Property and Financial Claims Chapter 3 Section 1 The accounting equation is the basis for keeping all accounting records in balance.

What You Will Learn The relationship between property and financial claims. The meaning of equity as it is used in accounting. The parts of the accounting equation. The definition of each part of the accounting equation.

Key Terms Property Property rights Financial claims Credit Creditor Assets Equity Investments Owner equity Liabilities Accounting equation

Property: Ownership and Control Property is anything of value that is owned or controlled. Property Rights Financial Claim Own Yes Control (like rent) No The right to own property is basic to a free enterprise system. When you own an item you have a legal right or financial claim to that item. When you have control over an item, you have rights only to the use of that item.

Property: Ownership and Control Property rights Creditors’ and owner’ financial claim to assets of the business Financial claims Legal rights to an items Property (Cost) = Financial Claims (Financial Investments) Bike Your claim to the Bike $600 In accounting, property and financial claims are measured in money. Dollar amounts measure both property rights or financial claims to the property.

Property: Ownership and Control Credit – buying property and agreeing to pay for it later. Creditor is the business or person selling you the property on credit Property Financial Claims Bike Lock = Creditor’s Financial Claim + Owners Financial Claim $100 $40 $60 When you buy property with cash, you acquire all of the financial claims to that property at the time of purchase.

Financial Claims in Accounting Assets Property or items of value owned by a business Equity The financial claim to these assets Investments Assets, generally long-term in nature, not intended to be converted to cash or used in the normal operation of the business

Financial Claims in Accounting Owner’s equity The owner’s claim to the assets of the business Liabilities The creditor’s claim to the assets of the business Accounting equation Assets = Liabilities + Owner’s Equity

Math Hint Using Algebra You can calculate amounts in a financial equation using the rules of algebra. The basic accounting equation is in form of a= b + c To find either b or c , Rewrite the equation as B= a - c, or c= a - b

A Matter of Ethics Company Policy Many companies provide office supplies for their employees’ use while on the job. Imagine that you work for a large department store like JC Penny. Several of your co-workers take company supplies home for their personal use, such as pens, bags, hangers, and boxes. You need boxes to store some items at home, so you consider taking them from the supply room. Chapter 3: Company Property, p. 48 Most companies have guidelines governing the use of company property such as telephones, office equipment, office supplies, the Internet, and e-mail. If you are employed, ask your supervisor for a copy of the company's policies on the use of its property. If you are not employed, ask your parents if they can bring you the guidelines from their workplace. Using your favorite search engine, find a company on the Web that has posted its policies on the use of company property. Prepare a presentation outlining the most common guidelines of the policies you review.

A Matter of Ethics (cont.) Ethical Decision Making What are the ethical issues? What are the alternatives? Who are the affected parties? How do the alternatives affect the parties? What would you do?

Transactions that Affect Owner’s Investment, Cash and Credit Chapter 3 Section 2 You can analyze real world business transactions by using the accounting equation.

What You Will Learn How accounts are used in business transactions The steps used to analyze business transactions How investments by the owner effects the accounting equation.

What You Will Learn (cont.) How a cash payment transaction affects the accounting equation. How a credit transaction effects the accounting equation.

Key Terms Business transaction Account Accounts receivable Accounts payable On account

Business Transactions A business transaction is an economic event that causes a change Either an increase or decrease In assets, liabilities or owner’s equity An account shows the balance for a specific item, such as cash or computer equipment. It also is a record of increases or decreases for that specific item. Accounts represents things like money invested in the business, office furniture, or money owed to a creditor. It is measured in dollar value. Every account is set up according to the business need.

= + Assets Liabilities Owner’s Equity Cash in Bank Accounts Payable Maria Sanchez, Capital Accounts Receivable Computer Equipment Office Equipment Delivery Equipment = +

Business Transactions Accounts Receivable is the total amount of money owed to a business. Accounts Payable is the amount of money owed, or payable to the creditors of a business. The second asset account listed is accounts receivable. It is an asset because it represents a claim to assets of other peoples or businesses. A future value that eventually will bring cash into the business. The liability account listed is Accounts Payable. Finally, notice that owner equity is identified by the owner’s name followed by the word capital. Remember capital refers to the dollar value of assets contributed to the business.

Effects of Transaction on the Accounting Equation Business Transaction ANALYSIS Identify 1. Identify the account affected Classify 2. Classify the account affected +/- 3. Determine the amount of increase or decrease for each account affected Balance 4. Make sure the accounting equation remains in balance When a business transaction occurs, an accounting clerk analyzes the transaction to see how it affects each part of the accounting equation. It is simple. Just follow these steps.

Key Points Business Transactions In Balance Every business transaction affects at least two accounts In Balance After recording each transaction, the accounting equation must be in balance

Investment by the Owner 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. The owner, Maria Sanchez, took two telephones valued at $200 each (total $400) from her home and transferred them to her business as Office Equipment. Open book to review the business transactions for the following slides. Page 52-55.

Cash Payment Transactions Roadrunner issued a $3,000 check to purchase a computer system.

Credit Transaction When a business buys an item on credit, it is buying on account. You will learn about Purchase on account Sale on account Payment made on account Payment received on account

Business Transactions Roadrunner bought a used truck on account from North Shore Auto for $12,000. Roadrunner sold one telephone to Green Company for $200 on account. Roadrunner issued a check for $350 in partial payment of the amount own to its creditor, North Shore Auto. Roadrunner received and deposited a check for $200 from Green Co. The check received is full payment for the telephone sold on account in transaction 2.

Problem 3-2 Determining the Effects of Transactions on the Accounting Equation Asset = Liabilities + Owners's Equity Cash in bank Accounts Receivable Computer Equipment Office Funiture Accounts Payable Jan Swift, Capital 1. Jan Swift deposit $30,000 in a checking account to start the business 30000 2. The owner transferred a desk and chair to the business value $700 700 3. WordService issued a check for $4,000 for the purchase of a computer -4000 4000 4. The office bought office furniture on account for $5,000 5000 5. The desk and chair previously transferred to business sold on account for $700 -700 6. WordService wrote a check for $2000 in partial payment of the amount owed Eastern Furniture -2000   24000 3000 30700 33700

Transactions that Affect Revenue, Expenses, and Withdrawals by the Owner Chapter 3 Section 3 The experience you gain by analyzing revenue, expenses and withdrawal transactions will help you analyze transactions in real-life situations

What You Will Learn How revenue transactions affect the accounting equation How expenses transactions affect the accounting equation How withdrawals by the owner affects the accounting equation.

Key Terms Revenue Expense Withdrawal

Revenue and Expense Revenue Expenses Income earned from sale of goods and services. Increases owner equity because it increases the assets of the business Expenses Price paid for goods and services used to operate the business Decreases owner equity because they decrease assets or increase liability

Business Transaction Roadrunner receives a check for $12,000 from a customer, Sims Corporation, for delivery service. Roadrunner wrote a check for $700 to rent for the month.

Withdrawal by the Owner Withdrawal – owner take money from the business for personal use. Business Transaction Maria Sanchez withdrew $500 from the business for her personal use Withdrawal by owner is not the same as an expense, expense is cost of operating business.

Problem 3-3