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

1 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.

2 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?

3 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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. Property and Financial Claims SECTION 3.1

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

5 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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. financial claims Property and Financial Claims SECTION 3.1

6 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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).creditcreditor Property and Financial Claims SECTION 3.1

7 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Financial Claims in Accounting A company can possess various property or items of value, known as assets:assets  cash  office equipment  manufacturing equipment  buildings  land EquitiesEquities 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. owner’s equity Property and Financial Claims SECTION 3.1

8 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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: liabilitiesaccounting equation Property and Financial Claims SECTION 3.1

9 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  property Anything of value that a business or person owns and therefore controls.  financial claim Legal right to an item.  credit An agreement to pay for a purchase at a later time; an entry on the right side of an account.  creditor A business or person to whom money is owed.  assets Property or items of value owned by a business. Property and Financial Claims SECTION 3.1

10 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  equities The total financial claims to the assets of a business.  owner’s equity The owner’s claims to the assets of the business.  liabilities Amounts owed to creditors; the claims of creditors to the assets of a business.  accounting equation The accounting relationship between assets and the two types of equities. Assets = Liabilities + Owner’s Equity. Property and Financial Claims SECTION 3.1

11 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?

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

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

14 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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.business transaction accounts The number of accounts will vary from business to business. Two possible business accounts are  accounts receivable, an asset account, and accounts receivable  accounts payable, a liability account. accounts payable Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2

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

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

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

18 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

19 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

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

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

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

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

24 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  business transaction An economic event that causes a change – either an increase or a decrease – in assets, liabilities, or owner’s equity.  account A subdivision under assets, liabilities, or owner’s equity that summarizes the changes and shows the balance for a specific item.  accounts receivable The amount of money owed to a business by its credit customers. Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2

25 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  accounts payable The amount of money owed, or payable, to the creditors of a business.  investment Money or other property provided for the purpose of making a profit.  on account The purchase of an item on credit. Transactions That Affect Owner’s Investment, Cash, and Credit SECTION 3.2

26 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?

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

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

29 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Revenue and Expense Transactions Examples of revenue, income earned from the sales of goods and services, arerevenue  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 expenses  rent,  utilities, and  advertising. Transactions That Affect Revenue, Expense, and Withdrawals by the Owner SECTION 3.3

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

31 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Withdrawals by the Owner An owner can make a withdrawal of cash or other assets from the business assets if revenue is earned.withdrawal 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. Transactions That Affect Revenue, Expense, and Withdrawals by the Owner SECTION 3.3

32 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  revenue Income earned from the sale of goods and services.  expense The cost of goods or services used to operate a business.  withdrawal The removal of cash or another asset from the business by the owner for personal use. Transactions That Affect Revenue, Expense, and Withdrawals by the Owner SECTION 3.3

33 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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? Chapter 3 Review CHAPTER 3

34 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 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 Chapter 3 Review CHAPTER 3

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

36 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 2 1.Identify the accounts affected. a. Cash in Bank is affected. b. Owner’s Capital is affected. 2.Classify the accounts affected a. Cash in Bank is an asset account. b. Owner’s Capital is an owner’s equity account. 3.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, Make sure the accounting equation remains in balance. Assets = Liabilities + Owner’s Equity $12,000 = 0 + $12,000 Chapter 3 Review CHAPTER 3

37 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Resources Glencoe Accounting Online Learning Center English Glossary Spanish Glossary