# Business Transactions and the Accounting Equation

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Business Transactions and the Accounting Equation
Chapter 3 Business Transactions and the Accounting Equation

Property Financial Claim
Anything of value that a person or business owns and therefore controls. Also Known As holdings, belongings, and real estate. 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.

Creditor’s Financial Claim + Owner’s Financial Claim
Credit & Creditor 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. 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 \$ \$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.

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

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

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 Bank Accounts Payable Maria 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

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

Transaction’s Effect on the Accounting Equation
Assets = 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

Account Balances Assets Liabilities Owner’s Equity Cash
Office Equipment Accounts Payable Maria Sanchez, Capital Delivery Equip Accounts Receivable Computer Equip

Revenue & Expense Transactions
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 Withdrawals by the Owner Sometimes called a drawing or a draw Whenever an owner takes an asset for personal use

Transaction’s Effect on the Accounting Equation
Assets = 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

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