TRANSACTIONS THAT AFFECT OWNER’S INVESTMENT, CASH & CREDITChapter 3 Section 2

BUSINESS TRANSACTIONS Economic event that causes a change-either

an increase or a decrease in assets, liabilities or Owner’s Equity

Assets = Liabilities + Owner’s Equity

Examples: Business buys a computer with cash Sell hotdogs for cash

EACH TYPE OF TRANSACTION IS RECORDED IN A SPECIFIC ACCOUNT

ACCOUNTS The type of business will determine how

many accounts will be used Regardless of how many accounts are used—

all will be classified as either: Asset Liability Owner’s Equity

ACCOUNTSAssets Liabilities Owner’s EquityCash in Bank Accounts Payable Maria Sanchez,

CapitalAccounts ReceivableComputer EquipmentOffice EquipmentDelivery Equipment

Which accounts do you not recognize?

STEPS TO ANALYZE TRANSACTIONS 1. Identify the accounts affected 2. Classify the accounts affected 3. Determine the amount of increase or

decrease for each account affected. 4. Make sure the accounting equation

remains in balance

BUSINESS TRANSACTION #1 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.

Step 1: Identify the accounts affected Cash in bank Maria Sanchez, Capital

Step 2: Classify the accounts affected Cash in bank—asset Maria Sanchez, Capital—Owner’s Equity

BUSINESS TRANSACTION #1 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.

Step 3: Determine the amount of increase or decrease for each account affected. Cash in bank--$25,000 increase (+)Maria Sanchez, Capital--$25,000 increase (+)

Step 4: Make sure the accounting equation is in balanceIt remains in balanceAssets Liability Owner’s Equity

Cash in bank Maria Sanchez, Capital

+ $25,000 + $25,000

BUSINESS TRANSACTION #2 The owner, Maria Sanchez, took two

telephones valued at $200 each ($400 total) from her home and transferred them to the business as Office Equipment.

Step 1: Identify Office Equipment Maria Sanchez, Capital

Step 2: Classify Office Equipment—Asset Maria Sanchez, Capital—Owner’s Equity

BUSINESS TRANSACTION #2 The owner, Maria Sanchez, took two

telephones valued at $200 each ($400 total) from her home and transferred them to the business as Office Equipment.

Step 3: +/- Office Equipment— $200 increase (+) Maria Sanchez, Capital—$200 increase (+)

Step 4: Balanced?Yes

BUSINESS TRANSACTION #2 Assets Liabilities Owner’s

EquityCash in Bank Office

EquipmentMaria Sanchez, Capital

Prev. Balance

25,000 0 0 25,000

Trans. 2 400 0 400Balance 25,000 400 0 25,400

BUSINESS TRANSACTION #3 Roadrunner issued a $3,000 check to

purchase a computer system. Step 1: Identify

Cash Computer Equipment

Step 2: Classify Cash—asset Computer Equipment Asset

Step 3: +/- Cash—$3,000 decrease (-) Computer Equipment—$3,000 increase (+)

BUSINESS TRANSACTION #3 Roadrunner issued a $3,000 check to

purchase a computer system. Step 4: Balanced?

Assets Liabilities Owner’s Equity

Cash Computer Equip.

Office Equip.

Maria Sanchez, Capital

Prev. Balance

25,000 0 400 25,400

Trans 3 - 3,000 + 3000Balance 22,000 3,000 400 25,400

BUSINESS TRANSACTION #4 Roadrunner bought a used truck on account

from North Shore Auto for $12,000. Step 1: Identify

Delivery equipment Accounts Payable

Step 2: Classify Delivery Equipment—asset Accounts Payable--liability

Step 3: +/- Delivery equipment—$12,000 increase (+) Accounts Payable—$12,000 increase (+)

BUSINESS TRANSACTION #4 Roadrunner bought a used truck on account

from North Shore Auto for $12,000. Balanced?

Assets Liability Owner’s Equity

Cash Computer Equip.

Office Equip

Delivery Equip

Accounts Payable

Owner’s Equity

Prev. Balance

22,000 3,000 400 0 0 25,400

Trans. 4 12,000 12,000Balance 22,000 3,000 400 12,000 12,000 25,400

Assets = Liability + Owner’s Equity?

TRANSACTION #5 Roadrunner sold one telephone to Green

Company for $200 on account. Step 1: Identify

Accounts Receivable Office Equipment

Step 2: Classify Accounts Receivable—asset Office Equipment--asset

Step 3: +/- Accounts Receivable—$200 increase (+) Office Equipment—$200 decrease (-)

TRANSACTION #5 Roadrunner sold one telephone to Green

Company for $200 on account. Step 4: Balanced?

Assets Liab. O.E.

Cash Acct. Rec

Computer Equip

Office Equip

Delivery Equip.

Acct. Pay.

Maria Sanchez, Capital

Prev. Bal.

22,000

0 3,000 400 12,000 12,000 25,400

Trans 5 + 200 - 200

Balance

22,000

200 3,000 200 12,000 12,000 25,400

Does Assets = Liability + Owner’s Equity?

TRANSACTION 6: Roadrunner issued a check for $350 in partial

payment of the amount awed to it’s creditor, North Shore Auto.

Step 1: Identify Cash Accounts payable

Step 2: Classify Cash—asset Accounts Payable-Liability

Step 3: +/- Cash—$350 decrease (-) Accounts payable—$350 decrease (-)

TRANSACTION #6 Roadrunner issued a check for $350 in partial

payment of the amount awed to it’s creditor, North Shore Auto.

Step 4: Balanced?

Assets Liability

O.E.

Cash in bank

Acct. Rec.

Computer equip.

Office equip.

Delivery equip.

Acct. Pay.

M. Sanchez, Capital

Prev. Bal.

22,000 200 3,000 200 12,000 12,000 25,400

Trans 6 -350 -350

Balance 21,650 200 3,000 200 12,000 11,650 25,400

Does Assets = liabilities + Owners Equity?

TRANSACTION #7 Roadrunner received and deposited a check for

$200 from Green Co. The check received is full payment for the telephone sold on account in Transaction #5.

Step 1: Identify Accounts Receivable Cash

Step 2: Classify Accounts Receivable—Asset Cash—Asset

Step 3: +/- Accounts Receivable—$200 decrease (-) Cash– $200 increase (+)

TRANSACTION #7 Step 4: Balanced?

Assets Liab. O.E.

Cash Acct. Rec.

Comp. Equip

Office Equip.

Delivery Equip.

Acct. Pay.

M. Sanchez, Capital

Prev. Bal.

21,650 200 3,000 200 12,000 11,650 25,400

Trans. 7

+ 200 - 200

Balance

21,850 0 3,000 200 12,000 11,650 25,400

Does Assets = Liabilities + Owners Equity?