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

2. 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.

3. 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.

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. 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

11. 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

12. 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