Starting a Proprietorship: Changes That Affect the Accounting Equation Lesson 1 Starting a Proprietorship: Changes That Affect the Accounting Equation

What is Accounting? Accounting – planning, recording, analyzing, and interpreting financial information Accounting System – a planned process for providing financial information that will be useful to management Accounting Records – organized summaries of a business’s financial activities Financial Statements – financial reports that summarize the financial condition and operations of a business

Types of Businesses Service Business – a business that performs an activity for a fee Examples: ? Proprietorship – a business owned by one person

ACCOUNTING CONCEPT: Business Entity A business’s financial information is recorded and reported separately from the owner’s personal financial information.

Ethical Decisions Ethics – The principles of right and wrong that guide an individual in making decisions Business Ethics – The use of ethics in making business decisions

The Accounting Equation Assets = Liabilities + Owner’s Equity Assets (Cash, Supplies, Prepaid Insurance) ** Used either to acquire other assets or to operate a business Equities - Financial rights to the assets of a business Liabilities (Accounts Payable-Co. Name) Owner’s Equity (Capital) ** Amount remaining after the value of all liabilities is subtracted from the value of all assets

THE ACCOUNTING EQUATION Lesson 1-1 5/22/2018 THE ACCOUNTING EQUATION page 8 An equation showing the relationship among assets, liabilities, and owner’s equity Work Together/OYO 1-1 p. 9 LESSON 1-1

CONCEPT: Units of Measure Business transactions are stated in numbers that have common values. U.S. records transactions in dollars.

Terminology Transaction – A business activity that changes assets, liabilities or owner’s equity. Account - A record summarizing all the information pertaining to a single item in the accounting equation. Account Title -Name given to an account. Account Balance - The amount in an account. Capital - The account used to summarize the owner’s equity in a business.

Record a Transaction Read the transaction. Identify the accounts involved. Classify the accounts: (Asset, Liability, Owner’s Equity) **Both sides of the accounting equation must ALWAYS equal.

Received Cash Investment from Owner Asset (Cash) increase + Owner’s Equity (Capital) increase + Equity of the owner - The owner will invest in the assets of the business.

2. Paid Cash for Supplies When changes are made on only one side of accounting equation, the equation must still be in balance. Ex. One asset exchanged for another asset Asset (Cash) decreases - Asset (Supplies) increases +

3. Paid Cash for Insurance Insurance premiums must be paid in advance. Insurance coverage is something of value owned by the sole proprietorship. Ex. One asset exchanged for another asset Asset (Cash) decreases - Asset (Prepaid Insurance) increases +

4. Bought Supplies “on Account” “Bought on Account” - Common business practice to buy items and pay for them at a future date. Asset (Supplies) increases + Liability (Accounts Payable) increases +

5. Paid Cash “on Account” Asset (Cash) decreases - Liability (Accounts Payable) decreases - Work Together/OYO 1-2, p. 13

Revenue Definition - Increase in Owner’s Equity resulting from the operation of the business. ** When cash is received from a sale, the total amount of both (1) assets and (2) owner’s equity is increased. Sale on Account – A sale on which cash will be received at a later date.

Revenue Transaction: Received Cash From Sales Asset (Cash) increases + Owner’s Equity (Capital) Revenue increases +

Revenue Transaction: Sold Services on Account Sale on Account – Sale for which cash will be received at a later date. Assets (Accounts Receivable) increases + Owner’s Equity (Capital) Revenue increases + CONCEPT: Realization of Revenue – Revenue is recorded at the time goods or services are SOLD

Expense Definition – Decrease in Owner’s Equity resulting from the operation of a business. ** When cash is paid for expenses, the business has less cash. Asset (Cash) decreases - Owner’s Equity (Capital) Expense decreases – Examples: Paid Cash for Rent Expense Paid Cash for Telephone Bill Expense

Other Cash Transactions: (1 )Received Cash on Account When a company receives cash from a customer for a prior sale. Assets (Cash) increases + Assets (Accounts Receivable) decreases -

Other Cash Transactions: (2) Paid Cash to Owner-Personal Use Withdrawal - Assets taken out of a business for the owner’s personal use. Decrease in owner’s equity because a withdrawal is not a result of normal operations of a business. Withdrawal is NOT an expense. Asset (Cash) decreases - Owner’s Equity (Drawing) decreases -

Summary of Changes in Owner’s Equity Increase: Sales (Revenue) paid by cash + Sales (Revenue) on Account + Decrease: Expenses (Rent, Telephone, Advertising) - Withdrawals: (Asset for personal use; Cash or Supplies) - Work Together/OYO 1-3, p. 17