Chapter 3 Business Transactions and the Accounting Equation
Chapter 4
Transactions That Affect Assets, Liabilities, and Owner’s Capital
Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals
Chapter 6 Recording Transactions in a General Journal
Chapter 7 Posting Journal Entries to General Ledger Accounts
Chapter 8 The Six-Column Work Sheet
Chapter 9 Financial Statements for a Sole Proprietorship
Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
Chapter 11 Cash Control and Banking Activities
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What You’ll Learn
 Describe the relationship between property and financial claims.
 Explain the meaning of the term equities as it is used in accounting.
 List and define each part of the accounting equation.
 Demonstrate the effects of transactions on the accounting equation.
 Check the balance of the accounting equation after a business transaction has been analyzed and recorded.
 Define the accounting terms introduced in this chapter.
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1

What Do You Think?
Why is it important to keep track of financial claims?
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2

SECTION 3.1
Property and Financial Claims
Main Idea
Any item of property has at least one financial claim against it.
You Will Learn
 what it means to own property.
 the two types of financial claims to property.
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SECTION 3.1
Property and Financial Claims
Key Terms
 property
 financial claim
 credit
 creditor
 assets
 equities
 owner’s equity
 liabilities
 accounting equation
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SECTION 3.1
Property and Financial Claims
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.
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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).
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6

SECTION 3.1
Property and Financial Claims
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 .
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7

SECTION 3.1
Property and Financial Claims
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 :
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8

SECTION 3.1
Property and Financial Claims
Key Terms Review
 property
Anything of value that a business or person owns and therefore controls.
 financial claim
Legal right to an item.
 credit
An agreement to pay for a purchase at a later time; an entry on the right side of an account.
 creditor
A business or person to whom money is owed.
 assets
Property or items of value owned by a business.
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SECTION 3.1
Property and Financial Claims
Key Terms Review
 equities
The total financial claims to the assets of a business.
 owner’s equity
The owner’s claims to the assets of the business.
 liabilities
Amounts owed to creditors; the claims of creditors to the assets of a business.
 accounting equation
The accounting relationship between assets and the two types of equities. Assets = Liabilities +
Owner’s Equity.
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10

What Do You Think?
What do you think is meant by the term transaction ?
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11

SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
Main Idea
Accounts are used to analyze business transactions.
You Will Learn
 how businesses use accounts.
 the steps used to analyze a business transaction.
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12

SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
Key Terms
 business transaction
 account
 accounts receivable
 accounts payable
 investment
 on account
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13

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.
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14

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.
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15

SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
Investments by the Owner
Money or other property paid out in order to produce
profit is an investment . Analyze a cash investment
transaction:
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SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
Investments by the Owner
Money or other property paid out in order to produce
profit is an investment . Analyze a cash investment
transaction:
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SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
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18

SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
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19

SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
Cash Payment Transaction
Analyze a cash purchase business transaction:
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20

SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
Cash Payment Transaction
Analyze a cash purchase business transaction:
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21

SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
Credit Transaction
Purchasing an item on credit is also called buying
on account
.
Analyze a purchase on account business transaction:
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22

SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
Credit Transaction
Purchasing an item on credit is also called buying
on account
.
Analyze a purchase on account business transaction:
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23

SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
Key Terms Review
 business transaction
An economic event that causes a change – either an increase or a decrease – in assets, liabilities, or owner’s equity.
 account
A subdivision under assets, liabilities, or owner’s equity that summarizes the changes and shows the balance for a specific item.
 accounts receivable
The amount of money owed to a business by its credit customers.
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SECTION 3.2
Transactions That Affect Owner’s
Investment, Cash, and Credit
Key Terms Review
 accounts payable
The amount of money owed, or payable, to the creditors of a business.
 investment
Money or other property provided for the purpose of making a profit.
 on account
The purchase of an item on credit.
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25

What Do You Think?
How do you think revenue, expenses, investments and withdrawals affect owner’s equity?
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26

SECTION 3.3
Transactions That Affect
Revenue, Expense, and
Withdrawals by the Owner
Main Idea
Owner’s equity is changed by revenue, expenses, investments, and withdrawals.
You Will Learn
 how revenue and expenses affect owner’s equity.
 how withdrawals affect owner’s equity.
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27

SECTION 3.3
Transactions That Affect
Revenue, Expense, and
Withdrawals by the Owner
Key Terms
 revenue
 expense
 withdrawal
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28

SECTION 3.3
Transactions That Affect
Revenue, Expense, and
Withdrawals by the Owner
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.
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29

SECTION 3.3
Transactions That Affect
Revenue, Expense, and
Withdrawals by the Owner
Revenue and Expense Transactions
Revenues increase owner’s equity and expenses decrease owner’s equity.
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SECTION 3.3
Transactions That Affect
Revenue, Expense, and
Withdrawals by the Owner
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.
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31

SECTION 3.3
Transactions That Affect
Revenue, Expense, and
Withdrawals by the Owner
Key Terms Review
 revenue
Income earned from the sale of goods and services.
 expense
The cost of goods or services used to operate a business.
 withdrawal
The removal of cash or another asset from the business by the owner for personal use.
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CHAPTER 3 Chapter 3 Review
Question 1
O’Donnell’s Car Wash has the following assets and liabilities.
Assets: Cash in Bank $9,500; Accounts Receivable
$500; Computer Equipment $3,500; Car Wash
Equipment $75,000; Building $450,000
Liabilities: Alto’s Equipment Service $2,500;
First National Bank (mortgage on building) $200,000
What is the owner’s equity for O’Donnell’s?
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CHAPTER 3 Chapter 3 Review
Answer 1
Step 1: Calculate total assets.
$9,500 + $500 + $3,500 + $75,000 + $450,000 = $538,500
Step 2: Calculate total liabilities.
$2,500 + $200,000 = $205,500
Step 3: Calculate owner’s equity .
$538,500 - $202,500 = $336,000
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CHAPTER 3 Chapter 3 Review
Question 2
A business owner invests $12,000 cash in the business.
How would you analyze this transaction?
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CHAPTER 3 Chapter 3 Review
Answer 2
1.
Identify the accounts affected.
a.
Cash in Bank is affected.
b. Owner’s Capital is affected.
2.
Classify the accounts affected a. Cash in Bank is an asset account.
b.
Owner’s Capital is an owner’s equity account.
3.
Determine the amount of increase or decrease for each account affected.
a.
Cash in Bank is increased by $12,000.
b.
Owner’s Capital is increased by $12,000.
4.
Make sure the accounting equation remains in balance.
Assets = Liabilities + Owner’s Equity
$12,000 = 0 + $12,000
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