 Property  Property Rights  Financial Claims  Credit  Creditor  Assets  Investments  Equity  Owner’s Equity  Liabilities  Business Transaction  Account  Accounts Receivable  Accounts Payable  On Account Glencoe Accounting Real World Applications & Connections 5th Edition

 What is the relationship between property and financial claims?  What does equity mean when it is used in accounting?  What are the parts of the accounting equation?  What are the 4 steps used to analyze business transactions?  How do investments by the Owner affect the equation? Cash payments? Buying on credit or a credit transaction? Glencoe Accounting Real World Applications & Connections 5th Edition

 Anything of value that is owned or controlled.  Difference between control and ownership: Own – purchased, have legal rights to, financial claims (you can sell it). Control – Like renting, specific time frame and usage. No financial claim (you can’t sell it). Glencoe Accounting Real World Applications & Connections 5th Edition

 Property rights = financial claims  Example: you purchase an Ipod for $400 Property = Financial Claims (Cost) (Financial Investment) Ipod= Your claim to the Ipod $400= $400 Glencoe Accounting Real World Applications & Connections 5th Edition

 Let’s change our example: You are now purchasing the Ipod, but on credit. You give the store $100 now and you owe $300 later. Property = Financial Claims Ipod = Your claim (Owner) + Creditor’s Claim $400= $100 + $300 Glencoe Accounting Real World Applications & Connections 5th Edition

 Let’s look at a business example: A delivery service is purchasing a vehicle for $10,000. A $3,000 cash down payment and borrowing $7,000 from the bank. Property = Creditor’s Financial Claim + Owner’s Financial Claim Truck $10,000 = $7,000 + $3,000 In other words: ASSETS =LIABILITIES + OWNER’S EQUITY Glencoe Accounting Real World Applications & Connections 5th Edition

Common Accounts in Business: ASSETS = LIABILITIES + OWNER’S EQUITY Cash in Bank Accounts Payable Owner, Capital Accounts Receivable Equipment - Computer - Office - Delivery Supplies Inventory Glencoe Accounting Real World Applications & Connections 5th Edition

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 affected. 4. Make sure the accounting equation remains in balance. Glencoe Accounting Real World Applications & Connections 5th Edition

 Every business transaction affects at least two accounts.  After recording each transaction, the accounting equation must remain in balance. Glencoe Accounting Real World Applications & Connections 5th Edition

Jimmy Smith has invested $25,000 to open a business checking account in the name of Jimmy’s Pet Supplies. Analysis Identify1. Cash transactions are recorded in the account Cash in Bank. Jimmy investment of personal funds are recorded in Capital acct. Classify2. Cash in Bank is an Asset account, Capital is Owner’s Equity Account. +/-3. Cash in Bank is increased $25,000. Jimmy Smith, Capital is increased $25,000. Balance4. The accounting equation remains balanced. Glencoe Accounting Real World Applications & Connections 5th Edition

The Owner, Jimmy Smith, issued a $2,500 check to purchase a Computer System. Analysis Identify1. The Computer Equipment account is used to record the transaction. The business paid cash so the account Cash in Bank is affected. Classify2. Both Computer Equipment and Cash in Bank are Asset accounts. +/-3. Computer Equipment is increased $2,500. Cash in Bank is decreased $2,500. Balance4. The accounting equation remains balanced. Glencoe Accounting Real World Applications & Connections 5th Edition

Jimmy’s Pet Supplies purchased a truck on account from Used Autos for $15,000. Analysis Identify1. The Delivery Equipment account is used to record the transaction. The business promise to pay later so the Accounts Payable is affected. Classify2. Delivery Equipment is an asset account. Accounts Payable is a liability account. +/-3. Delivery Equipment is increased $15,000. Accounts Payable is increased $15,000. Balance4. The accounting equation remains balanced. Glencoe Accounting Real World Applications & Connections 5th Edition

Cash Computer Delivery in Bank + Equipment + Equipment = Accounts Payable + Jimmy Smith, Capital Trans 1 $25,000 =$25,000 Trans 2 - $2,500 + $2,500 =______ Bal: $22,500 + $2,500 = $25,000 Trans3 ______ + ______ +$15,000 = $15,000 + ________ Bal: $22,500 + $2,500 + $15,000 = $15,000 + $25,000 Glencoe Accounting Real World Applications & Connections 5th Edition