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Business Transactions and the Accounting Equation Making Accounting Relevant Every business has assets, liabilities (debts), and owner’s equity. Think.

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Presentation on theme: "Business Transactions and the Accounting Equation Making Accounting Relevant Every business has assets, liabilities (debts), and owner’s equity. Think."— Presentation transcript:

1 Business Transactions and the Accounting Equation Making Accounting Relevant Every business has assets, liabilities (debts), and owner’s equity. Think about a business in your community. Making Accounting Relevant Every business has assets, liabilities (debts), and owner’s equity. Think about a business in your community. What possible assets does this business possess?

2 Section 1Property and Financial Claims What You’ll Learn  The relationship between property and financial claims.  The meaning of equity as it is used in accounting.  The parts of the accounting equation.  The definition of each part of the accounting equation. What You’ll Learn  The relationship between property and financial claims.  The meaning of equity as it is used in accounting.  The parts of the accounting equation.  The definition of each part of the accounting equation.

3 Why It’s Important The accounting equation is the basis for keeping all accounting records in balance. Why It’s Important The accounting equation is the basis for keeping all accounting records in balance. Section 1 Property and Financial Claims (con’t.) Key Terms  property  property rights  financial claims  credit  creditor  assets Key Terms  property  property rights  financial claims  credit  creditor  assets  investments  equity  owner’s equity  liabilities  accounting equation  investments  equity  owner’s equity  liabilities  accounting equation

4 Property: Ownership and Control Property is anything of value that is owned or controlled. Property: Ownership and Control Property is anything of value that is owned or controlled. Section 1 Property and Financial Claims (con’t.) PropertyFinancial RightClaim OwnYesYes Control (like rent)YesNo PropertyFinancial RightClaim OwnYesYes Control (like rent)YesNo

5 Property: Ownership and Control (con’t.) In accounting, property and financial claims are measured in dollar amounts. Property: Ownership and Control (con’t.) In accounting, property and financial claims are measured in dollar amounts. Section 1 Property and Financial Claims (con’t.) Property=Financial (Cost)(Financial Investments) Bike Lock=Your Claim to the Bike $600=$600 Property=Financial (Cost)(Financial Investments) Bike Lock=Your Claim to the Bike $600=$600

6 Property: Ownership and Control (con’t.) When you buy property and agree to pay for it later, you are buying on credit. Property: Ownership and Control (con’t.) When you buy property and agree to pay for it later, you are buying on credit. Section 1 Property and Financial Claims (con’t.) Property= Financial Claims Bike Creditor’s Owner’s Lock = Financial Claim+Financial Claim $100=$40+$60 Property= Financial Claims Bike Creditor’s Owner’s Lock = Financial Claim+Financial Claim $100=$40+$60

7 Financial Claims in Accounting  Assets property or items of value owned by a business  Owner’s Equity the owner’s claims to the assets of the business  Liabilities creditor’s claims to the assets of the business Financial Claims in Accounting  Assets property or items of value owned by a business  Owner’s Equity the owner’s claims to the assets of the business  Liabilities creditor’s claims to the assets of the business Section 1 Property and Financial Claims (con’t.)

8 The Accounting Equation Section 1 Property and Financial Claims (con’t.) Creditor’s Owner’sFinancial Claim Creditor’s Owner’s Financial ClaimFinancial Claim Property = + Assets=Liabilities+Owner’s Equity Assets=Liabilities+Owner’s Equity

9 Check Your Understanding What is meant by having a financial claim to property? Section 1 Property and Financial Claims (con’t.)

10 Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit What You’ll Learn  How accounts are used in business transactions.  The steps used to analyze business transactions.  How investments by the owner affect the accounting equation.  How a cash payment transaction affects the accounting equation.  How a credit transaction affects the accounting equation. What You’ll Learn  How accounts are used in business transactions.  The steps used to analyze business transactions.  How investments by the owner affect the accounting equation.  How a cash payment transaction affects the accounting equation.  How a credit transaction affects the accounting equation.

11 Why It’s Important You can analyze real-world business transactions by using the accounting equation. Why It’s Important You can analyze real-world business transactions by using the accounting equation. Key Terms  business transactions  account  accounts receivable  accounts payable  on account Key Terms  business transactions  account  accounts receivable  accounts payable  on account Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

12 Business Transactions  An economic event that causes a change — either an increase or a decrease — in assets, liabilities, or owner’s equity.  The increases and decreases caused by business transactions are recorded in specific accounts.  Accounts may be classified as either assets, liabilities, or owner’s equity.  An economic event that causes a change — either an increase or a decrease — in assets, liabilities, or owner’s equity.  The increases and decreases caused by business transactions are recorded in specific accounts.  Accounts may be classified as either assets, liabilities, or owner’s equity. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

