Business Transactions and the Accounting Equation Making Accounting Relevant Every business has...

Business Transactions and the Accounting Equation

Business Transactions and the Accounting Equation

Making Accounting Relevant

Every business has assets, liabilities

(debts), and owner’s equity. Think

about a business in your community.

Making Accounting Relevant

Every business has assets, liabilities

(debts), and owner’s equity. Think

about a business in your community.

What possible assets does this business possess?What possible assets does this business possess?

Section 1Property and Financial Claims

Section 1Property and Financial Claims

What You’ll Learn

The relationship between property and financial claims.

The meaning of equity as it is used in accounting.

The parts of the accounting equation.

The definition of each part of the accounting equation.

What You’ll Learn

The relationship between property and financial claims.

The meaning of equity as it is used in accounting.

The parts of the accounting equation.

The definition of each part of the accounting equation.

Why It’s Important

The accounting equation is the basis for keeping all accounting records in balance.


The accounting equation is the basis for keeping all accounting records in balance.

Section 1 Property and Financial Claims (con’t.)Section 1 Property and Financial Claims (con’t.)

Key Terms property

property rights

financial claims

credit

creditor

assets

Key Terms property

property rights

financial claims

credit

creditor

assets

investments

equity

owner’s equity

liabilities

accounting equation

investments

equity

owner’s equity

liabilities

accounting equation

Property: Ownership and Control

Property is anything of value that is

owned or controlled.

Property: Ownership and Control

Property is anything of value that is

owned or controlled.


Property FinancialRight Claim

Own Yes YesControl (like rent) Yes No

Property FinancialRight Claim

Own Yes YesControl (like rent) Yes No

Property: Ownership and Control (con’t.)

In accounting, property and financial

claims are measured in dollar amounts.


In accounting, property and financial

claims are measured in dollar amounts.


Property = Financial

(Cost) (Financial Investments)

Bike Lock = Your Claim to the Bike$600 = $600

Property = Financial

(Cost) (Financial Investments)

Bike Lock = Your Claim to the Bike$600 = $600


When you buy property and agree to

pay for it later, you are buying on credit.


When you buy property and agree to

pay for it later, you are buying on credit.


Property = Financial Claims

Bike Creditor’s Owner’s Lock = Financial Claim + Financial Claim

$100 = $40 + $60

Property = Financial Claims

Bike Creditor’s Owner’s Lock = Financial Claim + Financial Claim

$100 = $40 + $60

Financial Claims in Accounting

Assets property or items

of value owned by a

business

Owner’s Equity the

owner’s claims to the

assets of the business

Liabilities creditor’s

claims to the assets of the

business

Financial Claims in Accounting

Assets property or items

of value owned by a

business

Owner’s Equity the

owner’s claims to the

assets of the business

Liabilities creditor’s

claims to the assets of the

business


The Accounting EquationThe Accounting Equation


Creditor’s Owner’s

Financial Claim Financial Claim

Creditor’s Owner’s

Financial Claim Financial ClaimProperty = +

Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity

Check Your UnderstandingCheck Your Understanding

What is meant by having a

financial claim to property?

What is meant by having a

financial claim to property?


Section 2Transactions That Affect Owner’s Investment, Cash, and Credit

Section 2Transactions That Affect Owner’s Investment, Cash, and CreditWhat You’ll Learn How accounts are used in business

transactions. The steps used to analyze business

transactions. How investments by the owner affect

the accounting equation. How a cash payment transaction affects

the accounting equation. How a credit transaction affects the

accounting equation.

What You’ll Learn How accounts are used in business

transactions. The steps used to analyze business

transactions. How investments by the owner affect

the accounting equation. How a cash payment transaction affects

the accounting equation. How a credit transaction affects the

accounting equation.


You can analyze real-world business

transactions by using the accounting

equation.


You can analyze real-world business

transactions by using the accounting

equation.

Key Terms business transactions account accounts receivable accounts payable on account

Key Terms business transactions account accounts receivable accounts payable on account

Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)


Business TransactionsBusiness Transactions

An economic event that causes a

change — either an increase or a

decrease — in assets, liabilities, or

owner’s equity.

The increases and decreases

caused by business transactions are

recorded in specific accounts.

Accounts may be classified as either

assets, liabilities, or owner’s equity.

An economic event that causes a

change — either an increase or a

decrease — in assets, liabilities, or

owner’s equity.

The increases and decreases

caused by business transactions are

recorded in specific accounts.

Accounts may be classified as either

assets, liabilities, or owner’s equity.



Business Transactions (con’t.)Business Transactions (con’t.)

Assets = Liabilities + Owner’s Equity

Cash in Bank Accounts Maria Sanchez,

Accounts Receivable Payable Capital

Computer Equipment

Office Equipment

Delivery Equipment


Cash in Bank Accounts Maria Sanchez,

Accounts Receivable Payable Capital

Computer Equipment

Office Equipment

Delivery Equipment



Effects of Business Transactions on the Accounting Equation

Analyzing business transactions:

Effects of Business Transactions on the Accounting Equation

Analyzing business transactions:

Business Transaction

ANALYSIS Identify

Classify

+ / -

Balance

1. Identify the accounts affected.2. Classify the accounts affected.3. Determine the amount of increase

or decrease for each account.4. Make sure the accounting

equation remains in balance.



