Chapter 1: Starting a ProprietorshipChapter 1: Starting a Proprietorship

OBJECTIVES: OBJECTIVES: Define accounting terms related to starting a service

business organized as a proprietorship

Identify accounting concepts and practices related to starting a service business organized as a proprietorship

Classify accounts as assets, liabilities, owner’s equity, and demonstrate their relationships in the accounting equation

Analyze how transactions related to started a service business organized as a proprietorship affect accounts in the accounting equation

Prepare a balance sheet for a service business organized as a proprietorship from information in an accounting equation

What is Accounting? What is Accounting?

Planning, recording, analyzing, and interpreting financial information

Accounting system: planned process for providing financial info that will be useful to management

Accounting records: organized summaries of a business’s financial activities

– Balance sheet, income statements, payroll, statement of owner’s equity, other financial statements

TypesTypes of Business:of Business:

– Service business: business that performs a service for a fee

– Merchandise business: provides a good to consumers

Which type is Encore Music?

Classification of Business OwnershipClassification of Business Ownership

– Proprietorship: business owned by one person

– Partnership: business in which 2 or more persons combine their assets and skills

– Corporation: organization with legal rights of a person and which may be owned by many persons

Which type is Encore Music?

Why might someone choose one form over the others? Why NOT?

Business EntityBusiness Entity A business’ financial information is

recorded and reported separately from the owner’s personal financial information– ex) home, car, personal belongings– Separate checking accounts

VERY important for sole proprietorship

The Accounting EquationThe Accounting Equation

Assets: anything of value that is owned– cash and supplies to conduct daily business– can be used to acquire other assets (supplies) or to operate

businessAssets = Equities

Equities: financial rights to the assets of a business_____________________________________________

2 Types of Equities: Liability: amount owed by a business

– Equity of those to whom money is owed.

Owner’s equity - amount remaining after value of all liabilities is subtracted from value of all assets– Equity of the owner

The Accounting Equation: The Accounting Equation:

Assets = Liabilities + Owner’s Equity (OE)

I Owe You

Billing

Assets - Liabilities = Owner’s Equity (OE)

THE ACCOUNTING EQUATIONTHE ACCOUNTING EQUATION

The Equation must ALWAYS be in balance!!!

Lesson 1-1, page 7Lesson 1-1, page 7

TTERMS REVIEWERMS REVIEWaccounting

accounting system

accounting records

service business

proprietorship

Lesson 1-1, page 8Lesson 1-1, page 8

asset

equities

liability

owner’s equity

accounting equation

TO DO:

1. Audit your understanding, pg 8

2. Work Together

3. On your own

1-1 WORK TOGETHER, p.81-1 WORK TOGETHER, p.8

3,000 8,000

10,000 6,000

63,000 35,000

70,000 22,000

50,000 58,000

17,500 2,250

40,250 14,250

100,000 23,456

10,000 12,000

ASSETS = LIABILITIES + OWNER’S EQUITY

1-1 WORK TOGETHER, p.81-1 WORK TOGETHER, p.8

11,000 3,000 8,000

10,000 4,000 6,000

63,000 35,000 28,000

70,000 22,000 48,000

108,000 50,000 58,000

17,500 2,250 15,250

40,250 26,000 14,250

100,000 23,456 76,544

22,000 10,000 12,000

ASSETS = LIABILITIES + OWNER’S EQUITY

1-1 WORK TOGETHER, p.81-1 WORK TOGETHER, p.8

23,000 13,000

70,000 30,000

48,000 25,000

55,000 10,500

412,000 618,000

5,500 1,250

64,000 38,000

88,000 29,000

90,000

45,750

ASSETS = LIABILITIES + OWNER’S EQUITY

1-1 WORK TOGETHER, p.81-1 WORK TOGETHER, p.8

23,000 10,000 13,000

100,000 70,000 30,000

48,000 25,000 23,000

55,000 44,500 10,500

1,030,000 412,000 618,000

5,500 1,250 4,250

64,000 26,000 38,000

117,000 88,000 29,000

90,000

45,750

ASSETS = LIABILITIES + OWNER’S EQUITY

Transaction: business activity that changes assets, liabilities, and OE

Ie: Any time you buy or sell something A transaction always affects AT LEAST TWO

accounts.

ALWAYS:

1. Read the transaction

2. Identify the accounts

3. Classify the accounts

Chapter 1-2: How Business Activities Change the Chapter 1-2: How Business Activities Change the Accounting EquationAccounting Equation

Unit of MeasurementUnit of Measurement

An accounting concept that states numbers have a common value - a common unit of measurement.

Followed for consistency and comparisons Example: In the U.S. amounts are stated in

dollars, in Mexico it’s pesos.

