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{ Chapter 3 Business Transactions and the Accounting Equation.

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1 { Chapter 3 Business Transactions and the Accounting Equation

2  Anything of value that a person or business owns and therefore controls. Also Known As holdings, belongings, and real estate. Property Financial Claim  A legal right to an item Property (Cost)=Financial Claim Bike=Your Claim to the Bike $600= This example is assuming you paid the entire amount and owe nothing to the original bike owner.

3  Credit – When you buy something and agree to pay for it later.  Creditor – The person selling the item with the agreement to be paid part/all in the future. Credit & Creditor Financial Claim on Partial Credit  You bought a lock for $100. You paid $60 and promised to pay $40 at a later date. Property (Cost)=Financial Claim Bike Lock= Creditor’s Financial Claim + Owner’s Financial Claim $100=$40 + $60 The person who owns the item possess the item. However, if the owner doesn’t pay the creditor, then the creditor can exercise his/her right to claim the item and take it back.

4  Assets – The item of value (property)  Liabilities – The creditor’s claim to the assets  Owner’s Equity – The owner’s claim to the assets The Accounting Equation Property (Cost)=Financial Claim Bike Lock= Creditor’s Financial Claim + Owner’s Financial Claim $100=$40 + $60 Assets=Liabilities + Owner’s Equity Bike Lock= Creditor’s Financial Claim + Owner’s Financial Claim $100=$40 + $60

5 ASSETS=LIABILITIES+OWNER’S EQUITY $17,000=$7,000+ =$6,000+$20,000 $10,000=+$7,000 =$9,000+$17,000 $8,000=$2,000+ $20,000=$7,000+ =$12,000+$4,000 $30,000=+$22,000 =$1,000+ $25,000=$5,000+ =$10,000+$25,000 $7,500=+$3,000 Balancing the Accounting Equation

6 Transactions & Accounts  Business Transaction – an economic event that causes a change in assets, liabilities, or owner’s equity  Account – a subdivision under assets, liabilities, or owner’s equity. Assets=Liabilities+Owner’s Equity Cash in BankAccounts PayableMaria Sanchez, Capital Accounts Receivable Computer Equipment Office Equipment Delivery Equipment Accounts Receivable – the total amount of money due to be received by a business Accounts Payable – the amount owed to the creditors of a business

7 Transaction’s Effect on the Accounting Equation TransactionAssets=Liabilities+Owner’s Equity Owner Investment Cash Transaction Credit Transaction Revenue Transaction Expense Transaction Withdrawal by Owner

8 Transaction’s Effect on the Accounting Equation TransactionAssets=Liabilities+Owner’s Equity Owner Investment $25,000 Cash for Office Equipment $400 Cash Purchase of Computer Equipment $3,000 Purchase Delivery Equipment on Credit $12,000 Sold one of the telephones on account $200 Wrote check to North Shore Auto $350 for Accounts Payable Received account payment $200 Equation Check =+

9 Account Balances Cash 0 Office Equipment 0 Maria Sanchez, Capital 0 Computer Equip 0 Delivery Equip 0 Accounts Payable 0 Accounts Receivable 0 Assets LiabilitiesOwner’s Equity

10  Revenue – income earned from the sale of goods or services  Investment – contribution to assets by the owner not through the sale of goods or services  Expenses – the cost of products or services used to operate a business Revenue & Expense Transactions Withdrawals by the Owner  Sometimes called a drawing or a draw  Whenever an owner takes an asset for personal use

11 Transaction’s Effect on the Accounting Equation TransactionAssets=Liabilities+Owner’s Equity Received check for delivery services $1,200 Wrote check for rent $700 Owner withdrawals cash for personal use $500 Equation Check =+

12 Account Balances Cash 21,850 Office Equipment 200 Maria Sanchez, Capital 25,400 Computer Equip 3,000 Delivery Equip 12,000 Accounts Payable 11,650 Accounts Receivable 0 Assets LiabilitiesOwner’s Equity


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