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.

Why It’s Important

You can analyze real-world business

transactions by using the accounting

equation.

Why It’s Important

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.)

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.

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

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

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

Assets = Liabilities + Owner’s Equity

Cash in Bank Accounts Maria Sanchez,

Accounts Receivable Payable Capital

Computer Equipment

Office Equipment

Delivery Equipment

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

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

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.

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

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

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.

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

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

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

Business Transaction 1 (con’t.)

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.

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

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

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

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

Business Transaction 1 (con’t.)

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.

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

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

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

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

Business Transaction 1 (con’t.)

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.

ANALYSIS Balance 4. The accounting equation remains in balance.

Assets = Liabilities + Owner’s Equity

Cash in Bank Maria Sanchez, Capital

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

Assets = Liabilities + Owner’s Equity

Cash in Bank Maria Sanchez, Capital

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

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

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

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

Business Transaction 2

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.

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

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

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

Business Transaction 2 (con’t.)

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.

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

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

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

Business Transaction 2 (con’t.)

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

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

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

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

Business Transaction 2 (con’t.)

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 Balance 4. The accounting equation remains in balance.

Assets = Liabilities + Owner’s Equity

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

Assets = Liabilities + Owner’s Equity

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

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

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

Cash Payment TransactionsCash Payment Transactions

Business Transaction 3

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.

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

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

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

Business Transaction 3 (con’t.)

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

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

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

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

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

Business Transaction 3 (con’t.)

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

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

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

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

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

Business Transaction 3 (con’t.)

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

ANALYSIS Balance 4. The accounting equation remains in balance.

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

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

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

Credit TransactionsCredit Transactions

Business Transaction 4

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.

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

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

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

Business Transaction 4 (con’t.)

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

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

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

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

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

Business Transaction 4 (con’t.)

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

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

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

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

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

Business Transaction 4 (con’t.)

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

ANALYSIS Balance 4. The accounting equation remains in balance.

Assets = Liabilities + Owner’s Equity

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

Prev. Bal. $22,000 +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

Assets = Liabilities + Owner’s Equity

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

Prev. Bal. $22,000 +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

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

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

Check Your UnderstandingCheck Your Understanding

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

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