TRANSACTIONS THAT AFFECT
OWNER’S INVESTMENT, CASH,
AND CREDIT
3.2
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
▪ Main Idea
Accounts are used to analyze business transactions
▪ What do you think is meant by the term transaction?
An exchange of goods, services, or funds between parties
KEY TERMS
▪ business transaction
▪ account
▪ accounts receivable
▪ accounts payable
▪ investment
▪ on account
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Business Transactions
▪ A 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
accounts payable, a liability account
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Roadrunner Delivery Service
Assets = Liabilities + Owner’s Equity
Cash in bank Accounts payable Maria Sanchez, capital
Accounts receivable
Computer equipment
Office equipment
Delivery equipment
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Effects of Transactions on the Accounting Equation
▪ To analyze a business transaction, follow these steps:
▪ Identify the accounts affected
▪ Classify the accounts affected
▪ What does it mean to classify accounts?
To determine whether they are assets, liabilities, or owner’s equity
▪ Determine the amount of increase or decrease for each account affected
▪ Make sure the accounting equation remains in balance
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Investments by the Owner
Money or other property paid out in order to produce profit is an investment
What does the +/- symbol
represent?
The process of determining
the increase or decrease to
each account in the
transaction
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Investments by the Owner
Money or other property paid out in order to produce profit is an investment
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
How do you know to use an
account called Office Equipment
instead of Telephone Equipment?
By referring to the list of
accounts used by this business
(see p. 54)
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Cash Payment Transaction
Analyze a cash purchase business transaction:
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Cash Payment Transaction
Analyze a cash purchase business transaction:
• How would owner’s equity change
if Roadrunner bought the
computer on account instead of
for cash?
It wouldn’t
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Credit Transaction
Purchasing an item on credit is also called buying on account
• Which accounts will be
affected by the transaction?
Delivery equipment and
Accounts Payable
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Credit Transaction
Purchasing an item on credit is also called buying on account
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Credit Transaction
Purchasing an item on credit is also called buying on account
Why would Roadrunner agree
to be paid in the future for the
telephone?
There could be many different
reasons, but one might be that
Roadrunner got the best price
from this particular buyer and
had the confidence the buyer
would pay the debt
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Credit Transaction
Purchasing an item on credit is also called buying on account
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Credit Transaction
• Roadrunner paid $350 toward the
truck loan.
• Why does the delivery account
still have a $12,000 balance?
Because the payment reduces a
liability and is subtracted from
the liability balance, not the
asset balance
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Credit Transaction
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Credit Transaction
• If you see the word Receivable in
an account name, what type of
account is it? Why?
Asset account because it
represents a claim to the assets
of other people or businesses
TRANSACTIONS THAT AFFECT OWNER’S
INVESTMENT, CASH, AND CREDIT
Credit Transaction
• What is the balance of Accounts
Receivable after this transaction?
$0
