Business Transactions and The Accounting Equation Chapter 3 Business Transactions and The Accounting Equation

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 SECTION 3.1 Property and Financial Claims 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.

Business Transactions SECTION 3.2 Transactions That Affect Owner’s Investment, Cash, and Credit 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.

Effects of Transactions on the Accounting Equation SECTION 3.2 Transactions That Affect Owner’s Investment, Cash, and Credit 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.

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.

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

Revenue and Expense Transactions 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.

Revenue and Expense Transactions 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.

Withdrawals by the Owner 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.