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Property and Financial Claims, The Accounting Equation and Business Transactions Property and Financial Claims, The Accounting Equation and Business Transactions.

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Presentation on theme: "Property and Financial Claims, The Accounting Equation and Business Transactions Property and Financial Claims, The Accounting Equation and Business Transactions."— Presentation transcript:

1 Property and Financial Claims, The Accounting Equation and Business Transactions Property and Financial Claims, The Accounting Equation and Business Transactions

2 HomeWork: 1. Create a business of your own – it must be a service business – a sole proprietorship. You are the owner. 2. Decide what the name of the business will be. The name of the business must insinuate what type of service you provide. Include a description of the services your business will provide. 3. Make a list of the things of value (including cash) you will need to start the business. Indicate where you will get these things (from yourself, a loan from the bank or have the business buy it on credit). Assign a dollar value to all of the things you list. HomeWork: 1. Create a business of your own – it must be a service business – a sole proprietorship. You are the owner. 2. Decide what the name of the business will be. The name of the business must insinuate what type of service you provide. Include a description of the services your business will provide. 3. Make a list of the things of value (including cash) you will need to start the business. Indicate where you will get these things (from yourself, a loan from the bank or have the business buy it on credit). Assign a dollar value to all of the things you list.

3 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 (cont'd.) PropertyFinancial RightClaim OwnYesYes Control (like rent)YesNo PropertyFinancial RightClaim OwnYesYes Control (like rent)YesNo

4 Property: Ownership and Control (cont'd.) In accounting, property and financial claims are measured in dollar amounts. Property: Ownership and Control (cont'd.) In accounting, property and financial claims are measured in dollar amounts. Section 1 Property and Financial Claims (cont'd.) PropertyFinancial Claims (Cost) = (Financial Investments) Bike =Your Claim to the Bike $600=$600 PropertyFinancial Claims (Cost) = (Financial Investments) Bike =Your Claim to the Bike $600=$600

5 Property: Ownership and Control When you buy property and agree to pay for it later, you are buying on credit. The business you buy the property from is a creditor. Property: Ownership and Control When you buy property and agree to pay for it later, you are buying on credit. The business you buy the property from is a creditor. Section 1 Property and Financial Claims (cont'd.) Property= Financial Claims Bike Creditor’s Owner’s Rack = Financial Claim+Financial Claim $2,000=$800+$1,200 Property= Financial Claims Bike Creditor’s Owner’s Rack = Financial Claim+Financial Claim $2,000=$800+$1,200

6 Financial Claims in Accounting  Assets:  Property or items of value owned by a business  Liabilities:  A creditor’s claims to the assets of the business  Owner’s Equity:  The owner’s claims to the assets of the business Section 1 Property and Financial Claims (cont'd.) These financial claims to the assets together are called Equity

7 Financial Claims in Accounting  The EQUITY of a business includes the claims of the creditors (liabilities) and the claims of the owner (owner’s equity). Section 1 Property and Financial Claims (cont'd.)

8 The Accounting Equation Section 1 Property and Financial Claims (cont'd.) Creditor’s Owner’s Financial ClaimFinancial Claim Property = + Assets=Liabilities+Owner’s Equity

9 Business Transactions  An economic event that causes a change — either an increase or a decrease — in assets, liabilities, or owner’s equity.  Separate accounts are maintained for each item of value the business has, for the creditor’s claims and the owner’s claims. Each account is classified as:  Assets  Liabilities  Owner’s Equity Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (cont'd.)

10 Business Transactions  Each transaction affects at least two accounts.  The accounting equation must remain in balance after a transaction.  An account shows the balance for a specific item and a record of the increases and decreases caused by business transactions. Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (cont'd.)

11 Business Transactions (cont'd.) Assets=Liabilities+Owner’s Equity Accounts Maria Sanchez, Cash in Bank Payable Capital Accounts Receivable Computer Equipment Office Equipment Delivery Equipment Assets=Liabilities+Owner’s Equity Accounts Maria Sanchez, Cash in Bank Payable Capital Accounts Receivable Computer Equipment Office Equipment Delivery Equipment Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (cont'd.) Capital Account – tracks the monetary value of investments by the owner (cash and noncash investments)

12 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 (cont'd.)

13 Types of Transactions  Owner Investment Transactions  Cash investment  Asset investment  Cash or Credit Transactions  Purchase assets  Sell assets owned by the business

14 Types of Transactions  Revenue Transactions  Income earned from the sale of goods or services.  Expense Transactions  The price paid for goods or services used to operate a business.  Withdrawal Transactions  When the owner takes cash or other assets from the business for personal use.


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