1. Business Transactions and The Accounting Equation
Chapter 3
Business Transactions and The Accounting Equation

2. Property and Financial Claims
SECTION 3.1
Property
Property is anything of value that a person or business owns. A purpose of accounting is to provide:
financial information about property.
financial claims (legal rights) to property.
Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

3. PROPERTY = FINANCIAL CLAIMS
SECTION 3.1
Property and Financial Claims
Property
There is a relationship between property and financial claims that can be expressed as an equation:
PROPERTY = FINANCIAL CLAIMS
When you buy something and agree to pay for it later, you are buying it on credit, and you share the financial claim with the creditor (the business or person selling you the item on credit).
Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

4. Property and Financial Claims
SECTION 3.1
Financial Claims in Accounting
A company can possess various property or items of value, known as assets:
cash
office equipment
manufacturing equipment
buildings
land
Equities are financial claims to these assets. When a business obtains a loan to help purchase an item, the owner’s financial claims to the assets are called the owner’s equity.
Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

5. Property and Financial Claims
SECTION 3.1
Financial Claims in Accounting
The creditor’s financial claims to the assets are called liabilities. The relationship between assets, liabilities, and owner’s equity are shown in the accounting equation:
Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

6. Business Transactions
SECTION 3.2
Transactions That Affect Owner’s Investment, Cash, and Credit
Business Transactions
A business transaction is an event that causes a change in assets, liabilities, or owner’s equity. A business records these changes in subdivisions called accounts.
The number of accounts will vary from business to business. Two possible business accounts are
accounts receivable, an asset account, and
accounts payable, a liability account.
Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

7. Effects of Transactions on the Accounting Equation
SECTION 3.2
Transactions That Affect Owner’s Investment, Cash, and Credit
Effects of Transactions on the Accounting Equation
To analyze a business transaction, follow these steps:
Identify the accounts affected.
Classify the accounts affected.
Determine the amount of increase or decrease for each account affected.
Make sure the accounting equation remains in balance.

8. Investments by the Owner
Money or other property paid out in order to produce profit is an investment. Analyze a cash investment transaction:
Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

9. Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

10. Cash Payment Transaction
Analyze a cash purchase business transaction:
Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

11. Credit Transaction
Purchasing an item on credit is also called buying on account. Analyze a purchase on account business transaction:
Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

12. Revenue and Expense Transactions
Transactions That Affect Revenue, Expense, and Withdrawals by the Owner
SECTION 3.3
Revenue and Expense Transactions
Examples of revenue, income earned from the sales of goods and services, are
fees earned for services performed, and
cash received from the sale of merchandise.
To generate revenue, a business may also incur expenses, or costs. Examples of expenses are
rent,
utilities, and
advertising.
Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

13. Revenue and Expense Transactions
Transactions That Affect Revenue, Expense, and Withdrawals by the Owner
SECTION 3.3
Revenue and Expense Transactions
Revenues increase owner’s equity and expenses decrease owner’s equity.
Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

14. Withdrawals by the Owner
Transactions That Affect Revenue, Expense, and Withdrawals by the Owner
SECTION 3.3
Withdrawals by the Owner
An owner can make a withdrawal of cash or other assets from the business assets if revenue is earned.
A withdrawal has the opposite effect on owner’s equity than investments:
Withdrawals decrease assets and owner’s equity.
Investments increase assets and owner’s equity.
Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.