Review from 3.1:
Balance between property and property rights
• Property = Creditor’s Financial Claim + Owner’s Financial Claim
Accounting concepts:
• Assets: items of value owned by a business
• Liabilities: creditor’s claims to assets of a business/debts of a
business (amount of money owed to creditors)
• Equity: financial claim to assets
– Owner’s Equity: owner’s claims to assets of the business, measured by
the dollar amount of owner’s claims to the total assets of the business
Accounting Equation:
• ASSETS = LIABILITIES + OWNER’S EQUITY
Section 2 Transactions That
Affect Owner’s
Investment, Cash, and
Credit
What You’ll Learn
 How accounts are used in business
transactions.
 The steps used to analyze business
transactions.
 How investments by the owner affect the
accounting equation.
 How a cash payment transaction affects
the accounting equation.
 How a credit transaction affects the
accounting equation.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Why It’s Important
You can analyze real-world business
transactions by using the accounting
equation.
Key Terms
 business transactions
 account
 accounts receivable
 accounts payable
 on account
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Business Transactions
 An economic event that causes a
change — either an increase or a
decrease — in assets, liabilities, or
owner’s equity.
 The increases and decreases
caused by business transactions are
recorded in specific accounts.
 Accounts may be classified as either
assets, liabilities, or owner’s equity.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Business Transactions
Assets
Cash in Bank
Accounts Receivable
Computer Equipment
Office Equipment
Delivery Equipment
=
(cont'd.)
Liabilities + Owner’s Equity
Accounts
Maria Sanchez,
Payable
Capital
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Effects of Business Transactions
on the Accounting Equation
Analyzing business transactions:
4- step process to transaction analysis
Business Transaction
1. Identify the accounts affected.
Classify 2. Classify the accounts affected.
+/3. Determine the amount of increase
or decrease for each account.
Balance 4. Make sure the accounting
equation remains in balance.
ANALYSIS Identify
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Investments by the Owner
Business Transaction 1
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.
ANALYSIS Identify
1. Cash transactions are recorded in
the account Cash in Bank. Maria
Sanchez is investing personal
funds in the business. Her
investment in the business is
recorded in the account called
Maria Sanchez, Capital.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Investments by the Owner (cont'd.)
Business Transaction 1 (cont'd.)
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.
ANALYSIS Classify
2. Cash in Bank is an asset account.
Maria Sanchez, Capital is an
owner’s equity account.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Investments by the Owner (cont'd.)
Business Transaction 1 (cont'd.)
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.
ANALYSIS
+/–
3. Cash in Bank is increased by
$25,000. Maria Sanchez, Capital
is increased by $25,000.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Investments by the Owner (cont'd.)
Business Transaction 1 (cont'd.)
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.
ANALYSIS Balance
Assets
4. The accounting equation remains
in balance.
= Liabilities +
Cash in Bank
Trans. 1
+$25,000
Owner’s Equity
Maria Sanchez, Capital
=
0
+
+$25,000
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Investments by the Owner
(cont'd.)
Business Transaction 2
The owner, Maria Sanchez, took two telephones
valued at $200 each (total $400) from her home and
transferred them to the business as Office Equipment.
ANALYSIS Identify
1. The business received two
telephones. Since a telephone is
office equipment, the account
Office Equipment is affected.
Maria Sanchez invested a
personal asset in the business, so
the account Maria Sanchez,
Capital is affected.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Investments by the Owner (cont'd.)
Business Transaction 2 (cont'd.)
The owner, Maria Sanchez, took two telephones
valued at $200 each (total $400) from her home and
transferred them to the business as Office Equipment.
ANALYSIS Classify
2. Office Equipment is an asset
account. Maria Sanchez, Capital
is an owner’s equity account.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Investments by the Owner (cont'd.)
Business Transaction 2 (cont'd.)
The owner, Maria Sanchez, took two telephones
valued at $200 each (total $400) from her home and
transferred them to the business as Office Equipment.
