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Understanding Transactions Impact on Owner's Equity in Accounting Equation

Learn how sales, expenses, and cash transactions affect owner's equity in the accounting equation, covering revenue, sales on account, expenses, and cash management.

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Understanding Transactions Impact on Owner's Equity in Accounting Equation

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  1. LESSON 1-3 How Transactions Change Owner’s Equity in an Accounting Equation Original created by M.C. McLaughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School

  2. Receiving Cash From Sales • A transaction for the sale of goods or services results in an increase in owners equity. • Revenue – an increase in owners equity resulting from the operation of a business. LESSON 1-3

  3. Sales on Account • Sale on Account – a sale for which cash will be received at a later date. Also called a charge sale. • These accounts are called Accounts Receivableand are assets. • Realization of Revenue - revenue is recorded at the time goods or services are sold. LESSON 1-3

  4. Sales on Account Analyze the transaction: What accounts will the transaction affect? • We have a customer who owes us money so the asset, accounts receivable is increasing. • We made a sale of merchandise which is revenue and increases owners equity. LESSON 1-3

  5. Transaction 6 August 12. Received cash from sales, $295.00. REVENUE TRANSACTIONS page 14 Transaction 7 August 12. Sold services on account to Oakdale School, $350.00. LESSON 1-3

  6. Expense Transactions • Expense – a decrease in owners equity resulting from the operation of a business. • A transaction to pay for goods or services needed to operate a business results in a decrease in owners equity. LESSON 1-3

  7. Expense Transaction Analyze the transaction: What accounts will the transaction affect? • We paid cash so our assets are decreasing. • We incurred an expense which decreases our owners equity account. LESSON 1-3

  8. Transaction 8 August 12. Paid cash for rent, $300.00. EXPENSE TRANSACTIONS page 15 Transaction 9 August 12. Paid cash for telephone bill, $40.00. LESSON 1-3

  9. Transaction 10 August 12. Received cash on account from Oakdale School, $200.00. OTHER CASH TRANSACTIONS page 16 Transaction 11 August 12. Paid cash to owner for personal use, $125.00. LESSON 1-3

  10. TERMS REVIEW page 17 • revenue • sale on account • expense • withdrawals LESSON 1-3

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