Property and Financial Claims, The Accounting Equation and Business Transactions

1. Chapter 3 $ Property and Financial Claims, The Accounting Equation and Business Transactions $ $ $

2. Section 1 Property and Financial Claims (cont'd.) Chapter 3 $ Property: Ownership and Control Property is anything of value that is owned or controlled. $ $ Property Financial Right Claim Own Yes Yes Control (like rent) Yes No $

3. Section 1 Property and Financial Claims (cont'd.) Chapter 3 $ Property: Ownership and Control (cont'd.) In accounting, property and financial claims are measured in dollar amounts. $ $ Property Financial Claims (Cost) = (Financial Investments) Bike = Your Claim to the Bike $600 = $600 $

4. Section 1 Property and Financial Claims (cont'd.) Chapter 3 $ Property: Ownership and Control When you buy property and agree to pay for it later, you are buying on credit. The business you buy the property from is a creditor. $ $ Property = Financial Claims Bike Creditor’s Owner’s Rack = Financial Claim + Financial Claim $2,000 = $800 + $1,200 $

5. Section 1 Property and Financial Claims (cont'd.) Chapter 3 $ • Financial Claims in Accounting • Assets: • Property or items of value owned by a business • Liabilities: • A creditor’s claims to the assets of the business • Owner’s Equity: • The owner’s claims to the assets of the business $ $ $ These financial claims to the assetstogether are called Equity

6. Section 1 Property and Financial Claims (cont'd.) Chapter 3 $ • Financial Claims in Accounting • The EQUITY of a business includes the claims of the creditors (liabilities) and the claims of the owner (owner’s equity). $ $ $

7. Section 1 Property and Financial Claims (cont'd.) Chapter 3 $ The Accounting Equation $ Creditor’s Owner’s Financial Claim Financial Claim Property = + $ $ Assets = Liabilities + Owner’s Equity

8. Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit (cont'd.) Chapter 3 $ Business Transactions • An economic event that causes a change — either an increase or a decrease — in assets, liabilities, or owner’s equity. • Separate accounts are maintained for each item of value the business has, for the creditor’s claims and the owner’s claims. Each account is classified as: • Assets • Liabilities • Owner’s Equity $ $ $

9. Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit (cont'd.) Chapter 3 $ Business Transactions • Each transaction affects at least two accounts. • The accounting equation must remain in balance after a transaction. • An account shows the balance for a specific item and a record of the increases and decreases caused by business transactions. $ $ $

10. Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit (cont'd.) Chapter 3 $ Business Transactions (cont'd.) $ Assets = Liabilities + Owner’s Equity Accounts Maria Sanchez, Cash in Bank Payable Capital Accounts Receivable Computer Equipment Office Equipment Delivery Equipment $ $ Capital Account – tracks the monetary value of investments by the owner (cash and noncash investments)

11. Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit (cont'd.) Chapter 3 $ Effects of Business Transactions on the Accounting Equation Analyzing business transactions: $ Business Transaction $ ANALYSISIdentify Classify + / - Balance 1. Identify the accounts affected. 2. Classify the accounts affected. 3. Determine the amount of increase or decrease for each account. 4. Make sure the accounting equation remains in balance. $

12. Chapter 3 $ Types of Transactions • Owner Investment Transactions • Cash investment • Asset investment • Cash or Credit Transactions • Purchase assets • Sell assets owned by the business $ $ $

13. Chapter 3 $ Types of Transactions • Revenue Transactions • Income earned from the sale of goods or services. • Expense Transactions • The price paid for goods or services used to operate a business. • Withdrawal Transactions • When the owner takes cash or other assets from the business for personal use. $ $ $