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

Lesson 1-1 The Accounting Equation 5/22/2018 LESSON 1-1 The Accounting Equation

Objectives Define accounting terms related to starting a service business organized as a proprietorship and to changes that affect the accounting equation. Identify accounting concepts and practices related to starting a service business organized as a proprietorship and to changes that affect the accounting equation.

Objectives continued Classify accounts to assets, liabilities, or owner’s equity and demonstrate their relationships in the accounting equation. Analyze how transactions affect accounts in an accounting equation.

TERMS REVIEW accounting accounting system accounting records financial statements service business proprietorship asset equities liability owner’s equity accounting equation ethics business ethics transaction account account title account balance capital revenue sale on account expense withdrawals

Accounting in the Real World Read Gold’s Gym on page 5 Critical Thinking Why is the location of a business important to the success of that business? What things would you consider when deciding where to locate a business such as Gold’s Gym?

What is Accounting? Accounting is planning, recording, analyzing, and interpreting financial information Accounting system is a planned process for providing financial information that will be useful to management Financial statements are financial reports that summarize the financial condition and operations of a business

The Business Service business is a business that performs an activity for a fee Proprietorship is a business owned by one person Read Business Structures on page 7 Why do you think more businesses are organized as proprietorships than any other form of business? What kinds of people do you think would be most successful as owners of a proprietorship?

The Accounting Equation Asset is anything that is owned of value Liability is an amount owed by a business Owner’s equity is the amount remaining after the value of all liabilities is subtracted from the value of assets

Audit Your Understanding? What is accounting? Give two examples of service businesses. What is a proprietorship? State the accounting equation.

LESSON 1-2 How Business Activities Change the Accounting Equation 5/22/2018 LESSON 1-2 How Business Activities Change the Accounting Equation

How Business Activities Change the Accounting Equation Transaction is a business activity that changes assets, liabilities, or owner’s equity Account is a record summarizing all the information pertaining to a single item in the accounting equation Account title is the name given to the account Account balance is the amount in the account Capital is the account used to summarize the owner’s equity in a business

RECEIVING CASH Transaction 1 August 1. Received cash from owner as an investment, $5,000.00.

PAYING CASH Transaction 2 August 3. Paid cash for supplies, $275.00. Transaction 3 August 4. Paid cash for insurance, $1,200.00.

TRANSACTIONS ON ACCOUNT Transaction 4 August 7. Bought supplies on account from Supply Depot, $500.00. Transaction 5 August 11. Paid cash on account to Supply Depot, $300.00.

Audit Your Understanding What must be done if a transaction increases the left side of the accounting equation? How can a transaction affect only one side of the accounting equation? To what does the phrase on account refer?

Lesson 1-3 5/22/2018 LESSON 1-3 How Transactions Change Owner’s Equity in an Accounting Equation

Revenue Transactions Revenue is an increase in owner’s equity resulting from the operation of the business Sale on account (charge sale) is a sale for which cash will be received at a later date

REVENUE TRANSACTIONS Transaction 6 August 12. Received cash from sales, $295.00. Transaction 7 August 12. Sold services on account to Oakdale School, $350.00.

Expense/Other Transactions Expense is a decrease in owner’s equity resulting from the operation of the business Withdrawal is when assets are taken out of a business for the owner’s personal use

EXPENSE TRANSACTIONS Transaction 8 August 12. Paid cash for rent, $300.00. Transaction 9 August 12. Paid cash for telephone bill, $40.00.

OTHER CASH TRANSACTIONS Transaction 10 August 12. Received cash on account from Oakdale School, $200.00. Transaction 11 August 12. Paid cash to owner for personal use, $125.00.

Audit Your Understanding How is owner’s equity affected when cash is received from sales? How is owner’s affected when services are sold on account? How is owner’s equity affected when cash is paid for expenses?