1. Chapter 2: Starting a Proprietorship: Changes that Affect Owner’s Equity

2. Chapter 2 Objectives:
Define accounting terms related to changes that affect owner’s equity for a service business organized as a proprietorship.
Identify accounting concepts and practices related to changes that affect owner’s equity for a service business organized as a proprietorship.
Analyze changes in an accounting equation that affect owner’s equity for a service business organized as a proprietorship.
Prepare a balance sheet for a service business organized as a proprietorship from information in an accounting equation.

3. Read page 24 together in class.

4. NEW OWNER’S EQUITY ACCOUNTS
Revenue
Expenses
Withdrawals
Investments
Sale on Account (aka Accounts Receivable, A/R)

5. Each Transaction in this chapter will change owner’s equity:
Transaction: A business activity that changes assets, liabilities, or owner’s equity.
Each Transaction in this chapter will change owner’s equity:
Receive cash from sales
Sell services on account
Pay cash for rent and phone bill
Receive cash on account
Pay cash to owner for personal use

6. Receiving Cash from Sales
A transaction for the sale of goods or services results in an increase in the owner’s equity.
This is called REVENUE
When cash is received from a sale, assets and OE are increased
Interest paid on a savings account and an investment by the owner is NOT revenue.
Has to be BUSINESS operation $$

7. Sold Services on Account
Sale on Account – a sale for which cash will be received at a later date
Aka: charge sale
THIS IS NOT THE SAME AS A CREDIT CARD SALE
In Encore Music example, Barbara gives lessons to kids at a daycare. The daycare is allowed to pay at the end of the month for all of the hours Barbara put in – this is SERVICES ON ACCOUNT

8. New Asset Account: Accounts Receivable
Accounts Receivable (A/R)
Regardless of when the money is received, the revenue should be recorded at the time of the sale
This concept is called REALIZATION OF REVENUE
Selling on Account
Both A/R and Owner’s Equity are increased

9. REVENUE TRANSACTIONS  increase OE
Lesson 02-1 (GJ)
REVENUE TRANSACTIONS  increase OE
Transaction 6 August 12. Received cash from sales, $
Transaction 7 August 12. Sold services on account to Kids Time, $
Lesson 2-1, page 26

10. Paying for Expenses
Expense – A decrease in owner’s equity resulting from the operation of a business
Rent
Advertising
Donations to non-profit organizations
Equipment rentals
Cash is decreased, as well as Owner’s Equity

11. PAID CASH FOR EXPENSES  Decrease OE
Transaction 8 August 12. Paid cash for rent, $
Transaction 9 August 12. Paid cash for telephone bill, $45.00.
Lesson 2-1, page 27

12. Receiving Cash on Account
When a company receives cash from a customer for a prior sale, it increases the cash balance and decreases the accounts receivable.

13. Paying Cash to the Owner for Personal Use
Withdrawals – assets taken out of a business for the owner’s personal use
Decrease owner’s equity
Can decrease any asset, but usually Assets
A decrease in owner’s equity because of a withdrawal is not a result of the normal operations of a business.
Withdrawals are NOT expenses
Can be for simply paying him/herself

14. OTHER TRANSACTIONS
Transaction 10 August 12. Received cash on account from Kids Time, $
–100 (withdrawal)
Transaction 11 August 12. Paid cash to owner for personal use, $
Lesson 2-1, page 28

15. Summary: The Owner’s Capital Account
Expenses -
Withdrawals -
Revenue +
Investment +
Sale on Account +

16. SUMMARY OF CHANGES IN OWNER’S EQUITY
Transaction Change in
Number Kind of Transaction Owner’s Equity
6 Revenue (cash)
7 Revenue (on account)
8 Expense (rent) –250.00
9 Expense (telephone) –45.00
11 Withdrawal –100.00
Net change in owner’s equity
Lesson 2-1, page 28

17. TO DO:
Work Together, pg 29
On your own, pg 29

18. Ch 2-2: Reporting a Changed Accounting Equation on a Balance Sheet
A balance sheet reports the business’s financial condition ON A SPECIFIC DATE: Assets, Liabilities, Owner’s Equity.
May be prepared at any time.
**Most businesses prepare a balance sheet on the last day of the month**
Provide business owners, managers with frequent, regular info for making business decisions.
The ‘total’ lines MUST be on the same line
Skip a line if needed to make them line up horizontally

19. BALANCE SHEET PREPARATION
Lesson 02-1 (GJ)
BALANCE SHEET PREPARATION
1. Write the heading. 1
2. Prepare the assets section. 2 3
3. Prepare the liabilities section. 4 6
4. Prepare the owner’s equity section. 5 7 8
5. Add and compare the totals.
6. Rule single lines.
7. Write the totals.
8. Rule double lines.
Lesson 2-2, page 30

20. TERMS REVIEW TO DO: Work Together, pg 31 On your own, pg 31
App 2-1, 2-2, 2-3
Page 33-35
revenue
sale on account
expense
withdrawals
CHAPTER 2 QUIZ – TUESDAY!!!
Lesson 2-1, page 29