Business Transactions and The Basic Accounting Equation

1. Business Transactions and The Basic Accounting Equation Introduction to Business Chapter 2

2. Learning Objectives • Describe the relationship between property and property rights. • Explain the meaning of “equity” as it is used in accounting. • List the parts of the basic accounting equation and define each part. • Show how various business transactions affect the basic accounting equation.

3. Learning Objectives • Check the balance of the basic accounting equation after a business transaction has been analyzed and recorded. • Define the accounting terms introduced in this chapter.

4. Property and Property Rights • The right to own property is basic to our private enterprise system. • Property – anything of value that is owned or controlled. • When you own property, you have a legal right to that item. • When you have control over an item, you have the right only to the use of the item. • Property Rights – the cost or financial claims of property, measured by dollar amounts.

5. Property and Property Rights • Credit – when you buy property and agree to pay for it later. • Creditor – the business or person selling you the property on credit, who you owe money to. • When you buy property on credit, you do not have the only financial claim to property. You share that claim with the creditor.

6. Check Your Learning – page 19 Use the following formula to solve problems 1-4. Creditor’s Financial Claim + Owner’s Financial Claim Property

7. Financial Claims in Accounting • Separate Entity - businesses are considered separate entities from the personal property of their owners. • The owner’s personal financial transactions are not a part of the business’s records.

8. Financial Claims in Accounting • In Accounting: • Assets – the property or items of value owned by a business. Some examples are cash, office equipment, buildings, and land. • Equity – the total financial claims to the assets or property of a business. • Owner’s Equity – the owner’s claims to the assets of a business. • Liabilities – creditor’s claims to the assets of the a business, or money owed to creditors.

9. Basic Accounting Equation • The relationship between assets and total equities – liabilities plus owner’s equity – is known as the basic accounting equation. Assets = Liabilities + Owner’s Equity • Read example on page 20 *Check Your Learning page 21

10. Business Transactions • Business Transaction – an economic event that causes a change in assets, liabilities, or owner’s equity. • They involve buying, selling, or exchanging goods and services. • The financial position of the business changes when transaction occur. • Account – a record of the increases or decreases in and the balance for a specific item such as cash or equipment.

11. Business Transactions • Accounts represent things in the real world such as money invested, office furniture, money owed. • Each business sets up its accounts according to its needs. • Accounts Receivable – the total amount of money to be received in the future for goods and services sold on credit. • Accounts Payable – the amount of money owed, or payable, to a businesses creditors. • Capital – refers to the dollar amount of the owner’s investment in the business.

12. Effects of Business Transactions on the Basic Accounting Equation • When a business transaction occurs: • Identify the accounts affected. • Classify the accounts affected (asset, liability, or owner’s equity) • Determine the amount of increase or decrease for each account affected. • Make sure the basic accounting equation remains in balance.

13. Transactions that occur most often: • Investments by the owner • Cash transactions • Credit transactions • Revenue and expense transactions • Withdrawals by the owner *Remember, each transaction affects at least two accounts. • * Check Your Learning - page 27

14. Revenue and Expense Transactions • Revenue – income earned from the sale of goods and services. Revenue increases owner’s equity because it increases the business’s assets. • Expense – any price paid for goods and services used to operate a business. Expenses decrease owner’s equity because they decrease the business’s assets.

15. Withdrawals By The Owner • If a business earns revenue, the owner will take cash or other assets from the business for personal use. • This transaction is called a withdrawal. • A withdrawal decreases both assets and owner’s equity. Check Your Learning – page 30