Business Transactions and the Accounting Equation

1
Chapter 3

Business Transactions and the Accounting Equation

Making Accounting Relevant Every business has
assets, liabilities (debts), and owners equity.
Think about a business in your community.


What possible assets does this business possess?
2
Chapter 3

Section 1 Property and Financial Claims

• What Youll 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.

3
Section 1 Property and Financial Claims (cont.)
Chapter 3

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

• Key Terms
• property
• property rights
• financial claims
• credit
• creditor
• assets

• investments
• equity
• owners equity
• liabilities
• accounting equation

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Section 1 Property and Financial Claims (cont.)
Chapter 3

Property Ownership and Control Property is
anything of value that is owned or controlled.


Property Financial Right Claim Own Yes Yes Cont
rol (like rent) Yes No

5
Section 1 Property and Financial Claims (cont.)
Chapter 3

Property Ownership and Control (cont.) 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

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Section 1 Property and Financial Claims (cont.)
Chapter 3

Property Ownership and Control (cont.) When
you buy property and agree to pay for it later,
you are buying on credit.


Property Financial Claims Bike Creditors
Owners Lock Financial Claim Financial
Claim 100 40 60

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Section 1 Property and Financial Claims (cont.)
Chapter 3

• Financial Claims in Accounting
• ? Assets property or items of value owned by a
  business
• ? Owners Equity the owners claims to the
  assets of the business
• ? Liabilities creditors claims to the assets of
  the business

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Section 1 Property and Financial Claims (cont.)
Chapter 3

The Accounting Equation

Creditors Owners Financial
Claim Financial Claim
Property


Assets Liabilities Owners Equity
9
Section 1 Property and Financial Claims (cont.)
Chapter 3

Check Your Understanding

What is meant by having a financial claim to
property?


10
Chapter 3
Section 2 Transactions That Affect Owners
Investment, Cash, and Credit

• What Youll 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.

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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Why Its Important You can analyze real-world
business transactions by using the accounting
equation.

• Key Terms
• business transactions
• account
• accounts receivable
• accounts payable
• on account

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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Business Transactions

• An economic event that causes a change either
  an increase or a decrease in assets,
  liabilities, or owners equity.
• The increases and decreases caused by business
  transactions are recorded in specific accounts.
• Accounts may be classified as either assets,
  liabilities, or owners equity.

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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Business Transactions (cont.)

Assets Liabilities Owners Equity Cash in
Bank Accounts Maria Sanchez, Accounts
Receivable Payable Capital Computer
Equipment Office Equipment Delivery Equipment


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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

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.

15
Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Investments by the Owner
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.

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.

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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Investments by the Owner (cont.)
Business Transaction 1 (cont.)

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 owners
equity account.

17
Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Investments by the Owner (cont.)
Business Transaction 1 (cont.)

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.

18
Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Investments by the Owner (cont.)
Business Transaction 1 (cont.)

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 Owners Equity Cash in
Bank Maria Sanchez, Capital Trans.
1 25,000 0 25,000
19
Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Investments by the Owner (cont.)
Business Transaction 2

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 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.

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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Investments by the Owner (cont.)
Business Transaction 2 (cont.)

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
owners equity account.

21
Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Investments by the Owner (cont.)
Business Transaction 2 (cont.)

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.

22
Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Investments by the Owner (cont.)
Business Transaction 2 (cont.)
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 Owne
rs 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

23
Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Cash Payment Transactions
Business Transaction 3

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


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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Cash Payment Transactions (cont.)
Business Transaction 3 (cont.)

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

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

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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Cash Payment Transactions (cont.)
Business Transaction 3 (cont.)

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.

26
Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Cash Payment Transactions (cont.)
Business Transaction 3 (cont.)
Roadrunner issued a 3,000 check to purchase a
computer system.

ANALYSIS Balance 4. The accounting equation
remains in balance.

Assets Liabilities
Owners Equity Cash 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

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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Credit Transactions
Business Transaction 4

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


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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Credit Transactions (cont.)
Business Transaction 4 (cont.)

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.

29
Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Credit Transactions (cont.)
Business Transaction 4 (cont.)

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.

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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Credit Transactions (cont.)
Business Transaction 4 (cont.)
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 Owners
Equity Cash Computer Office Delivery Accounts M
aria Sanchez, in Bank Equip. Equip. Equip. Pay
able 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

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Section 2 Transactions That Affect Owners
Investment, Cash, and Credit (cont.)
Chapter 3

Check Your Understanding

When a business transaction occurs, what is the
role of the accountant or accounting clerk?


32
Chapter 3
Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner

• What Youll Learn
• How revenue transactions affect the accounting
  equation.
• How expense transactions affect the accounting
  equation.
• How withdrawals by the owner affect the
  accounting equation.

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Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Why Its Important 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

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Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Revenue 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.

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Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Revenue Transaction
Business Transaction 8

Roadrunner received a check for 1,200 from a
customer, Sims Corporation, for delivery services.
ANALYSIS Identify 1. Roadrunner received cash, so
Cash in Bank is affected. The payment received is
revenue. Revenue increases owners equity, so
Maria Sanchez, Capital is also affected.


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Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Revenue Transaction (cont.)
Business Transaction 8 (cont.)

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

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

37
Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Revenue Transaction (cont.)
Business Transaction 8 (cont.)

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

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

38
Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Revenue Transaction (cont.)
Business Transaction 8 (cont.)
Roadrunner received a check for 1,200 from a
customer, Sims Corporation, for delivery services.

ANALYSIS Balance 4. The accounting equation
remains in balance.


Assets Liabilities Owners
Equity Cash Accounts Computer Office Delivery Ac
counts 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

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Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Expense Transaction
Business Transaction 9

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

ANALYSIS Identify 1. Roadrunner pays rent for use
of building space. Rent is an expense. Expenses
decrease owners 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.

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Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Expense Transaction (cont.)
Business Transaction 9 (cont.)

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

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

41
Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Expense Transaction (cont.)
Business Transaction 9 (cont.)

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

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

42
Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Expense Transaction (cont.)
Business Transaction 9 (cont.)
Roadrunner wrote a check for 700 to pay the
rent for the month.

ANALYSIS Balance 4. The accounting equation
remains in balance.


Assets Liabilities Owners
Equity Cash Accounts Computer Office Delivery Ac
counts Maria Sanchez, in Bank Receivable Equip
. Equip. Equip. Payable Capital 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

43
Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

• 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.

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Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Withdrawals by the Owner (cont.)
Business Transaction 10

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

ANALYSIS Identify 1. A withdrawal decreases the
owners 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.

45
Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Withdrawals by the Owner (cont.)
Business Transaction 10 (cont.)

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

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

46
Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Withdrawals by the Owner (cont.)
Business Transaction 10 (cont.)

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

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

47
Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Withdrawals by the Owner (cont.)
Business Transaction 10 (cont.)
Maria Sanchez withdrew 500 from the business
for her personal use.

ANALYSIS Balance 4. The accounting equation
remains in balance.


Assets Liabilities Owners
Equity Cash Accounts Computer Office Delivery Ac
counts Maria Sanchez, in Bank Receivable Equip
. Equip. Equip. Payable Capital 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

48
Section 3 Transactions That Affect Revenue,
Expense, and Withdrawals by the Owner (cont.)
Chapter 3

Check Your Understanding

1. What effect does revenue have on a business?

2. What effect do withdrawals have on a business?