Chapter 3

Business Transactions and The Accounting EquationChapter 3Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. PropertyProperty 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.Property and Financial ClaimsSECTION 3.1Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. PropertyThere is a relationship between property and financial claims that can be expressed as an equation:PROPERTY = FINANCIAL CLAIMSWhen 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).

Property and Financial ClaimsSECTION 3.1

Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. Financial Claims in AccountingA company can possess various property or items of value, known as assets: cashoffice equipmentmanufacturing equipmentbuildingslandEquities are financial claims to these assets. When a business obtains a loan to help purchase an item, the owners financial claims to the assets are called the owners equity.Property and Financial ClaimsSECTION 3.1Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. Financial Claims in AccountingThe creditors financial claims to the assets are called liabilities. The relationship between assets, liabilities, and owners equity are shown in the accounting equation:

Property and Financial ClaimsSECTION 3.1

Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. Business TransactionsA business transaction is an event that causes a change in assets, liabilities, or owners equity. A business records these changes in subdivisions called accounts.The number of accounts will vary from business to business. Two possible business accounts areaccounts receivable, an asset account, andaccounts payable, a liability account.

Transactions That Affect Owners Investment, Cash, and CreditSECTION 3.2Transactions That Affect Owners Investment, Cash, and CreditSECTION 3.2Effects of Transactions on the Accounting EquationTo 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.Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. Investments by the OwnerMoney or other property paid out in order to produce profit is an investment. Analyze a cash investment transaction:

Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved.

Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. Cash Payment TransactionAnalyze a cash purchase business transaction:

Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. Credit TransactionPurchasing an item on credit is also called buying on account. Analyze a purchase on account business transaction:

Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. Revenue and Expense TransactionsExamples of revenue, income earned from the sales of goods and services, arefees earned for services performed, andcash received from the sale of merchandise.To generate revenue, a business may also incur expenses, or costs. Examples of expenses arerent,utilities, andadvertising.

Transactions That Affect Revenue, Expense, and Withdrawals by the OwnerSECTION 3.3Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. Transactions That Affect Revenue, Expense, and Withdrawals by the OwnerSECTION 3.3Revenue and Expense TransactionsRevenues increase owners equity and expenses decrease owners equity.

Glencoe Accounting Unit 2 Chapter 3 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. Transactions That Affect Revenue, Expense, and Withdrawals by the OwnerSECTION 3.3Withdrawals by the OwnerAn 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 owners equity than investments:Withdrawals decrease assets and owners equity.Investments increase assets and owners equity.