13 Business Transactions (con’t.) Assets=Liabilities+Owner’s Equity Cash in BankAccounts Maria Sanchez, Accounts Receivable Payable Capital Computer Equipment Office Equipment Delivery Equipment Assets=Liabilities+Owner’s Equity Cash in BankAccounts Maria Sanchez, Accounts Receivable Payable Capital Computer Equipment Office Equipment Delivery Equipment Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

14 Effects of Business Transactions on the Accounting Equation Analyzing business transactions: Effects of Business Transactions on the Accounting Equation Analyzing business transactions: Business Transaction 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. 4.Make sure the accounting equation remains in balance. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

15 Investments by the Owner Business Transaction 1 ANALYSIS Identify 1.Cash transactions are recorded in the account Cash in Bank. Maria Sanchez is investing personal funds in the business. Her investment in the business is recorded in the account called Maria Sanchez, Capital. Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

16 Investments by the Owner (con’t.) Business Transaction 1 (con’t.) Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service. ANALYSIS Classify 2.Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s equity account. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

17 Investments by the Owner (con’t.) Business Transaction 1 (con’t.) Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service. ANALYSIS + / – 3.Cash in Bank is increased by $25,000. Maria Sanchez, Capital is increased by $25,000. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

18 Investments by the Owner (con’t.) Business Transaction 1 (con’t.) Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service. ANALYSIS Balance 4.The accounting equation remains in balance. Assets=Liabilities+Owner’s Equity Cash in BankMaria Sanchez, Capital Trans. 1+$25,000=0++$25,000 Assets=Liabilities+Owner’s Equity Cash in BankMaria Sanchez, Capital Trans. 1+$25,000=0++$25,000 Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

19 Investments by the Owner (con’t.) Business Transaction 2 ANALYSIS Identify 1.The business received two telephones. Since a telephone is office equipment, the account Office Equipment is affected. Maria Sanchez invested a personal asset in the business, so the account Maria Sanchez, Capital is affected. The owner, Maria Sanchez, took two telephones valued at $200 each (total $400) from her home and transferred them to the business as Office Equipment. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

20 Investments by the Owner (con’t.) Business Transaction 2 (con’t.) The owner, Maria Sanchez, took two telephones valued at $200 each (total $400) from her home and transferred them to the business as Office Equipment. ANALYSIS Classify 2.Office Equipment is an asset account. Maria Sanchez, Capital is an owner’s equity account. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

21 Investments by the Owner (con’t.) Business Transaction 2 (con’t.) The owner, Maria Sanchez, took two telephones valued at $200 each (total $400) from her home and transferred them to the business as Office Equipment. ANALYSIS + / – 3.Office Equipment is increased by $400. Maria Sanchez, Capital is increased by $400. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

22 Investments by the Owner (con’t.) Business Transaction 2 (con’t.) The owner, Maria Sanchez, took two telephones valued at $200 each (total $400) from her home and transferred them to the business as Office Equipment. ANALYSIS Balance 4.The accounting equation remains in balance. Assets=Liabilities+Owner’s Equity CashOfficeMaria Sanchez, in BankEquip.Capital Prev. Bal. $25,000 00$25,000 Trans Balance $ 25,000 +$400=0+$25,400 Assets=Liabilities+Owner’s Equity CashOfficeMaria Sanchez, in BankEquip.Capital Prev. Bal. $25,000 00$25,000 Trans Balance $ 25,000 +$400=0+$25,400 Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

23 Cash Payment Transactions Business Transaction 3 ANALYSIS Identify 1.The Computer Equipment account is used to record transactions involving any type of computer equipment. The business paid cash for the computer system, so the account Cash in Bank is affected. (Payments made by check are treated as cash payments and are recorded in the Cash in Bank account.) Roadrunner issued a $3,000 check to purchase a computer system. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

24 Cash Payment Transactions (con’t.) Business Transaction 3 (con’t.) Roadrunner issued a $3,000 check to purchase a computer system. ANALYSIS Classify 2.Computer Equipment and Cash in Bank are both asset accounts. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

25 Cash Payment Transactions (con’t.) Business Transaction 3 (con’t.) Roadrunner issued a $3,000 check to purchase a computer system. ANALYSIS + / – 3.Computer Equipment is increased by $3,000. Cash in Bank is decreased by $3,000. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

26 Cash Payment Transactions (con’t.) Business Transaction 3 (con’t.) Roadrunner issued a $3,000 check to purchase a computer system. ANALYSIS Balance 4.The accounting equation remains in balance. Assets=Liabilities+Owner’s Equity CashComputerOfficeMaria Sanchez, in BankEquip.Equip.Capital Prev. Bal. $25,000 0$4000$25,400 Trans. 3 – 3,000+3,000 Balance $22,000 + $3,000 + $400=0+$25,400 Assets=Liabilities+Owner’s Equity CashComputerOfficeMaria Sanchez, in BankEquip.Equip.Capital Prev. Bal. $25,000 0$4000$25,400 Trans. 3 – 3,000+3,000 Balance $22,000 + $3,000 + $400=0+$25,400 Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

