C HAPTER 3.1 P ROPERTY AND F INANCIAL C LAIMS The right to own property is basic to a free enterprise system Property is anything of value that a person or business owns and therefore controls Is a legal right to an item In accounting property is measured in dollar amounts Dollar amounts measure both the cost of the property and the financial claims to the property PropertyFinancial Claim

E XAMPLE – $600 M OUNTAIN B IKE Property (Cost)=Financial Claim BikeYour claim to the bike $600$600 You paid cash so you have all the financial claim to the property at the time of the purchase

P ROPERTY AND FINANCIAL CLAIMS When you buy something and agree to pay for it later you are buying it on credit The business or person selling you the item on credit is called a creditor CreditCreditor A creditor can be any person or business to which you owe money When you buy property on credit, you do not have the only claim to the property. A creditor is also know as a note holder (IOU)

P ROPERTY = F INANCIAL C LAIMS Property = ______Financial Claims__________________ Bike Lock Creditor’s Financial Claim + Owners Financial Claim $100 $40 + $60 Buy a vehicle for $8000. Pay $1200 in cash. Loan for $6800 Property = Financial Claims Vehicle = Creditor’s Financial Claim + Owner’s Financial Claim As the owner you control the vehicle – What happens if you don’t make the payments you agreed to make?

F INANCIAL C LAIMS IN ACCOUNTING Property or items of value owned by a business Cash Office equipment Manufacturing equip Buildings Land Financial claim to assets AssetsEquities

R OADRUNNER D ELIVERY S ERVICE Creditor’ Financial + Owner’s Financial Property = Claim Claim Truck $10,000 $7,000 + $3,000 Truck $10,000 __________ __________

A SSETS = L IABILITIES + O WNER ’ S E QUITY Owner’s claim to the assets in the company Creditor’s claims to the assets Liabilities are the debts of the business Owner’s EquityLiabilities

A SSETS = L IABILITIES + O WNER ’ S E QUITY Property = Creditor’s Financial + Owner’s Financial Claim Claim ASSETS = LIABILITIES + OWNER’S EQUITY Why does the equation show liabilities before owner’s equity?

P RACTICE Vehicle $16,000 Vehicle Loan $12,000 Computer System $2,000 Property = Creditors Financial + Owner’s Financial ClaimClaim _________ = __________________+ __________________ Practice – Problem 3-1 in your notebook

T RANSACTIONS THAT AFFECT O WNER ’ S I NVESTMENT, C ASH, AND C REDIT An economic event that causes a change- either an increase or a decrease- in assets, liabilities, or owner’s equity. The change is reflected in the accounting system of the business A subdivision under assets, liabilities, or owner’s equity No matter how many accounts a business has, they will be classified as either assets, liabilities, or owner’s equity Business TransactionAccount

ASSETS = L IABILITIES + O WNER ’ S E QUITY A ssets Owner’s Equity Cash in the Bank Business Person, Capital Accounts Receivable Computer Equipment Office Equipment Delivery Equipment L iabilities Accounts Payable

B USINESS T RANSACTIONS Total amount of money owed to a business – money to be received later because of the sale of goods or services on credit Is the amount owed or payable, to the creditors of a business Account is the owner’s name, Capital Accounts ReceivableAccounts Payable Owner’s Equity

E FFECTS OF T RANSACTIONS ON THE A CCOUNTING E QUATION Business Transaction Identify – Identify the Accounts affected Classify – Classify the Accounts affected - /+ - Determine the amount of increase/decrease for each account affected Balance - Make sure the accounting equation stays in balance

C OMMON T RANSACTIONS Investments by the owner Cash transactions Credit transactions Revenue and expense transactions Withdrawals by the owner

T RANSACTION 1 Investment by owner Identify – Cash in Bank Maria Sanchez, Capital Classify – Cash in Bank (Asset) Maria Sanchez, Capital (Owner’s Equity -/+ + Cash in Bank increased + Maria Sanchez, Capital (Owner’s Equity) BalanceThe accounting equation remains in balance

R EVIEW T RANSACTIONS 1-7 Complete “Do the Math Complete Problem 3-2

T RANSACTIONS THAT A FFECT R EVENUE, E XPENSE, AND W ITHDRAWALS BY THE O WNER Income earned from the sale of goods or services Examples: Fees for services performed Cash received for from the sale of merchandise Both Revenue and Investments by owner increase Owner’s Equity They originate from two separate resources Revenue increases Assets and Owner’s Equity RevenueTransaction

E XPENSE T RANSACTION The cost of products or goods, materials and services used to operate a business Expenses decrease Assets and Owner’s Equity because they decrease the assets Rent Utilities Advertising ExpenseExamples

B USINESS T RANSACTIONS Transaction 8 Transaction 9

W ITHDRAWALS BY THE OWNER If a business earns revenue, the owner will take cash for personal use A withdrawal decreases Assets and Owners Equity $ withdrawal from business for Personal use Withdrawal (Draw)Transaction 10