Chapter 3 Basic Accounting Equation  Property = property rights skis = your claim to the skis $100 = $100  Property = property rights ski boots = creditors claim + owner’s claim $150 = $75 + $75

Basic Accounting Equation  Assets = Equities House = Loan +Investment $45,000 = $30,000 + $15,000 Property = creditor’s claim + owner’s claim

Basic Accounting Equation Assets= Liabilities + Owner’s Equity You have = You Owe + You Own Assets = Creditor’s Equity + Owner’s Equity Property = Property Rights Property = Creditor’s claim + Owner’s Claim  Business Transactions—event that causes a change in the equation  Account—is a record of increases or decreases of a specific item

Basic Accounting Equation  Assets= Liabilities + Owner’s Equity Cash in Bank = Accounts Payable + Paul Howard, Capital Accounts Receivable Office Furniture Equipment Accounts Receivable—total of money to be received in the future Accounts Payable–total of money to be paid to a creditor in the future Receivable---to be received Payable---to be paid Capital---money the owner invests in the business.

Effects of Business Transactions on the Basic Accounting Equation The owner of Word Service, Paul Howard, deposited $20,000 in a bank checking account under the name of Word Service. 1. Identify the accounts that are affected. There must be at least two accounts. a. Cash in Bank and Capital 2. Classify the Accounts a. Assets and Owner’s Equity 3. Do the accounts increase or decrease a. Both accounts increase.

Assets = Liabilities + Owner’s Equity Cash in Bank= + Paul Howard, Capital $20,000=$20,000 At least two accounts have been affected.

Homecoming Dance Dr. Devitt, the owner of the rights to the homecoming dance decided to expand the dance. In order to expand the dance he invested $10,000. After he made the investment, he decided to buy a chair for the crowned king and queen. The chair cost $500 and he paid cash for the chair. He also decided to buy new bleachers for all of the football team to sit on, but since they were $5,000 he decided to buy them on account and pay for them later. Dr. Devitt, was very happy to see that $2,000 worth of tickets were sold. Everyone that bought tickets decided that they would pay at a later date.

 Revenue Income earned from the sale of goods and services.  Examples of revenue Fees earned Services performed  Revenue increases owner’s equity because it increases the business’s assets.  Dr. Devitt sold 50 tickets to the dance and earned $250.

 Expenses Any price paid for goods and services used to operate a business. Cost of doing business.  Examples of expenses Rent expense Utilities expense Insurance expense  Expenses decrease owner’s equity because they decrease the business’s assets or increase liabilities.  Business Transaction: Dr. Devitt wrote a check for $500 to the pay for use of the cafeteria.