ACCOUNTING I Business Transactions and the Accounting Equation Chapter 3 Vocabulary

Property Anything of value that is owned or controlled. 2 Options: Own = Legal Rights/Financial Claim Control = Property Rights Only the “right” to use the property Example: Pay $20 to buy DVD – you own & control it. Pay $5 to rent DVD – you only have limited rights

DIFFERENCE BETWEEN OWNERSHIP & CONTROL PROPERTY RIGHT FINANCIAL CLAIM OWNYES CONTROLYESNO

Property Rights/Financial Claims Property Rights Creditors’ and owners’ financial claims to the assets of a business. Financial Claims Legal rights to an item. Property = Financial Claims (Cost) (Financial Investment) DVD Your claim to the DVD $20$20

Cash vs. Credit When you buy with CASH, you acquire all the financial claim at the TIME of the purchase. When you buy with CREDIT, you are not the ONLY one who has financial claim to the property Credit = when you buy property & agree to pay for it later. Creditor = The business or person selling you the property on credit.

Example You decide to purchase a plasma TV from Nebraska Furniture Mart for $3500. You sign up for a NFM credit card and receive 0% financing for 12 months. You decide to pay $292 for 12 months to pay off debt. Property = Creditor’s FC + Owner’s FC Mo.1 $3500 $3208$292 Mo. 2 $3500 $2916 $584 Mo. 3 $3500 $2624 $876

FINANCIAL CLAIMS IN ACCOUNTING

Financial Claims in Accounting You decide to purchase a plasma TV from Nebraska Furniture Mart for $3500. You sign up for a NFM credit card and receive 0% financing for 12 months. You decide to pay $292 for 12 months to pay off debt. Property = Creditor’s FC + Owner’s FC Mo.1 $3500 $3208 $292 Mo. 2 $3500 $2916 $584 Mo. 3 $3500 $2624 $876 ASSETSLIABILITIESOWNER’S EQUITY

Asset Asset = property or items of value owned by a business. Examples: Cash Office Equipment Building Land Equity = the accounting term for the financial claim to these assets.

Investments Investments = assets, long-term in nature not intended to be converted to cash or used in the normal operations of business in the next accounting period. Examples: Property Land Equipment

Liabilities The creditor’s claims to assets of the business. Debts of the business.

THE ACCOUNTING EQUATION ASSETS = LIABILITIES + OWNER’S EQUITY

DEMO PROBLEMS 1-3

TRANSACTIONS that affect Owner’s Investment, Cash & Credit

Business Transactions An economic event that causes a change, either an increase or a decrease, in assets, liabilities or owner’s equity. In Accounting, increases & decreases are recorded in specific accounts. An account = shows the balance for a specific item as well as the increase/decrease.

Business Accounts ASSETS = LIABILITIES + OWNER’S EQUITY Cash In Bank Accounts Payable Name of Owner, Capital Accounts Receivable Computer Equipment Office Equipment Delivery Equipment Accounts Receivable = the total amount of money owed to a business. Money to be received later – future value Accounts Payable = the amount of money owed, or payable, to the creditors of a business. Future obligation requiring payment of cash/services

Effects of Transactions on the Accounting Equation

Effects of Business Transactions 4 STEPS: 1. Identify the accounts affected Cash, Equipment, A/R, A/P 2. Classify the accounts affected Asset, Liability or Owner’s Equity 3. Determine the amount of increase/decrease Cash in Bank – Increase $50 Accounts Payable – Decrease $50 4. Make sure the accounting equation is still in balance

Types of Transactions 1. Investments by the Owner Dollar amount contributed by the business owner 2. Cash Transactions 3. Credit Transactions 4. Revenue & Expense Transactions Revenue = income earned from the sale of goods/services Expense = the price paid for goods/services used to operate a business 5. Withdrawals by the Owner Cash taken from the business for the owner’s personal use.

DEMO PROBLEM 3-5