0 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 2 The Basic Accounting Cycle Chapter 3 Business

1Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Unit 2The Basic Accounting Cycle

Chapter 3 Business Transactions and the Accounting Equation

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital

Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals

Chapter 6 Recording Transactions in a General Journal

Chapter 7 Posting Journal Entries to General Ledger Accounts

Chapter 8 The Six-Column Work Sheet

Chapter 9 Financial Statements for a Sole Proprietorship

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

Chapter 11 Cash Control and Banking Activities


Chapter 3Business Transactions and

the Accounting Equation

What You’ll Learn Describe the relationship between property and

financial claims. Explain the meaning of the term equities as it is used

in accounting. List and define each part of the accounting equation. Demonstrate the effects of transactions on the

accounting equation. Check the balance of the accounting equation after a

business transaction has been analyzed and recorded.

Define the accounting terms introduced in this chapter.


Chapter 3, Section 1 Property and Financial Claims

What Do You Think?

Why is it important to keep track of financial claims?


Main IdeaAny item of property has at least one financial claim against it.

You Will Learn what it means to own property. the two types of financial claims to property.

Property and Financial ClaimsSECTION 3.1


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.



PropertyThere is a relationship between property and financial claims that can be expressed as an equation:

PROPERTY = FINANCIAL CLAIMS

When 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).



Financial Claims in AccountingA company can possess various property or items of value, known as assets:

cash office equipment manufacturing equipment buildings land

Equities are financial claims to these assets. When a business obtains a loan to help purchase an item, the owner’s financial claims to the assets are called the owner’s equity.



Financial Claims in AccountingThe creditor’s financial claims to the assets are called liabilities. The relationship between assets, liabilities, and owner’s equity are shown in the accounting equation:



Key Terms property financial claim credit creditor assets equities owner’s equity liabilities accounting equation



Chapter 3, Section 2 Transactions That Affect Owner’s

Investment, Cash, and Credit

What Do You Think?

What do you think is meant by the term transaction?


Main IdeaAccounts are used to analyze business transactions.

You Will Learn how businesses use accounts. the steps used to analyze a business transaction.

Transactions That Affect Owner’s Investment, Cash, and Credit

SECTION 3.2


Business TransactionsA business transaction is an event that causes a change in assets, liabilities, or owner’s equity. A business records these changes in subdivisions called accounts.

The number of accounts will vary from business to business. Two possible business accounts are

accounts receivable, an asset account, and accounts payable, a liability account.


SECTION 3.2


Effects 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.


SECTION 3.2


Investments by the OwnerMoney or other property paid out in order to produce profit is an investment. Analyze a cash investment transaction:


SECTION 3.2


Investments by the OwnerMoney or other property paid out in order to produce profit is an investment. Analyze a cash investment transaction:


SECTION 3.2



SECTION 3.2



SECTION 3.2


Cash Payment TransactionAnalyze a cash purchase business transaction:


SECTION 3.2


Cash Payment TransactionAnalyze a cash purchase business transaction:


SECTION 3.2


Credit TransactionPurchasing an item on credit is also called buying on account. Analyze a purchase on account business transaction:


SECTION 3.2


Credit TransactionPurchasing an item on credit is also called buying on account. Analyze a purchase on account business transaction:


SECTION 3.2


Key Terms business transaction account accounts receivable accounts payable investment on account


SECTION 3.2


Chapter 3, Section 3 Transactions That Affect Revenue,

Expense, and Withdrawals by the Owner

What Do You Think?How do you think revenue, expenses, investments and withdrawals affect owner’s equity?


Main IdeaOwner’s equity is changed by revenue, expenses, investments, and withdrawals.

You Will Learn how revenue and expenses affect owner’s equity. how withdrawals affect owner’s equity.

Transactions That Affect Revenue, Expense, and Withdrawals by the Owner

SECTION 3.3


Revenue and Expense TransactionsExamples of revenue, income earned from the sales of goods and services, are

fees earned for services performed, and cash received from the sale of merchandise.

To generate revenue, a business may also incur expenses, or costs. Examples of expenses are

rent, utilities, and advertising.


SECTION 3.3


Revenue and Expense TransactionsRevenues increase owner’s equity and expenses decrease owner’s equity.


SECTION 3.3


Withdrawals 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 owner’s equity than investments:

Withdrawals decrease assets and owner’s equity. Investments increase assets and owner’s equity.


SECTION 3.3


Key Terms revenue expense withdrawal


SECTION 3.3


Question 1 O’Donnell’s Car Wash has the following assets and liabilities.

Assets: Cash in Bank $9,500; Accounts Receivable $500; Computer Equipment $3,500; Car Wash Equipment $75,000; Building $450,000

Liabilities: Alto’s Equipment Service $2,500; First National Bank (mortgage on building) $200,000

What is the owner’s equity for O’Donnell’s?

Chapter 3 ReviewCHAPTER 3


Answer 1 Step 1: Calculate total assets.

$9,500 + $500 + $3,500 + $75,000 + $450,000 = $538,500

Step 2: Calculate total liabilities.

$2,500 + $200,000 = $205,500

Step 3: Calculate owner’s equity.

$538,500 - $202,500 = $336,000



Question 2 A business owner invests $12,000 cash in the business. How would you analyze this transaction?



Answer 2 1. Identify the accounts affected.

a. Cash in Bank is affected.b. Owner’s Capital is affected.

2. Classify the accounts affecteda. Cash in Bank is an asset account.b. Owner’s Capital is an owner’s equity account.

3. Determine the amount of increase or decrease for each account affected.a. Cash in Bank is increased by $12,000.b. Owner’s Capital is increased by $12,000.

– Make sure the accounting equation remains in balance. Assets = Liabilities + Owner’s Equity $12,000 = 0 + $12,000



Resources

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0 Glencoe Accounting Unit 2 Chapter 3 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 2 The Basic Accounting Cycle Chapter 3 Business