CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-3 How Transactions Change Owner’s Equity in an Accounting Equation

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning REVENUE TRANSACTIONS Received Cash from Sales A transaction for the sale of goods or services results in an increase in owner’s equity. A revenue is an increase in owner’s equity resulting from the operation of a business. When cash is received from a sale, both assets and owner’s equity is increased 2 LESSON 1-3

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning REVENUE TRANSACTIONS Sold Services on Account A sale for which cash will be received at a later date is called a sale on account Also know as a charge sale Regardless of when payment is made, the revenue should be recorded at the time of a sale ACCOUNTING CONCEPT: Realization of Revenue When revenue is recorded at the time goods or services are sold 3 LESSON 1-3

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning EXPENSE TRANSACTIONS A transaction to pay for goods or services needed to operate a business decrease owner’s equity An expense is a decrease in owner’s equity resulting from the operation of a business The asset account Cash is decreased when cash is paid for expenses The owner’s equity account, Capital is also decreased Expense transactions might be: Rent, Telephone Bill, Equipment Rental/Repairs, Charitable Contributions, etc. 4 LESSON 1-3

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning OTHER CASH TRANSACTIONS Received Cash on Account When a business receives cash from a customer for a prior sale, the transactions increases the cash account balance and decreases the accounts receivable balance Paid Cash to the Owner for Personal Use Assets taken out a business for the owner’s personal use are called withdrawals Withdrawals decrease the owner’s equity Withdrawals are not a result of the normal operation of a business, therefore, is not considered an expense 5 LESSON 1-3

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning TechKnow Consulting TechKnow receives $295 for services performed The asset account, Cash, is increased by $295 This increase is on the LEFT side of the equation The owner’s equity account, Capital, is increased by $295 This increase is on the RIGHT side of the equation The accounting equation is still balanced TechKnow sells services of $350 on account The asset account, Accounts Receivable – Oakdale School, is increased by $350 This is increase is on the LEFT side of the equation The owner’s equity account, Capital, is increased by $350 This increase is on the RIGHT side of the equation The accounting equation is still balanced 6 LESSON 1-3

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 7 LESSON 1-3 REVENUE TRANSACTIONS Transaction 6 August 12. Received cash from sales, $ Transaction 7 August 12. Sold services on account to Oakdale School, $ page 14

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning TechKnow Consulting, cont. TechKnow paid $300 cash for rent The asset account, Cash, is decreased by $300 This decrease is on the LEFT side of the equation The owner’s equity account, Capital, is decreased by $300 This decrease is on the RIGHT side of the equation The accounting equation is still balanced TechKnow pays $40 for telephone bill The asset account, Cash, is decreased by $40 This is decrease is on the LEFT side of the equation The owner’s equity account, Capital, is decreased by $40 This decrease is on the RIGHT side of the equation The accounting equation is still balanced 8 LESSON 1-3

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 9 LESSON 1-3 EXPENSE TRANSACTIONS Transaction 8 August 12. Paid cash for rent, $ Transaction 9 August 12. Paid cash for telephone bill, $ page 15

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning TechKnow Consulting, cont. TechKnow received $200 on account from Oakdale School The asset account, Cash, is increased by $200 This increase is on the LEFT side of the equation The asset account, Accounts Receivable-Oakdale School, is decreased by $200 This decrease is also on the LEFT side of the equation The accounting equation is still balanced TechKnow paid $125 to owner for personal use The asset account, Cash, is decreased by $125 This is decrease is on the LEFT side of the equation The owner’s equity account, Capital, is decreased by $125 This decrease is on the RIGHT side of the equation The accounting equation is still balanced 10 LESSON 1-3

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 11 LESSON 1-3 OTHER CASH TRANSACTIONS Transaction 10 August 18. Received cash on account from Oakdale School, $ Transaction 11 August 18. Paid cash to owner for personal use, $ page 16

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning SUMMARY OF CHANGES IN OWNER’S EQUITY Transactions that affect Owner’s Equity: Revenue Transactions Expense Transactions Other Cash Transactions Owner’s Equity started at $5,000 and has increased to $5, LESSON 1-3 **Transaction #10 not included as it affects only the LEFT side (not owner’s equity)

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 13 LESSON 1-3 TERMS REVIEW revenue sale on account expense withdrawals page 17

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning WORK TOGETHER 1-3 (page 17) Determining how transactions change an accounting equation Write the answers to the following problem in the working papers. Place a plus (+) in the appropriate column if the account is increased. Place a minus (-) in the appropriate column if the account is decreased. 14 LESSON 1-3

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 1-3 Practice Complete On Your Own 1-3 on page 17 Complete Application Problem 1-3 online 15 LESSON 1-3