Unit 2 The Basic Accounting Cycle Chapter 3 Business Transactions and the Accounting Equation Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals Chapter 6 Recording Transactions in a General Journal Chapter 7 Posting Journal Entries to General Ledger Accounts Chapter 8 The Six-Column Work Sheet Chapter 9 Financial Statements for a Sole Proprietorship Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship Chapter 11 Cash Control and Banking Activities Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3 Business Transactions and the Accounting Equation What You’ll Learn Describe the relationship between property and financial claims. Explain the meaning of the term equities as it is used in accounting. List and define each part of the accounting equation. Demonstrate the effects of transactions on the accounting equation. Check the balance of the accounting equation after a business transaction has been analyzed and recorded. Define the accounting terms introduced in this chapter. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3, Section 1 Property and Financial Claims What Do You Think? Why is it important to keep track of financial claims? Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Property and Financial Claims SECTION 3.1 Main Idea Any item of property has at least one financial claim against it. You Will Learn what it means to own property. the two types of financial claims to property. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Property and Financial Claims SECTION 3.1 Property Property is anything of value that a person or business owns. A purpose of accounting is to provide: financial information about property. financial claims (legal rights) to property. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

PROPERTY = FINANCIAL CLAIMS Property and Financial Claims SECTION 3.1 Property There is a relationship between property and financial claims that can be expressed as an equation: PROPERTY = FINANCIAL CLAIMS When you buy something and agree to pay for it later, you are buying it on credit, and you share the financial claim with the creditor (the business or person selling you the item on credit). Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Property and Financial Claims SECTION 3.1 Financial Claims in Accounting A company can possess various property or items of value, known as assets: cash office equipment manufacturing equipment buildings land Equities are financial claims to these assets. When a business obtains a loan to help purchase an item, the owner’s financial claims to the assets are called the owner’s equity. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Property and Financial Claims SECTION 3.1 Financial Claims in Accounting The creditor’s financial claims to the assets are called liabilities. The relationship between assets, liabilities, and owner’s equity are shown in the accounting equation: Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Property and Financial Claims SECTION 3.1 Key Terms property financial claim credit creditor assets equities owner’s equity liabilities accounting equation Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3, Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit What Do You Think? What do you think is meant by the term transaction? Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Main Idea Accounts are used to analyze business transactions. You Will Learn how businesses use accounts. the steps used to analyze a business transaction. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Business Transactions A business transaction is an event that causes a change in assets, liabilities, or owner’s equity. A business records these changes in subdivisions called accounts. The number of accounts will vary from business to business. Two possible business accounts are accounts receivable, an asset account, and accounts payable, a liability account. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Effects of Transactions on the Accounting Equation To analyze a business transaction, follow these steps: Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account affected. Make sure the accounting equation remains in balance. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Investments by the Owner Money or other property paid out in order to produce profit is an investment. Analyze a cash investment transaction: Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Investments by the Owner Money or other property paid out in order to produce profit is an investment. Analyze a cash investment transaction: Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Cash Payment Transaction Analyze a cash purchase business transaction: Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Cash Payment Transaction Analyze a cash purchase business transaction: Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Credit Transaction Purchasing an item on credit is also called buying on account. Analyze a purchase on account business transaction: Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Credit Transaction Purchasing an item on credit is also called buying on account. Analyze a purchase on account business transaction: Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2 Key Terms business transaction account accounts receivable accounts payable investment on account Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3, Section 3 Transactions That Affect Revenue, Expense, and Withdrawals by the Owner What Do You Think? How do you think revenue, expenses, investments and withdrawals affect owner’s equity? Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Revenue, Expense, and Withdrawals by the Owner SECTION 3.3 Main Idea Owner’s equity is changed by revenue, expenses, investments, and withdrawals. You Will Learn how revenue and expenses affect owner’s equity. how withdrawals affect owner’s equity. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Revenue, Expense, and Withdrawals by the Owner SECTION 3.3 Revenue and Expense Transactions Examples of revenue, income earned from the sales of goods and services, are fees earned for services performed, and cash received from the sale of merchandise. To generate revenue, a business may also incur expenses, or costs. Examples of expenses are rent, utilities, and advertising. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Revenue, Expense, and Withdrawals by the Owner SECTION 3.3 Revenue and Expense Transactions Revenues increase owner’s equity and expenses decrease owner’s equity. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Revenue, Expense, and Withdrawals by the Owner SECTION 3.3 Withdrawals by the Owner An owner can make a withdrawal of cash or other assets from the business assets if revenue is earned. A withdrawal has the opposite effect on owner’s equity than investments: Withdrawals decrease assets and owner’s equity. Investments increase assets and owner’s equity. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Transactions That Affect Revenue, Expense, and Withdrawals by the Owner SECTION 3.3 Key Terms revenue expense withdrawal Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3 Review Question 1 O’Donnell’s Car Wash has the following assets and liabilities. Assets: Cash in Bank $9,500; Accounts Receivable $500; Computer Equipment $3,500; Car Wash Equipment $75,000; Building $450,000 Liabilities: Alto’s Equipment Service $2,500; First National Bank (mortgage on building) $200,000 What is the owner’s equity for O’Donnell’s? Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3 Review Answer 1 Step 1: Calculate total assets. $9,500 + $500 + $3,500 + $75,000 + $450,000 = $538,500 Step 2: Calculate total liabilities. $2,500 + $200,000 = $205,500 Step 3: Calculate owner’s equity. $538,500 - $202,500 = $336,000 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3 Review Question 2 A business owner invests $12,000 cash in the business. How would you analyze this transaction? Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3 Review Answer 2 Identify the accounts affected. a. Cash in Bank is affected. b. Owner’s Capital is affected. Classify the accounts affected a. Cash in Bank is an asset account. b. Owner’s Capital is an owner’s equity account. Determine the amount of increase or decrease for each account affected. a. Cash in Bank is increased by $12,000. b. Owner’s Capital is increased by $12,000. Make sure the accounting equation remains in balance. Assets = Liabilities + Owner’s Equity $12,000 = 0 + $12,000 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

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