Accounting Chapter 3 Teacher Notes

Chapter 3 Business Transactions and the Accounting Equation

Accounting Terms:

  1. Equities: Equity is what you own more than what you owe. Business equities are the financial rights to the business assets.

The Accounting Equation:

Assets = Liabilities + Owner’s Equity

The left and right sides must ALWAYS be EQUAL.

The accounting equation can be expressed in 3 ways:

Other terms:

  1. Transaction: any business activity that changes assets, liabilities, or owner’s equity. Include: sales, purchases, loans, bill and debt payments, etc.
  1. Account: a record summarizing all the information about one item  in the accounting equation; where transaction are posted to in debits and credits

  2. Account balance: the amount currently in the account, after all transactions have been posted (recorded)

  3. Capital = owner’s equity. The capital account = the owner’s equity account (same thing)


Changes that Affect Owner’s Equity

Revenue is an increase in owner's equity from the operation of a business.

Sales of goods and services can either be made for cash or “on account” (credit). Either way, they will increase owner's equity, the capital account on the right side.

Example: ABC Company sells $5000 in materials to ZYX Company. ZYX pays $2000 down,and puts the rest on account. The account postings for ABC Company would be:




+ $2000


+ $5000

A/R ABC Company

+ $3000



Realization of revenue: applied when revenue is recorded at the time goods or services are sold.

Expense: decrease in owner's equity resulting from the operation of a business.

Business expenses include everything they need to do business ... rent, utilities, office supplies, raw materials and equipment, maintenance and repairs, etc.

Owner withdrawals (usually cash but might be supplies) will decrease owner's equity.