Patchogue-Medford High School
Accounting I – Chapter 3 Notes
Chapter 3 – Business Transactions and the Accounting Equation Page 50
Objective: Students will be able to demonstrate their knowledge to distinguish between property and financial claims against the company. They will explain equity and how it is used in the accounting equation. They will show how transactions affect the accounting equation and how revenue and expenses affect Owner’s Equity.
Ask: What do you think a company’s assets, liabilities, and equities are?
Property – Anything of value that is owned or controlled. (automobile, machinery, furniture.)
Financial Claim – When you buy something of value on credit and owe a creditor. The creditor has a financial claim on that asset. This is a legal right to that property. (car loan, purchases on credit) (pages 53 & 54)
Credit – When you buy something and agree to pay for it later. The party you owe is called a creditor.
Creditor – Person or business selling on account or credit. They are owed the money and have a claim on the asset until it is paid off in total.
The purchase of a desk ($100) in which the owner pays $60 down and owes the balance.
Property = Financial Claim
Asset = Creditors Claim + Owners Claim
$100 = 40 + 60
The Accounting Equation:
All transactions affect the Accounting Equation. It must always be in balance and each transaction has at least two categories (accounts) that it will change.
Assets = Liabilities + Owners Equity
(Problem 3-1 Accounting Equation page 56, work book pg 20)
Assets – Property or items of values owned by a business
Investments – Assets, short term or long term not intended for use in the direct use of operating the company.
Liabilities – Creditors claim on a business’s assets, money owed
Equity – Financial claims to assets
Business Transactions – An economic event that causes a change in the accounting equation. All business transactions go into accounts.
Account – Where increases and decreases are recorded and a balance can be shown.
Accounts are categorized by Assets, (begin with account number 1), Liabilities, (begin with account number 2), Capital, (begin with account number 3), Revenue, (begin with the account number 4), Expenses, (begin with the account number 6). (see page 57)
1 - Asset account examples: Cash, Accounts Receivable (money owed to your company), Machinery & Equipment, Autos, Furniture, ect.
2 - Liability account examples: Accounts Payable (money your company owes to a creditor), Notes Payable.
3 – Owners Equity account examples: Capital (investment of money or assets used to produce profit)
4 – Revenue account examples: Services provided, Fees
6 – Expense account examples: Wage, Rent, Advertising, Utilities, Insurance
Each transaction is analyzed using a four-step method: (page58)
- Identify the accounts affected
- Classify the accounts affected
- Determine the amount of increase & decrease for each account
- Make sure the accounting equation remains in balance.
Different types of transactions: (pages 58-61) (63-65)
- Revenue – Income from sale of goods or services
- Expense – Cost of products or services used to operate a business
(Problem 3-2 Accounting Equation pg. 62, work book pg 20)
(Problem 3-3 Accounting Equation pg. 66, work book pg 21)
Terms Page 68
Questions Page 69
Computerized Accounting page 70
Spreadsheet Program page 27 in work book
Prob. 3-4 Classifying Accounts TB pg 71 WB pg 22
Prob. 3-5 Completing the Equation TB pg 71 WB pg 22
Prob. 3-6 Classifying accounts TB pg 71 WB pg 22
Prob. 3-7 Increase & Decrease in Acct BalTB pg 72 WB pg 23
Prob. 3-8 Effects of Transactions TB pg 73 WB pg 24
Prob. 3-9 Effects of Transaction on equat. TB pg 71 WB pg 25
(3-9 on computer, pg 29)
(Prob 3-10 Describing Transactions TB pg 74 WB pg 26
(Prob. 3-11 Completing acct. equation TB pg 75 WB pg 26