program was designed to sensitize public schoolteachers about the unique challenges faced by children in thefoster care system. Assume that Treehouse staff deliver the program and thensend the school district a bill for their services. Treehouse useda lot of staff time, supplies, travel, and other expenses toproduce this program, but they might not get paid for the programfor several weeks.

That said, thisframework does cover certain types of transactions, and sometimesdifferent types of non-profit and governmental transactions haveunique rules that apply just in those contexts. We’ll cover thosemore nuanced accounting rules in the lectures on non-profitfinancial management and government financial management. Now that we’ve toured the basic financialstatements, let’s take a step back and go over how we produce thosestatements. Financial statements are useful because they’reprepared according to generally accepted accounting principles(GAAP). To understand financial statements you must know a few ofthose principles, and you must know how typical financialtransactions shape the numbers you see in those statements.

• Rather, it makes a statement about how something is currently structured and how it can be developed further.
• If those investments have become more valuable,they’re contributing to the mission.
• But on the cash basis those stakeholders won’tknow about this transaction until Treehouse pays off the invoice.That might be several weeks away.
• For Level 2 andLevel 3 assets, the owner must discount the reported asset value toaccount for uncertainty in that valuation.
• This is different than if theorganization were to hire the one-time services of, say, a plumberfrom another company to fix some leaky pipes.

• But on the accrual basis, Treehouse wouldrecognize both those expenses and the expected revenue immediatelyafter delivering the program.
• Unrealized gains and losses do not directlyaffect cash or any other resources that Treehouse has available todeliver services.
• To help you produce your own tables, we have created an accounting transaction analysis template in PDF format.
• She wanted to make sure shecould earn some interest on these funds.

So even though Boeing stock is intangible, it’s quitevaluable. On the cash basis it will be several weeks beforewe know those expenses had been incurred and that Treehouse hadearned $2,500 in revenue. But on the accrual basis, Treehouse wouldrecognize both those expenses and the expected revenue immediatelyafter delivering the program. The City of Rochester, NY is like most classic“Rust Belt” cities.

Analysis of Business Transactions

• It’s much easier to manage anorganization when there are no strings attached to its money.
• The change to liabilities will increase liabilities on the balance sheet.
• She made a $5,000 down payment and took out afive-year loan at 2.5% interest to finance the rest.
• It incurred avariety of expenses – staff time, travel, supplies, etc. – todeliver that service.
• Each account can identified with an account type, either assets, liabilities, equity, revenue or expenses.
• However, beaware that bad debt is not unique to non-profits or to pledgesreceivable.

Her interest in after-school tutoring wasprompted by recent changes in state policy that would requirestudents to pass a series of end-of-year exams to qualify forgraduation. Finally, we must consider what happens ifTreehouse is paid for a service before it delivers that service.This is known as deferred revenue or unearnedrevenue. Deferred revenue is a liability because it representsa future claim on Treehouse resources.