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Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit What You’ll Learn   How accounts are used in business transactions.   The steps.

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Presentation on theme: "Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit What You’ll Learn   How accounts are used in business transactions.   The steps."— Presentation transcript:

1 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.

2 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.)

3 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.)

4 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.)

5 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.)

6 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.)

7 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.)

8 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.)

9 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.)

10 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.)

11 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.)

12 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.)

13 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. 2 +400 +400 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. 2 +400 +400 Balance $ 25,000 +$400=0+$25,400 Section 2Transactions That Affect Owner’s Investment, Cash, and Credit (con’t.)

14 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.)

15 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.)

16 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.)

17 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.)

18 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.)

19 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.)

20 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.)

21 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. $22,000 +3,000$400 0 0$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. $22,000 +3,000$400 0 0$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.)

22 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.)

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