Property and Financial Claims

Chapter 3

Section 1

What You Will 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.

Key Terms

Property Property rights Financial claims Credit Creditor Assets

Equity Investments Owner equity Liabilities Accounting equation

Property: Ownership and Control

Property is anything of value that is owned or controlled.

Property Rights Financial Claim

Own Yes Yes

Control (like rent)

Yes No

Property: Ownership and Control

Property rights Creditors’ and owner’ financial claim to assets of the business

Financial claims Legal rights to an items

Property

(Cost)

= Financial Claims

(Financial Investments)

Bike = Your claim to the Bike

$600 = $600

Property: Ownership and Control

Credit – buying property and agreeing to pay for it later.

Creditor is the business or person selling you the property on credit

Property Financial Claims

Bike Lock

= Creditor’s Financial Claim

+ Owners Financial Claim

$100 = $40 + $60

Financial Claims in Accounting

Assets Property or items of value owned by a business

Equity The financial claim to these assets

Investments Assets, generally long-term in nature, not intended to

be converted to cash or used in the normal operation of the business

Financial Claims in Accounting

Owner’s equityThe owner’s claim to the assets of the

business Liabilities

The creditor’s claim to the assets of the business

Accounting equationAssets = Liabilities + Owner’s Equity

Math Hint

Using AlgebraYou can calculate amounts in a financial

equation using the rules of algebra.The basic accounting equation is in form of

a= b + c To find either b or c , Rewrite the equation as

B= a - c, or c= a - b

A Matter of Ethics

Company PolicyMany companies provide office supplies for their employees’ use while on the job. Imagine that you work for a large department store like JC Penny. Several of your co-workers take company supplies home for their personal use, such as pens, bags, hangers, and boxes. You need boxes to store some items at home, so you consider taking them from the supply room.

A Matter of Ethics (cont.)

Ethical Decision MakingWhat are the ethical issues?What are the alternatives?Who are the affected parties?How do the alternatives affect the parties?What would you do?

Problem 3-1 Balancing the Accounting Equation

Assets Liabilities Owner's Equity17,000 7000 10,00026000 6000 20000

10,000 3,000 700026000 9000 170008,000 2000 6,000

20,000 7000 13,00016000 12000 4000

30,000 8,000 2200022,000 1000 21,00025,000 5000 20,00035000 10000 250007,500 4,500 3000

Transactions that Affect Owner’s Investment, Cash and CreditChapter 3

Section 2

What You Will Learn

How accounts are used in business transactions

The steps used to analyze business transactions

How investments by the owner effects the accounting equation.

What You Will Learn (cont.)

How a cash payment transaction affects the accounting equation.

How a credit transaction effects the accounting equation.

Key Terms

Business transaction Account Accounts receivable Accounts payable On account

Business Transactions

A business transaction is an economic event that causes a change Either an increase or decrease In assets, liabilities or owner’s equity

An account shows the balance for a specific item, such as cash or computer equipment. It also is a record of increases or decreases for that

specific item.

Assets Liabilities Owner’s Equity

Cash in Bank Accounts Payable

Maria Sanchez, Capital

Accounts Receivable

Computer Equipment

Office Equipment

Delivery Equipment

Business Transactions

Accounts Receivable is the total amount of money owed to a business.

Accounts Payable is the amount of money owed, or payable to the creditors of a business.

Effects of Transaction on the Accounting Equation Business Transaction

ANALYSIS Identify 1. Identify the account affected

Classify 2. Classify the account affected

+/- 3. Determine the amount of increase or decrease for each account affected

Balance 4. Make sure the accounting equation remains in balance

Key Points

Business TransactionsEvery business transaction affects at least

two accounts In Balance

After recording each transaction, the accounting equation must be in balance

Investment by the Owner

1. Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service.

2. The owner, Maria Sanchez, took two telephones valued at $200 each (total $400) from her home and transferred them to her business as Office Equipment.

Cash Payment Transactions

1. Roadrunner issued a $3,000 check to purchase a computer system.

Credit Transaction

When a business buys an item on credit, it is buying on account.

You will learn aboutPurchase on accountSale on accountPayment made on accountPayment received on account

Business Transactions

1. Roadrunner bought a used truck on account from North Shore Auto for $12,000.

2. Roadrunner sold one telephone to Green Company for $200 on account.

3. Roadrunner issued a check for $350 in partial payment of the amount own to its creditor, North Shore Auto.

4. Roadrunner received and deposited a check for $200 from Green Co. The check received is full payment for the telephone sold on account in transaction 2.

Problem 3-2 Determining the Effects of Transactions on the Accounting Equation

Asset = Liabilities + Owners's Equity

Cash in bankAccounts

Receivable Computer Equipment Office Funiture Accounts Payable Jan Swift, Capital

1. Jan Swift deposit $30,000 in a checking account to start the business 30000 30000

2. The owner transferred a desk and chair to the business value $700 700 700

3. WordService issued a check for $4,000 for the purchase of a computer -4000 4000

4. The office bought office furniture on account for $5,000 5000 5000

5. The desk and chair previously transferred to business sold on account for $700 700 -700

6. WordService wrote a check for $2000 in partial payment of the amount owed Eastern Furniture -2000 -2000

24000 700 4000 5000 3000 30700

33700 = 33700

Transactions that Affect Revenue, Expenses, and Withdrawals by the Owner

Chapter 3

Section 3

What You Will Learn

How revenue transactions affect the accounting equation

How expenses transactions affect the accounting equation

How withdrawals by the owner affects the accounting equation.

Key Terms

Revenue

Expense

Withdrawal

Revenue and Expense

Revenue Income earned from sale of goods and services. Increases owner equity because it increases the

assets of the business

Expenses Price paid for goods and services used to operate the

business Decreases owner equity because they decrease

assets or increase liability

Business Transaction

1. Roadrunner receives a check for $12,000 from a customer, Sims Corporation, for delivery service.

2. Roadrunner wrote a check for $700 to rent for the month.

Withdrawal by the Owner

Withdrawal – owner take money from the business for personal use.Business Transaction

Maria Sanchez withdrew $500 from the business for her personal use

Withdrawal by owner is not the same as an expense, expense is cost of operating business.

Problem 3-3