The Accounting

Equation
CATE Program Lesson Plan
 The equation…
Assets=Liabilities + Owners Equity
 Important Terms

• Property • Equity
• Financial Claims • Owner’s Equity
• Credit • Liabilities
• Creditor • Business Transaction
• Assets • Account
• Accounting equation • Accounts Receivable
• Revenue • Accounts Payable
• Expense • On Account
 Review questions

• Why is understanding • What are the four steps

the accounting equation used to analyze business
crucial to understanding transactions?
the condition of any • What are the parts of the
business? accounting equation?
• What does equity mean • How do investments by
when it is used in the Owner affect the
accounting? equation?
 Property: Ownership and
Control
• Property = anything of value that is owned or
controlled.
• Difference between control and ownership:
Own – purchased, have legal rights to, financial
claims (you can sell it).
Control – Like renting, specific time frame and
usage. No financial claim (you can’t sell it).
 Financial Claims

• Property = financial claims

• Example: you purchase an iPhone for $600
Property = Financial Claims
(Cost) (Financial Investment)
iPhone = Your claim to the iPhone
$600 = $600
 Credit
• Here’s another example: You are now purchasing the iPhone, but on
credit. You give the store $200 now and you owe $400 later.
Property = Financial Claims
iPhone = Your claim (Owner) + Creditor’s Claim
$600 = $200 + $400
Credit:
When you buy something and agree to pay for it later.
Creditor:
Any person or business to which you owe money.
 Business Example
• Here is a business example: A delivery service is purchasing a vehicle
for $15,000. A $5,000 cash down payment and borrowing $10,000 from
the bank.

Property = Creditor’s Financial Claim + Owner’s Financial Claim

Truck
$15,000 = $10,000 + $5,000

Again:
ASSETS = LIABILITIES + OWNER’S EQUITY
 Accounts
Common Accounts in Business:
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash in Bank Accounts Payable Owner, Capital
Accts Receivable Loans
Equipment Wages
- Computer Taxes
- Office
- Delivery
Supplies
Inventory
Goodwill
 Analysis of a Business
Transaction
Analysis Identify 1. Identify the accounts
affected.
2. Classify the accounts
Classify affected.
3. Determine the amount of
+/- increase or decrease for
each account affected.
4. Make sure the accounting
equation remains in
Balance balance.
 Business Transactions

• Every business transaction affects at least two

accounts.
• After recording each transaction, the accounting
equation must remain in balance.
 Transaction 1
Susie Jones has invested $50,000 to open a business checking account in
the name of Susie’s Delivery Service.

Analysis Identify 1. Cash transactions are recorded in

the account Cash in Bank. Jimmy
investment of personal funds are
recorded in Capital acct.
Classify 2. Cash in Bank is an Asset account,
Capital is Owner’s Equity
Account.
3. Cash in Bank is increased
+/- $50,000. Susie Jones, Capital is
increased $50,000.
4. The accounting equation remains
balanced.
Balance
 Transaction 2
The Owner, Susie Jones, issued a $3,500 check to purchase a
Computer System.

Analysis Identify 1. The Computer Equipment

account is used to record the
transaction. The business paid
cash so the account Cash in
Classify Bank is affected.
2. Both Computer Equipment and
+/- Cash in Bank are Asset accounts.
3. Computer Equipment is
increased $3,500. Cash in Bank
is decreased $3,500.
Balance 4. The accounting equation remains
balanced.
 Transaction 3
Susie’s Delivery Service purchased a truck on account from Used Autos for
$15,000.

Analysis Identify 1. The Delivery Equipment account

is used to record the transaction.
The business promise to pay later
so the Accounts Payable is
Classify affected.
2. Delivery Equipment is an asset
account. Accounts Payable is a
liability account.
+/- 3. Delivery Equipment is increased
$15,000.Accounts Payable is
increased $15,000.
4. The accounting equation remains
Balance balanced.
Assets = Liabilities + Owner’s
Equity

  Cash Computer Delivery   Acct S.Jones

  In Bank +Equip +Equip = Payable +Capital
Trans1 $ 50,000         $ 50,000
Trans2 $ (3,500) $ 3,500        
Balance $ 46,500 $ 3,500       $ 50,000
Trans3     $ 15,000   $ 15,000  
Balance $ 46,500 $ 3,500 $ 15,000   $ 15,000 $ 50,000