Investments by the OwnerInvestments by the Owner

Business Transaction 1

ANALYSIS Identify 1. Cash transactions are recorded in the account Cash in Bank. Maria Sanchez is investing personal funds in the business. Her investment in the business is recorded in the account called Maria Sanchez, Capital.

Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service.



Investments by the Owner (con’t.)Investments by the Owner (con’t.)

Business Transaction 1 (con’t.)


ANALYSIS Classify 2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s equity account.






ANALYSIS + / – 3. Cash in Bank is increased by $25,000. Maria Sanchez, Capital is increased by $25,000.






ANALYSIS Balance 4. The accounting equation remains in balance.


Cash in Bank Maria Sanchez, Capital

Trans. 1 +$25,000 = 0 + +$25,000


Cash in Bank Maria Sanchez, Capital

Trans. 1 +$25,000 = 0 + +$25,000





ANALYSIS Identify 1. The business received two telephones. Since a telephone is office equipment, the account Office Equipment is affected. Maria Sanchez invested a personal asset in the business, so the account Maria Sanchez, Capital is affected.

The owner, Maria Sanchez, took two telephones valued at $200 each (total $400) from her home and transferred them to the business as Office Equipment.






ANALYSIS Classify 2. Office Equipment is an asset account. Maria Sanchez, Capital is an owner’s equity account.






ANALYSIS + / – 3. Office Equipment is increased by $400. Maria Sanchez, Capital is increased by $400.








Cash Office Maria Sanchez, in Bank Equip. Capital

Prev. Bal. $25,000 0 0 $25,000

Trans. 2 +400 +400

Balance $25,000 + $400 = 0 + $25,400


Cash Office Maria Sanchez, in Bank Equip. Capital

Prev. Bal. $25,000 0 0 $25,000

Trans. 2 +400 +400

Balance $25,000 + $400 = 0 + $25,400



Cash Payment TransactionsCash Payment Transactions


ANALYSIS Identify 1. The Computer Equipment account is used to record transactions involving any type of computer equipment. The business paid cash for the computer system, so the account Cash in Bank is affected. (Payments made by check are treated as cash payments and are recorded in the Cash in Bank account.)

Roadrunner issued a $3,000 check to purchase a computer system.



Cash Payment Transactions (con’t.)Cash Payment Transactions (con’t.)



ANALYSIS Classify 2. Computer Equipment and Cash in Bank are both asset accounts.






ANALYSIS + / – 3. Computer Equipment is increased by $3,000. Cash in Bank is decreased by $3,000.







Assets = Liabilities + Owner’s EquityCash Computer Office Maria Sanchez,

in Bank Equip. Equip. Capital

Prev. Bal. $25,000 0 $400 0 $25,400

Trans. 3 – 3,000 +3,000

Balance $22,000 + $3,000 + $400 = 0 + $25,400

Assets = Liabilities + Owner’s EquityCash Computer Office Maria Sanchez,

in Bank Equip. Equip. Capital

Prev. Bal. $25,000 0 $400 0 $25,400

Trans. 3 – 3,000 +3,000

Balance $22,000 + $3,000 + $400 = 0 + $25,400



Credit TransactionsCredit Transactions


ANALYSIS Identify 1. Roadrunner purchased a truck to be used as a delivery vehicle, so the account, Delivery Equipment is affected. The business promised to pay for the truck at a later time. This promise to pay is a liability; therefore, the Accounts Payable is affected.

Roadrunner bought a used truck on account from North Shore Auto for $12,000.



Credit Transactions (con’t.)Credit Transactions (con’t.)



ANALYSIS Classify 2. Delivery Equipment is an asset account. Accounts Payable is a liability account.






ANALYSIS + / – 3. Delivery Equipment is increased by $12,000. Accounts Payable is also increased by $12,000.








Cash Computer Office Delivery Accounts Maria Sanchez, in Bank Equip. Equip. Equip. Payable Capital

Prev. Bal. $25,000 +3,000 $400 0 0 $25,400

Trans. 4 – +12,000 +12,000

Balance $22,000 + $3,000 + $400 +$12,000 = $12,000 + $25,400


Cash Computer Office Delivery Accounts Maria Sanchez, in Bank Equip. Equip. Equip. Payable Capital

Prev. Bal. $25,000 +3,000 $400 0 0 $25,400

Trans. 4 – +12,000 +12,000

Balance $22,000 + $3,000 + $400 +$12,000 = $12,000 + $25,400




When a business transaction

occurs, what is the role of the

accountant or accounting clerk?

When a business transaction

occurs, what is the role of the

accountant or accounting clerk?



