Accounting and Finance Foundations

Unit 5

Accounting and Finance Foundations Unit 5: Accounting Terminology 332

Accounting Terminology

Chapter 14

Lesson 14.1 Transactions

Changes to the accounting equation are called transactions. All transactions affecting the accounting equa-

tion will impact the chart of accounts to keep the accounting equation in balance.

Examples:

Transaction 1

Received cash from owner as an investment, $7,500

Assets = Liabilities + Owner’s Equity

Trans.

No.

Cash + Supplies + Accounts

Receivable,

Lisa Cook

+ Prepaid

Insurance

= Accounts

Payable

Office

Supply

+ Your

Name,

Capital

+ Rev. - Expenses - Drawing

1. 7500 + + + = + 7500 + - -

When the owner invests cash into the business, the Capital and Cash accounts are affected. Capital is clas-

sified as owner’s equity, and cash is classified as an asset. When the business receives cash as an invest-

ment, the amount of cash increases (don’t get confused by thinking since the owner spent money on the

business, cash decreases). The business cash account and the owner’s personal cash account must be

kept separate, and the capital account increases. (See Accounting Concept: Entity)

Transaction 2

Paid cash for supplies $300

Assets = Liabilities + Owner’s Equity

Trans.

No.

Cash + Supplies + Accounts

Receivable,

Lisa Cook

+ Prepaid

Insurance

= Accounts

Payable

Office

Supply

+ Your

Name,

Capital

+ Rev. - Expenses - Drawing

1. 7500 + + + = + 7500 + - -


2. -300
   7200

+ +300 + + = + 7500 + - -

When the business purchases supplies for cash, the two accounts affected are Cash and Supplies. Both

Cash and Supplies are classified as assets. When supplies are purchased, the amount of supplies increas-

es. When an owner uses cash to make a purchase, the amount of cash decreases. By increasing one asset

and decreasing another asset, the accounting equation stays in balance. It is also standard accounting

practice.

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