Business Transactions and the Accounting Equation Chapter 3 Business Transactions and the Accounting Equation

Property Financial Claim Anything of value that a person or business owns and therefore controls. Also Known As holdings, belongings, and real estate. Financial Claim A legal right to an item Property (Cost) = Financial Claim Bike Your Claim to the Bike $600 This example is assuming you paid the entire amount and owe nothing to the original bike owner.

Creditor’s Financial Claim + Owner’s Financial Claim Credit & Creditor Credit – When you buy something and agree to pay for it later. Creditor – The person selling the item with the agreement to be paid part/all in the future. Financial Claim on Partial Credit You bought a lock for $100. You paid $60 and promised to pay $40 at a later date. Property (Cost) = Financial Claim Bike Lock Creditor’s Financial Claim + Owner’s Financial Claim $100 $40 + $60 The person who owns the item possess the item. However, if the owner doesn’t pay the creditor, then the creditor can exercise his/her right to claim the item and take it back.

The Accounting Equation Assets – The item of value (property) Liabilities – The creditor’s claim to the assets Owner’s Equity – The owner’s claim to the assets Property (Cost) = Financial Claim Bike Lock Creditor’s Financial Claim + Owner’s Financial Claim $100 $40 + $60 Assets = Liabilities + Owner’s Equity Bike Lock Creditor’s Financial Claim + Owner’s Financial Claim $100 $40 + $60

Balancing the Accounting Equation ASSETS = LIABILITIES + OWNER’S EQUITY $17,000 $7,000 $6,000 $20,000 $10,000 $9,000 $8,000 $2,000 $12,000 $4,000 $30,000 $22,000 $1,000 $25,000 $5,000 $7,500 $3,000

Transactions & Accounts Business Transaction – an economic event that causes a change in assets, liabilities, or owner’s equity Account – a subdivision under assets, liabilities, or owner’s equity. Assets = Liabilities + Owner’s Equity Cash in Bank Accounts Payable Maria Sanchez, Capital Accounts Receivable Computer Equipment Office Equipment Delivery Equipment Accounts Receivable – the total amount of money due to be received by a business Accounts Payable – the amount owed to the creditors of a business

Transaction’s Effect on the Accounting Equation Assets = Liabilities + Owner’s Equity Owner Investment Cash Transaction Credit Transaction Revenue Transaction Expense Transaction Withdrawal by Owner

Transaction’s Effect on the Accounting Equation Assets = Liabilities + Owner’s Equity Owner Investment $25,000 Cash for Office Equipment $400 Cash Purchase of Computer Equipment $3,000 Purchase Delivery Equipment on Credit $12,000 Sold one of the telephones on account $200 Wrote check to North Shore Auto $350 for Accounts Payable Received account payment $200 Equation Check

Account Balances Assets Liabilities Owner’s Equity Cash Office Equipment Accounts Payable Maria Sanchez, Capital Delivery Equip Accounts Receivable Computer Equip

Revenue & Expense Transactions Revenue – income earned from the sale of goods or services Investment – contribution to assets by the owner not through the sale of goods or services Expenses – the cost of products or services used to operate a business Withdrawals by the Owner Sometimes called a drawing or a draw Whenever an owner takes an asset for personal use

Transaction’s Effect on the Accounting Equation Assets = Liabilities + Owner’s Equity Received check for delivery services $1,200 Wrote check for rent $700 Owner withdrawals cash for personal use $500 Equation Check

Account Balances Assets Liabilities Owner’s Equity 11,650 Cash 21,850 Office Equipment 200 Accounts Payable 11,650 Maria Sanchez, Capital 25,400 Delivery Equip 12,000 Accounts Receivable Computer Equip 3,000