AccountsAccounts

Account: record summarizing all info pertaining to a single item in the equation

Account title: name given to an account– Ie: One asset account is called ‘Cash’– Cash tells how much money the business has available

Account Balance: the amount in an account

Capital: account used to summarize the owner’s equity in a business

Review Account Titles: Review Account Titles: Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity

Asset Accounts: CASH SUPPLIES Pre-PAID INSURANCE

(Insurance Premiums)

Liabilities Accounts: ACCOUNTS PAYABLE

– A/P (ie: a bill)

Owner’s Equity CAPITAL

Analysis a TransactionAnalysis a Transaction

Ask these three questions:1. What accounts are affected?2. What is the account classification?3. How is the account affected - or + ?

EX) Received $10,000 cash as an Investment1. Cash and Capital2. Asset / Owner’s Equity3. Cash + / Capital +

RECEIVING CASHRECEIVING CASH

Lesson 1-2, page 9Lesson 1-2, page 9

Transaction 1 August 1. Received cash from owner as an investment, $10,000.00.

PAYING CASHPAYING CASH

Lesson 1-2, page 10Lesson 1-2, page 10

Transaction 2 August 3. Paid cash for supplies, $1,577.00.

Transaction 3 August 4. Paid cash for insurance, $1,200.00.

TRANSACTIONS ON ACCOUNTTRANSACTIONS ON ACCOUNT

Lesson 1-2, page 11Lesson 1-2, page 11

Transaction 4 August 7. Bought supplies on account from Ling Music Supplies, $2,720.00.

Transaction 5 August 11. Paid cash on account to Ling Music Supplies, $1,360.00.

Helpful RemindersHelpful Reminders

***THE TRANSACTION does NOT ALWAYS require that an amount be recorded on both sides of the equation.***

***The same amount may be added or subtracted from the same side and still be in balance***

TTERMS REVIEWERMS REVIEWtransaction

account

account title

account balance

capital

Lesson 1-2, page 12Lesson 1-2, page 12

TO DO:

-Audit your Understanding

-Work Together, pg 12

-On your own

-App prob 1-1, 1-2 – pg. 17

-Page 7, 9 in workbook

REMEMBER!!!! REMEMBER!!!!

When analyzing a transaction…

1. WHAT IS THE ACCOUNT TITLE? (cash, supplies, prepaid insurance, account payable, capital)

2. WHICH SIDE OF THE ACCOUNTING EQUATION WILL BE AFFECTED???

1. IS IT AN ASSET? LIABILITY? OWNER’S EQUITY?

3. HOW IS IT AFFECTED?

1. DO THE ACCOUNTS INCREASE, DECREASE, STAY THE SAME?

Make up 5 of your own transactions…On Work Together, pg 3

Concept of ‘Going Concern’: Concept of ‘Going Concern’:

Applied when financial statements are prepared with the expectation that a business will remain in operation indefinitely.

Ch 1-3: Reporting Financial Info on a Balance SheetCh 1-3: Reporting Financial Info on a Balance Sheet

Balance sheet: financial statement that reports assets, liabilities, and OE on a specific date

Heading : – Who– What– When

Body of a balance sheet: 3 major sections: 1. Assets (left side)2. Liabilities (right side)3. Owner’s Equity (right side)

5. Add amounts and compare the totals.

PREPARING A BALANCE SHEETPREPARING A BALANCE SHEET

Lesson 1-3, page 14Lesson 1-3, page 14

5

1

3

4

2

76

1. Write the heading.

2. Prepare the assets section.

3. Prepare the liabilities section.

4. Prepare the owner’s equity section.

6. Rule single lines after the last account/transaction listed.

7. Write the totals for each column.

8. Rule double lines if the two totals match.

8

TTERMS REVIEWERMS REVIEWbalance sheet

TO DO : - Audit you Understanding- Work Together, pg 15- On your own- App 1-3, 1-4, 1-5- App 1-3 – Create a balance sheet on pg 16- Cases for Critical Thinking 1, 2, pg 21

Lesson 1-3, page 15Lesson 1-3, page 15

EXTRAEXTRA

Accounting News Article Summary:

Go to nytimes.com, mcall.com, Wall Street Journal (or any news site)

Find TWO articles that are related to accounting.

Write a summary for each including:

1. Title of article, date, author, website

2. Accounting terms used in article

3. Summary of article – one paragraph

4. Explain how article is related to Accounting

True/FalseTrue/False

1. Anything that is of value that is owned is called an asset.

2. Liabilities are listed on the left side of the accounting equation.

3. An amount owned by a business is called owner’s equity.

4. A business owned by one person is called a proprietorship.

5. When supplies are bought on account, Cash is decreased and Supplies is increased in the accounting equation.

6. When cash is paid for Insurance, two assets are changed on the left side of the accounting equation.

7. When cash is paid on account, one asset is increased, and one liability is decreased in the accounting equation.

8. The left side of the accounting equation must always equal the right side.

9. Owner’s equity is listed on the right side of the balance sheet.

10. Double rules on a balance sheet mean that the totals have been verified as correct.

11. The accounting concept of Business entity is applied when the balance sheet is prepared with the expectation that the business will continue to operate indefinitely

12. The first step in preparing a balance sheet is to complete the assets section.