Chapter 2 - Starting a Proprietorship Objectives: 1.Define accounting terms related to changes that affect owner’s equity for a service business organized as a proprietorship. 2.Identify accounting concepts and practices related to changes that affect owner’s equity for a service business organized as a sole proprietorship. 3.Analyze changes in an accounting equation that affect owner’s equity for a service business organized as a proprietorship. 4.Prepare a balance sheet for a service business organized as a proprietorship from information in an accounting equation. Essential Questions 1.How is Owner’s Equity affected? 2.On a Balance Sheet, what accounts are on the left side and right side?

CHANGES TO OWNER’S EQUITY n Expenses (subtract from Owner’s Equity) n It costs $ to make $ – these costs are paid by the owner n (almost) always go up – not down n Withdrawals (subtract from OE) n Opposite of investing in the business – taking away from the business (cash or merchandise) n Revenues (add to OE) n Sales (sometimes for cash today, sometimes for cash at a later date, aka “on account”) n The purpose of being in business in the first place – to create sales – to produce profits

REVENUE TRANSACTIONS Lesson 2-1, page 26 Transaction 6 August 12. Received cash from sales, $ Transaction 7 August 12. Sold services on account to Kids Time, $ (cash we will “receive” – asset) (Encore Music contracts with 2 daycare centers)

GAAP – Generally Accepted Accounting Principles (10) FASB – Financial Accounting Standards Board n GAAP: –Realization of Revenue: revenue is recorded at the time goods or services are sold –You make the sale REAL by recording it in your permanent, legal records

PAID CASH FOR EXPENSES (EXPENSE TRANSACTIONS) Transaction 8 August 12. Paid cash for rent, $ Transaction 9 August 12. Paid cash for telephone bill, $ Lesson 2-1, page 27

Transactions Transaction 10 August 12. Received cash on account from Kid’s Time, $ Transaction 11 August 12. Paid cash to owner for personal use, $

Transaction Change in NumberKind of TransactionOwner’s Equity 6Revenue (cash) Revenue (on account) Expense (rent)– Expense (telephone)– Withdrawal– Net change in owner’s equity SUMMARY OF CHANGES IN OWNER’S EQUITY Lesson 2-1, page 28

Work Together 2-1 (p.29 wb21) & On Your Own 2-1 (p.29 wb22) WT OYO Revenue Expense

5.Add and compare the totals. BALANCE SHEET PREPARATION Write the heading. 2.Prepare the assets section. 3.Prepare the liabilities section. 4.Prepare the owner’s equity section. 6.Rule single lines. 7.Write the totals. 8.Rule double lines. 8 Lesson 2-2, page 30 **Can be prepared every/any day – but at least once a year – more likely once a month

Work Together 2-2 (p.31 wb23) & On Your Own 2-2 (p.31 wb24)

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