1. We will be recording business transactions for a company with the following details: Copyright © Houghton Mifflin Company. All rights reserved. 1-11-1 Owner’s name:L.P. Arch Business name:Arch Copy Co. Business type:Sole Proprietorship (one-person business)

2.  Sole proprietorship ◦ A one-owner business  Separate entity concept ◦ The concept by which a business is treated as a separate economic or accounting entity ◦ The business stands by itself, separate from its owners, creditors, and customers Copyright © Houghton Mifflin Company. All rights reserved. 1-21-2

3.  Accounts ◦ The categories under the Assets, Liabilities, and Owner’s Equity headings  Double-entry accounting ◦ The system by which each business transaction is recorded in at least two accounts and the accounting equation is kept in balance Copyright © Houghton Mifflin Company. All rights reserved. 1-31-3

4. 1. What accounts are involved? 2. What are the classifications of the accounts involved? 3. Are the accounts increased or decreased? 4. Is the equation in balance after the transaction has been recorded? Remember: each business transaction must affect at least two accounts Copyright © Houghton Mifflin Company. All rights reserved. 1-41-4

5. 1-51-5 Transaction (a): Arch deposited $70,000 in a bank account in the name of business.

6. Copyright © Houghton Mifflin Company. All rights reserved. 1-61-6 Transaction (b): Bought equipment, paying cash, $33,000.

7. Copyright © Houghton Mifflin Company. All rights reserved. 1-71-7 Transaction (c): Bought equipment on account from Melton Office Supply, $7,000.

8. Copyright © Houghton Mifflin Company. All rights reserved. 1-81-8 Transaction (d): Paid Melton Office Supply, a creditor, $2,000.

9. Transaction (e): Arch invested her own personal data processing equipment in Arch Copy Co. having a fair market value of $6,200. Copyright © Houghton Mifflin Company. All rights reserved. 1-91-9 +

10. Define and identify revenue and expense accounts Copyright © Houghton Mifflin Company. All rights reserved. 1 - 10

11.  The amounts a business earns  Examples ◦ Fees earned for performing services ◦ Sales of merchandise ◦ Rent income, and interest income  May take the form of cash, credit card receipts, or accounts receivable (charge accounts) Copyright © Houghton Mifflin Company. All rights reserved. 1 - 11

12.  Fees Earned for performing services  Sales Income from selling merchandise  Rent Income for the use of property  Interest Income for lending money  Credit Sales where cash will be received at a later time ◦ Example: Home Depot sells lumber to a customer and lets the customer pay later Copyright © Houghton Mifflin Company. All rights reserved. 1 - 12

13.  The costs that relate to earning revenue (the costs of doing business)  Examples ◦ Wages ◦ Rent ◦ Interest ◦ Advertising  May be paid in cash, immediately or at a future time (accounts payable) Copyright © Houghton Mifflin Company. All rights reserved. 1 - 13

14.  Wages Expense for labor performed  Rent Expense for the use of property  Interest Expense for the use of money  Advertising Expense  Expenses may be paid in cash when incurred (immediately) or at a later time  Expense incurred but not paid until later ◦ Example: Received a bill for a newspaper ad you took out last week ◦ Cash will be paid at a later time – involves Accounts Payable Copyright © Houghton Mifflin Company. All rights reserved. 1 - 14

15.  Revenues and expenses are under the umbrella of owner’s equity  Revenue  Add to Capital account  Expenses  Subtract from Capital account Copyright © Houghton Mifflin Company. All rights reserved. 1 - 15