ANALYSIS
+/–
3. Office Equipment is increased by
$400. Maria Sanchez, Capital is
increased by $400.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Investments by the Owner (cont'd.)
Business Transaction 2 (cont'd.)
The owner, Maria Sanchez, took two telephones
valued at $200 each (total $400) from her home and
transferred them to the business as Office Equipment.
ANALYSIS Balance
4. The accounting equation remains
in balance.
Trans. 2
Assets
= Liabilities + Owner’s Equity
Cash
Office
Maria Sanchez,
in Bank Equip.
Capital
$25,000
0
0
$25,000
+400
+400
Balance
$25,000 + $400
Prev. Bal.
=
0
+
$25,400
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Cash Payment Transactions
Business Transaction 3
Roadrunner issued a $3,000 check to purchase a
computer system.
ANALYSIS Identify
1. The Computer Equipment
account is used to record
transactions involving any type of
computer equipment. The
business paid cash for the
computer system, so the account
Cash in Bank is affected.
(Payments made by check are
treated as cash payments and are
recorded in the Cash in Bank
account.)
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Cash Payment Transactions
(cont'd.)
Business Transaction 3 (cont'd.)
Roadrunner issued a $3,000 check to purchase a
computer system.
ANALYSIS Classify
2. Computer Equipment and Cash
in Bank are both asset accounts.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Cash Payment Transactions
(cont'd.)
Business Transaction 3 (cont'd.)
Roadrunner issued a $3,000 check to purchase a
computer system.
ANALYSIS
+/–
3. Computer Equipment is
increased by $3,000. Cash in
Bank is decreased by $3,000.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Cash Payment Transactions
(cont'd.)
Business Transaction 3 (cont'd.)
Roadrunner issued a $3,000 check to purchase a
computer system.
ANALYSIS Balance
4. The accounting equation remains
in balance.
= Liabilities + Owner’s Equity
Assets
Cash Computer Office
in Bank Equip. Equip.
Prev. Bal.
Trans. 3
Balance
$25,000
0
$400
Maria Sanchez,
Capital
0
$25,400
– 3,000 +3,000
$22,000 + $3,000 + $400 =
0
+
$25,400
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Credit Transactions
Business Transaction 4
Roadrunner bought a used truck on account from
North Shore Auto for $12,000.
ANALYSIS Identify
1. Roadrunner purchased a truck to
be used as a delivery vehicle, so
the account Delivery Equipment
is affected. The business promised
to pay for the truck at a later time.
This promise to pay is a liability;
therefore, the Accounts Payable
account is affected.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Credit Transactions
(cont'd.)
Business Transaction 4 (cont'd.)
Roadrunner bought a used truck on account from
North Shore Auto for $12,000.
ANALYSIS Classify
2. Delivery Equipment is an asset
account. Accounts Payable is a
liability account.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Credit Transactions
(cont'd.)
Business Transaction 4 (cont'd.)
Roadrunner bought a used truck on account from
North Shore Auto for $12,000.
ANALYSIS
+/–
3. Delivery Equipment is increased
by $12,000. Accounts Payable is
also increased by $12,000.
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Credit Transactions
(cont'd.)
Business Transaction 4 (cont'd.)
Roadrunner bought a used truck on account from
North Shore Auto for $12,000.
ANALYSIS Balance
4. The accounting equation remains
in balance.
= Liabilities + Owner’s Equity
Assets
Cash Computer Office Delivery
in Bank Equip. Equip. Equip.
Prev. Bal.
Trans. 4
Balance
$22,000
–
+3,000
$400
Accounts
Payable
0
0
+12,000
+12,000
$22,000 + $3,000 + $400 +$12,000 = $12,000 +
Maria Sanchez,
Capital
$25,400
$25,400
Section 2 Transactions That Affect Owner’s
Investment, Cash, and Credit (cont'd.)
Check Your Understanding
When a business transaction
occurs, what is the role of the
accountant or accounting clerk?