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Business Transactions and the Accounting Equation

Learn about the relationship between property and financial claims, the meaning of equity, and the parts of the accounting equation. Discover how assets, liabilities, and owner's equity are essential in keeping accounting records balanced.

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Business Transactions and the Accounting Equation

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  1. Chapter 3 $ Business Transactions and the Accounting Equation $ Making Accounting Relevant Every business has assets, liabilities (debts), and owner’s equity. Think about a business in your community. $ $ What possible assets does this business possess?

  2. Chapter 3 $ Section 1 Property and Financial Claims • What You’ll 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. $ $ $

  3. Section 1 Property and Financial Claims (cont'd.) Chapter 3 $ Why It’s Important The accounting equation is the basis for keeping all accounting records in balance. $ • Key Terms • property • property rights • financial claims • credit • creditor • assets $ • investments • equity • owner’s equity • liabilities • accounting equation $

  4. 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 $

  5. 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 $

  6. Section 1 Property and Financial Claims (cont'd.) Chapter 3 $ Property: Ownership and Control (cont'd.) When you buy property and agree to pay for it later, you are buying on credit. $ $ Property = Financial Claims Bike Creditor’s Owner’s Lock = Financial Claim + Financial Claim $100 = $40 + $60 $

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

  8. 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

  9. Section 1 Property and Financial Claims (cont'd.) Chapter 3 $ Check Your Understanding $ What is meant by having a financial claim to property? $ $

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