Accounting 100
Chapter 2
Analyzing Business
Transactions
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Objectives
Record in equation form the financial
effects of a business transaction.
 Define, identify, and understand the
relationship between asset, liability, and
owner’s equity account.
 Analyze the effects of business
transactions on a firm’s assets,
liabilities, and owner’s equity.

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Business Transactions
A financial event that changes the
resources of the firm.
 May be a purchase, a sale, a receipt, or
payment of cash.
 The effects of each transaction must be
studied in order to know what and
where to record.

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Transaction #1

Margery Meadows deposits $50,000 in
the bank as the initial investment in her
new business, Meadows Accounting.
– Cash is increased by $50,000
– Business capital is increased by $50,000
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Transaction #2

Margery rents facilities for her new
business by signing a lease for six
months with monthly rent of $1,000
– The rent is paid in advance for the next 6
months in the amount of $6,000
– Cash is decreased by $6,000
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Transaction #3

Margery purchases a computer and
other equipment for $8,000 with a check
drawn on the bank.
– The equipment increases by $8,000
– The cash decreases by $8,000
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Current Financial Position
Cash + Prepaid Rent + Equipment =Capital
+50,000
- 6,000
44,000
- 8,000
36,000
=+ 50,000
+6,000
6,000
6,000
=
+ 8,000
8,000
50,000
= 50,000
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Accounting Classifications
Assets: property owned by a business
 Liabilities: debts or obligations of a
business
 Owner’s Equity: financial interest of
the owner of a business (also known as
proprietorship or net worth)

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Fundamental Accounting
Equation

Assets = Liabilities + Owner’s Equity

Assets - Liabilities = Owner’s Equity

Assets - Owner’s Equity = Liabilities
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Solving the Equation
Assets = Liabilities + Owner’s Equity
?
= $ 5,000
+
$35,000
$39,000 =
?
+
$35,000
$42,000 = $ 7,000
+
?
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Revenue
Revenue: inflow of money or other
assets (including claims to money) that
results from sales of services or goods.
 Revenue increases owner’s equity.
 When revenues exceed expenses there
is a profit (net income).

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Expenses
Expenses: outflow of money, the use of
other assets, or the incurring of a
liability.
 Expenses reduce owner’s equity.
 When expenses exceed revenues,
there is a loss (net loss).

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Transaction #4

During the month of December,
Meadows Accounting Services earned a
total of $15,000 in revenue from clients
who paid cash.
– Cash increased by $15,000
– Owner’s Equity increased by $15,000
• (Fees Earned in the name of the revenue
account)
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Withdrawals
Withdrawals are funds taken from a
business by the owner to pay personal
items (non-business related).
 Withdrawals reduce owner’s equity, but
are not considered a business expense.

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Financial Statements
Preparing accurate and informative
financial statements is one of the
accountant’s most important jobs.
 Business people use the financial
statements to make decisions.

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Income Statement
A formal report showing the results of
the business operations for a specific
period of time.
 Only revenues and expenses are
shown on the statement.
 Revenues - expenses = net income or
(loss).

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Statement of Owner’s Equity
A report showing changes that occurred
in the owner’s financial interest during a
specific period of time.
 The amount of net income (loss) is the
connecting link between the income
statement & statement of owner’s equity

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Balance Sheet
A formal report of the firm’s financial
position which lists the assets, liabilities,
and owner’s equity on a specific date.
 The link between the balance sheet
and the statement of owner’s equity is
the revised owner’s investment which
is calculated on the Statement of
Owner’s Equity.

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Chapter 2
The End
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