27 Credit Transactions Business Transaction 4 ANALYSIS Identify 1.Roadrunner purchased a truck to be used as a delivery vehicle, so the account, Delivery Equipment is affected. The business promised to pay for the truck at a later time. This promise to pay is a liability; therefore, the Accounts Payable is affected. Roadrunner bought a used truck on account from North Shore Auto for $12,000. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

28 Credit Transactions (con’t.) Business Transaction 4 (con’t.) Roadrunner bought a used truck on account from North Shore Auto for $12,000. ANALYSIS Classify 2.Delivery Equipment is an asset account. Accounts Payable is a liability account. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

29 Credit Transactions (con’t.) Business Transaction 4 (con’t.) Roadrunner bought a used truck on account from North Shore Auto for $12,000. ANALYSIS + / – 3.Delivery Equipment is increased by $12,000. Accounts Payable is also increased by $12,000. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

30 Credit Transactions (con’t.) Business Transaction 4 (con’t.) Roadrunner bought a used truck on account from North Shore Auto for $12,000. ANALYSIS Balance 4.The accounting equation remains in balance. Assets=Liabilities+Owner’s Equity CashComputerOfficeDeliveryAccountsMaria Sanchez, in BankEquip.Equip.Equip.PayableCapital Prev. Bal. $25,000 +3,000$ $25,400 Trans. 4 –+12,000+12,000 Balance $22,000 + $3,000 + $400 +$12,000=$12,000+$25,400 Assets=Liabilities+Owner’s Equity CashComputerOfficeDeliveryAccountsMaria Sanchez, in BankEquip.Equip.Equip.PayableCapital Prev. Bal. $25,000 +3,000$ $25,400 Trans. 4 –+12,000+12,000 Balance $22,000 + $3,000 + $400 +$12,000=$12,000+$25,400 Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

31 Check Your Understanding When a business transaction occurs, what is the role of the accountant or accounting clerk? Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

32 Section 3 Transactions That Affect Revenue, Expense, and Withdrawals by the Owner Section 3 Transactions That Affect Revenue, Expense, and Withdrawals by the Owner What You’ll Learn  How revenue transactions affect the accounting equation.  How expense transactions affect the accounting equation.  How withdrawals by the owner affect the accounting equation. What You’ll Learn  How revenue transactions affect the accounting equation.  How expense transactions affect the accounting equation.  How withdrawals by the owner affect the accounting equation.

33 Why It’s Important The experience you gain by analyzing revenue, expense, and withdrawal transactions will help you analyze transactions in real-world situations. Why It’s Important The experience you gain by analyzing revenue, expense, and withdrawal transactions will help you analyze transactions in real-world situations. Key Terms  revenue  expense  withdrawal Key Terms  revenue  expense  withdrawal Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

34 Revenue and Expense Transactions  Income earned from the sale of goods or services is revenue.  An expense is the price paid for goods or services used to operate a business.  Income earned from the sale of goods or services is revenue.  An expense is the price paid for goods or services used to operate a business. Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

35 Revenue Transaction Business Transaction 8 ANALYSIS Identify 1.Roadrunner received cash, so Cash in Bank is affected. The payment received is revenue. Revenue increases owner’s equity, so Maria Sanchez, Capital is also affected. Roadrunner received a check for $1,200 from a customer, Sims Corporation, for delivery services. Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

36 Revenue Transaction (con’t.) Business Transaction 8 (con’t.) Roadrunner received a check for $1,200 from a customer, Sims Corporation, for delivery services. ANALYSIS Classify 2.Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s equity account. Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

37 Revenue Transaction (con’t.) Business Transaction 8 (con’t.) Roadrunner received a check for $1,200 from a customer, Sims Corporation, for delivery services. ANALYSIS + / – 3.Cash in Bank is increased by $1,200. Maria Sanchez, Capital is also increased by $1,200. Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

38 Revenue Transaction (con’t.) Business Transaction 8 (con’t.) Roadrunner received a check for $1,200 from a customer, Sims Corporation, for delivery services. ANALYSIS Balance 4.The accounting equation remains in balance. Assets=Liabilities+Owner’s Equity CashAccountsComputerOfficeDeliveryAccountsMaria Sanchez, in BankReceivableEquip.Equip.Equip.PayableCapital Prev. Bal. $21,850 $0$3,000$200$12,000 $11,650$25,400 Trans. 8 +1,200 +1,200 Balance $23,050 +$0 + $3,000 + $200 + $12,000 = $11,650 +$26,600 Assets=Liabilities+Owner’s Equity CashAccountsComputerOfficeDeliveryAccountsMaria Sanchez, in BankReceivableEquip.Equip.Equip.PayableCapital Prev. Bal. $21,850 $0$3,000$200$12,000 $11,650$25,400 Trans. 8 +1,200 +1,200 Balance $23,050 +$0 + $3,000 + $200 + $12,000 = $11,650 +$26,600 Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

