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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
CHAPTER ONE
STARTING A PROPRIETORSHIP: CHANGES THAT AFFECT THE ACCOUNTING EQUATION
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
LESSON 1-1
The Accounting Equation
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
3
LESSON 1-1
WHAT IS ACCOUNTING?
Accounting Planning, recording, analyzing, and interpreting financial
information Accounting system
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
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
4
LESSON 1-1
WHAT IS ACCOUNTING?
Service business Business that performs an activity for a fee
Proprietorship Business owned by one person AKA “sole proprietorship”
Accounting Concept: Business Entity Applied when a business’s financial information is recorded
and reported separately from the owner’s personal financial information
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
5
LESSON 1-1
PROPRIETORSHIP
Advantages Ease of formation Total control by the owner Profits that are not shared
Disadvantages Limited resources Unlimited liability Limited expertise Limited life Legal obligations
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
THE ACCOUNTING EQUATION
Asset Anything of value
Includes: Cash Supplies Prepaid Insurance
Used to acquire other assets or to operate a business
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
THE ACCOUNTING EQUATION
Equities Financial rights to the assets of a business 2 types
Equity of those to whom money is owed Liability- amount owed by a business
Equity of the owner Owner’s Equity- Amount remaining after the value of all liabilities
are subtracted from the value of all assets
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
8
LESSON 1-1
THE ACCOUNTING EQUATION
Equation showing the relationship among assets, liabilities, and owner’s equity
Must be in balance
page 8
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
9
LESSON 1-1
CHARACTER COUNTS
Ethics Principles of right and wrong that guide an individual in
making decisions
Business Ethics Use of ethics in making business decisions
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
LESSON 1-2
How Business Activities Change the Accounting Equation
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
RECEIVING CASH
Account Record summarizing all the information pertaining to a single
item in the accounting equation
Account title Name given to an account
Account balance Amount in an account
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
12
LESSON 1-1
RECEIVING CASH
Capital
Account used to summarize the owner’s equity in a business
Capital Account = Owner’s Equity Account
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
RECEIVING CASH
Transaction Business activity that changes assets, liabilities, or owner’s
equity
Accounting Concept: Unit of Measurement Applied when business transactions are stated in numbers that
have common values (dollars, Euros, etc.)
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
14
LESSON 1-1
RECEIVING CASH
Transaction 1 August 1. Received cash from owner as an investment, $5,000.00.
page 10
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
PAYING CASH
A transaction does not always require than an amount be recorded on both sides of the equation Paying CASH for SUPPLIES
Both are Assets
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
PAYING CASH
Transaction 2 August 3. Paid cash for supplies, $275.00.
Transaction 3 August 4. Paid cash for insurance, $1,200.00.
page 11
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
TRANSACTIONS ON ACCOUNT
Buying something now, Paying later Accounts Payable Liability account
Right side of the equation
Paying a bill for past purchases Still use the Accounts Payable account
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
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.
page 12
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
LESSON 1-3
How Transactions Change Owner’s Equity in an Accounting Equation
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
REVENUE TRANSACTIONS
Revenue Increase in owner’s equity resulting from the operation of a
business Money received from providing goods or services
Sale on account Sale for which cash will be received at a later date
Accounts Receivable Asset account
Left side of equation Accounting Concept: Realization of Revenue
Applied when revenue is recorded at the time goods or services are sold
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
21
LESSON 1-1
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.
page 14
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
EXPENSE TRANSACTIONS
Expense Transaction to pay for goods or services needed to operate
a business results in a decrease in owner’s equity
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
EXPENSE TRANSACTIONS
Transaction 8 August 12. Paid cash for rent, $300.00.
Transaction 9 August 12. Paid cash for telephone bill, $40.00.
page 15
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 1-1
OTHER CASH TRANSACTIONS
When cash is received on account, the capital account is not affected REMEMBER- the sale was recorded previously
Withdrawals Assets taken out of a business for the owner’s personal use Decreases the owner’s equity Can withdraw any asset
Cash, supplies, etc…
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
25
LESSON 1-3
OTHER CASH TRANSACTIONS
Transaction 10 August 18. Received cash on account from Oakdale School, $200.00.
Transaction 11 August 18. Paid cash to owner for personal use, $125.00.
page 16