Download - Unit 2 chapter 3
Property and Financial Claims
Chapter 3
Section 1
What You Will Learn
The relationship between property and financial claims.
The meaning of equity as it is used in accounting.
The parts of the accounting equation. The definition of each part of the
accounting equation.
Key Terms
Property Property rights Financial claims Credit Creditor Assets
Equity Investments Owner equity Liabilities Accounting equation
Property: Ownership and Control
Property is anything of value that is owned or controlled.
Property Rights Financial Claim
Own Yes Yes
Control (like rent)
Yes No
Property: Ownership and Control
Property rights Creditors’ and owner’ financial claim to assets of the business
Financial claims Legal rights to an items
Property
(Cost)
= Financial Claims
(Financial Investments)
Bike = Your claim to the Bike
$600 = $600
Property: Ownership and Control
Credit – buying property and agreeing to pay for it later.
Creditor is the business or person selling you the property on credit
Property Financial Claims
Bike Lock
= Creditor’s Financial Claim
+ Owners Financial Claim
$100 = $40 + $60
Financial Claims in Accounting
Assets Property or items of value owned by a business
Equity The financial claim to these assets
Investments Assets, generally long-term in nature, not intended to
be converted to cash or used in the normal operation of the business
Financial Claims in Accounting
Owner’s equityThe owner’s claim to the assets of the
business Liabilities
The creditor’s claim to the assets of the business
Accounting equationAssets = Liabilities + Owner’s Equity
Math Hint
Using AlgebraYou can calculate amounts in a financial
equation using the rules of algebra.The basic accounting equation is in form of
a= b + c To find either b or c , Rewrite the equation as
B= a - c, or c= a - b
A Matter of Ethics
Company PolicyMany companies provide office supplies for their employees’ use while on the job. Imagine that you work for a large department store like JC Penny. Several of your co-workers take company supplies home for their personal use, such as pens, bags, hangers, and boxes. You need boxes to store some items at home, so you consider taking them from the supply room.
A Matter of Ethics (cont.)
Ethical Decision MakingWhat are the ethical issues?What are the alternatives?Who are the affected parties?How do the alternatives affect the parties?What would you do?
Problem 3-1 Balancing the Accounting Equation
Assets Liabilities Owner's Equity17,000 7000 10,00026000 6000 20000
10,000 3,000 700026000 9000 170008,000 2000 6,000
20,000 7000 13,00016000 12000 4000
30,000 8,000 2200022,000 1000 21,00025,000 5000 20,00035000 10000 250007,500 4,500 3000
Transactions that Affect Owner’s Investment, Cash and CreditChapter 3
Section 2
What You Will Learn
How accounts are used in business transactions
The steps used to analyze business transactions
How investments by the owner effects the accounting equation.
What You Will Learn (cont.)
How a cash payment transaction affects the accounting equation.
How a credit transaction effects the accounting equation.
Key Terms
Business transaction Account Accounts receivable Accounts payable On account
Business Transactions
A business transaction is an economic event that causes a change Either an increase or decrease In assets, liabilities or owner’s equity
An account shows the balance for a specific item, such as cash or computer equipment. It also is a record of increases or decreases for that
specific item.
Assets Liabilities Owner’s Equity
Cash in Bank Accounts Payable
Maria Sanchez, Capital
Accounts Receivable
Computer Equipment
Office Equipment
Delivery Equipment
Business Transactions
Accounts Receivable is the total amount of money owed to a business.
Accounts Payable is the amount of money owed, or payable to the creditors of a business.
Effects of Transaction on the Accounting Equation Business Transaction
ANALYSIS Identify 1. Identify the account affected
Classify 2. Classify the account affected
+/- 3. Determine the amount of increase or decrease for each account affected
Balance 4. Make sure the accounting equation remains in balance
Key Points
Business TransactionsEvery business transaction affects at least
two accounts In Balance
After recording each transaction, the accounting equation must be in balance
Investment by the Owner
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.
2. The owner, Maria Sanchez, took two telephones valued at $200 each (total $400) from her home and transferred them to her business as Office Equipment.
Cash Payment Transactions
1. Roadrunner issued a $3,000 check to purchase a computer system.
Credit Transaction
When a business buys an item on credit, it is buying on account.
You will learn aboutPurchase on accountSale on accountPayment made on accountPayment received on account
Business Transactions
1. Roadrunner bought a used truck on account from North Shore Auto for $12,000.
2. Roadrunner sold one telephone to Green Company for $200 on account.
3. Roadrunner issued a check for $350 in partial payment of the amount own to its creditor, North Shore Auto.
4. Roadrunner received and deposited a check for $200 from Green Co. The check received is full payment for the telephone sold on account in transaction 2.
Problem 3-2 Determining the Effects of Transactions on the Accounting Equation
Asset = Liabilities + Owners's Equity
Cash in bankAccounts
Receivable Computer Equipment Office Funiture Accounts Payable Jan Swift, Capital
1. Jan Swift deposit $30,000 in a checking account to start the business 30000 30000
2. The owner transferred a desk and chair to the business value $700 700 700
3. WordService issued a check for $4,000 for the purchase of a computer -4000 4000
4. The office bought office furniture on account for $5,000 5000 5000
5. The desk and chair previously transferred to business sold on account for $700 700 -700
6. WordService wrote a check for $2000 in partial payment of the amount owed Eastern Furniture -2000 -2000
24000 700 4000 5000 3000 30700
33700 = 33700
Transactions that Affect Revenue, Expenses, and Withdrawals by the Owner
Chapter 3
Section 3
What You Will Learn
How revenue transactions affect the accounting equation
How expenses transactions affect the accounting equation
How withdrawals by the owner affects the accounting equation.
Key Terms
Revenue
Expense
Withdrawal
Revenue and Expense
Revenue Income earned from sale of goods and services. Increases owner equity because it increases the
assets of the business
Expenses Price paid for goods and services used to operate the
business Decreases owner equity because they decrease
assets or increase liability
Business Transaction
1. Roadrunner receives a check for $12,000 from a customer, Sims Corporation, for delivery service.
2. Roadrunner wrote a check for $700 to rent for the month.
Withdrawal by the Owner
Withdrawal – owner take money from the business for personal use.Business Transaction
Maria Sanchez withdrew $500 from the business for her personal use
Withdrawal by owner is not the same as an expense, expense is cost of operating business.
Problem 3-3