39 Expense Transaction Business Transaction 9 ANALYSIS Identify 1.Roadrunner pays rent for use of building space. Rent is an expense. Expenses decrease owner’s equity, so the account Maria Sanchez, Capital is affected. The business is paying cash for the use of the building, so Cash in Bank is affected. Roadrunner wrote a check for $700 to pay the rent for the month. Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

40 Expense Transaction (con’t.) Business Transaction 9 (con’t.) Roadrunner wrote a check for $700 to pay the rent for the month. ANALYSIS Classify 2. Maria Sanchez, Capital is an owner’s equity account. Cash in Bank is an asset account. Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

41 Expense Transaction (con’t.) Business Transaction 9 (con’t.) Roadrunner wrote a check for $700 to pay the rent for the month. ANALYSIS + / – 3. Maria Sanchez, Capital is decreased by $700. Cash in Bank is decreased by $700. Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

42 Expense Transaction (con’t.) Business Transaction 9 (con’t.) Roadrunner wrote a check for $700 to pay the rent for the month. ANALYSIS Balance 4.The accounting equation remains in balance. Assets=Liabilities+Owner’s Equity CashAccountsComputerOfficeDeliveryAccountsMaria Sanchez, in BankReceivableEquip.Equip.Equip.PayableCapital Prev. Bal. $23,050 $0$3,000$200$12,000 $11,650$26,600 Trans. 8 – 700 – 700 Balance $22,350 +$0 + $3,000 + $200 + $12,000 = $11,650 +$25,900 Assets=Liabilities+Owner’s Equity CashAccountsComputerOfficeDeliveryAccountsMaria Sanchez, in BankReceivableEquip.Equip.Equip.PayableCapital Prev. Bal. $23,050 $0$3,000$200$12,000 $11,650$26,600 Trans. 8 – 700 – 700 Balance $22,350 +$0 + $3,000 + $200 + $12,000 = $11,650 +$25,900 Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

43 Withdrawals by the Owner If a business earns revenue, the owner will take cash or other assets from the business for personal use. This transaction is called a withdrawal. Withdrawals by the Owner If a business earns revenue, the owner will take cash or other assets from the business for personal use. This transaction is called a withdrawal. Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

44 Withdrawals by the Owner (con’t.) Business Transaction 10 ANALYSIS Identify 1.A withdrawal decreases the owner’s claim to the assets of the business, so Maria Sanchez, Capital is affected. Cash is paid out, so the Cash in Bank account is affected. Maria Sanchez withdrew $500 from the business for her personal use. Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

45 Withdrawals by the Owner (con’t.) Business Transaction 10 (con’t.) Maria Sanchez withdrew $500 from the business for her personal use. ANALYSIS Classify 2.Maria Sanchez, Capital is an owner’s equity account. Cash in Bank is an asset account. Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

46 Withdrawals by the Owner (con’t.) Business Transaction 10 (con’t.) Maria Sanchez withdrew $500 from the business for her personal use. ANALYSIS + / – 3.Maria Sanchez, Capital is decreased by $500. Cash in Bank is decreased by $500. Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

47 Withdrawals by the Owner (con’t.) Business Transaction 10 (con’t.) Maria Sanchez withdrew $500 from the business for her personal use. ANALYSIS Balance 4.The accounting equation remains in balance. Assets=Liabilities+Owner’s Equity CashAccountsComputerOfficeDeliveryAccountsMaria Sanchez, in BankReceivableEquip.Equip.Equip.PayableCapital Prev. Bal. $22,350 $0$3,000$200$12,000 $11,650$25,900 Trans. 8 – 500 – 500 Balance $21,850 +$0 + $3,000 + $200 + $12,000 = $11,650 +$25,400 Assets=Liabilities+Owner’s Equity CashAccountsComputerOfficeDeliveryAccountsMaria Sanchez, in BankReceivableEquip.Equip.Equip.PayableCapital Prev. Bal. $22,350 $0$3,000$200$12,000 $11,650$25,900 Trans. 8 – 500 – 500 Balance $21,850 +$0 + $3,000 + $200 + $12,000 = $11,650 +$25,400 Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)

48 Check Your Understanding 1. What effect does revenue have on a business? 2. What effect do withdrawals have on a business? Section 3Transactions That Affect Revenue, Expense, and Withdrawals by the Owner (con’t.)


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