Section 3Transactions That Affect Revenue, Expense, and Withdrawals by theOwner

Section 3Transactions That Affect Revenue, Expense, and Withdrawals by theOwnerWhat You’ll Learn

How revenue transactions affect the accounting equation.

How expense transactions affect the accounting equation.

How withdrawals by the owner affect the accounting equation.

What You’ll Learn

How revenue transactions affect the accounting equation.

How expense transactions affect the accounting equation.

How withdrawals by the owner affect the accounting equation.


The experience you gain by analyzing

revenue, expense, and withdrawal

transactions will help you analyze

transactions in real-world situations.


The experience you gain by analyzing

revenue, expense, and withdrawal

transactions will help you analyze

transactions in real-world situations.

Key Terms

revenue

expense

withdrawal

Key Terms

revenue

expense

withdrawal

Section 3 Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)


Revenue and Expense TransactionsRevenue and Expense Transactions

Income earned from the sale of

goods or services is revenue.

An expense is the price paid for

goods or services used to operate

a business.

Income earned from the sale of

goods or services is revenue.

An expense is the price paid for

goods or services used to operate

a business.



Revenue TransactionRevenue Transaction


ANALYSIS Identify 1. Roadrunner received cash, so Cash in Bank is affected. The payment received is revenue. Revenue increases owner’s equity, so Maria Sanchez, Capital is also affected.

Roadrunner received a check for $1,200 from a customer, Sims Corporation, for delivery services.



Revenue Transaction (con’t.)Revenue Transaction (con’t.)



ANALYSIS Classify 2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s equity account.






ANALYSIS + / – 3. Cash in Bank is increased by $1,200. Maria Sanchez, Capital is also increased by $1,200.








Cash Accounts Computer Office Delivery Accounts Maria Sanchez, in Bank Receivable Equip. Equip. Equip. Payable Capital

Prev. Bal. $21,850 $0 $3,000 $200 $12,000 $11,650 $25,400

Trans. 8 +1,200 +1,200

Balance $23,050 + $0 + $3,000 + $200 + $12,000 = $11,650 + $26,600



Prev. Bal. $21,850 $0 $3,000 $200 $12,000 $11,650 $25,400

Trans. 8 +1,200 +1,200

Balance $23,050 + $0 + $3,000 + $200 + $12,000 = $11,650 + $26,600



Expense TransactionExpense Transaction


ANALYSIS Identify 1. Roadrunner pays rent for use of building space. Rent is an expense. Expenses decrease owner’s equity, so the account Maria Sanchez, Capital is affected. The business is paying cash for the use of the building, so Cash in Bank is affected.

Roadrunner wrote a check for $700 to pay the rent for the month.



Expense Transaction (con’t.)Expense Transaction (con’t.)



ANALYSIS Classify 2. Maria Sanchez, Capital is an owner’s equity account. Cash in Bank is an asset account.






ANALYSIS + / – 3. Maria Sanchez, Capital is decreased by $700. Cash in Bank is decreased by $700.









Prev. Bal. $23,050 $0 $3,000 $200 $12,000 $11,650 $26,600

Trans. 8 – 700 – 700

Balance $22,350 + $0 + $3,000 + $200 + $12,000 = $11,650 + $25,900



Prev. Bal. $23,050 $0 $3,000 $200 $12,000 $11,650 $26,600

Trans. 8 – 700 – 700

Balance $22,350 + $0 + $3,000 + $200 + $12,000 = $11,650 + $25,900



Withdrawals by the Owner

If a business earns revenue, the

owner will take cash or other assets from

the business for personal use. This

transaction is called a withdrawal.

Withdrawals by the Owner

If a business earns revenue, the

owner will take cash or other assets from

the business for personal use. This

transaction is called a withdrawal.



Withdrawals by the Owner (con’t.)Withdrawals by the Owner (con’t.)


ANALYSIS Identify 1. A withdrawal decreases the owner’s claim to the assets of the business, so Maria Sanchez, Capital is affected. Cash is paid out, so the Cash in Bank account is affected.

Maria Sanchez withdrew $500 from the business for her personal use.






ANALYSIS Classify 2. Maria Sanchez, Capital is an owner’s equity account. Cash in Bank is an asset account.






ANALYSIS + / – 3. Maria Sanchez, Capital is decreased by $500. Cash in Bank is decreased by $500.









Prev. Bal. $22,350 $0 $3,000 $200 $12,000 $11,650 $25,900

Trans. 8 – 500 – 500

Balance $21,850 + $0 + $3,000 + $200 + $12,000 = $11,650 + $25,400



Prev. Bal. $22,350 $0 $3,000 $200 $12,000 $11,650 $25,900

Trans. 8 – 500 – 500

Balance $21,850 + $0 + $3,000 + $200 + $12,000 = $11,650 + $25,400




1. What effect does revenue have on

a business?

1. What effect does revenue have on

a business?

2. What effect do withdrawals have on

a business?

2. What effect do withdrawals have on

a business?



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