ACCOUNTING 1 Chapter 1

The Accounting Equation 1-1 What is accounting? What does an accountant do? Why do we need accountants? Has the poor economy affected accountants’ jobs?

Accounting is the Language of business What is Accounting? Accounting – planning, recording, analyzing and interpreting financial information Accounting System – planned process for providing financial information Accounting Records – organized summaries of financial activities Financial Statements – financial reports that summarize the financial condition and operations of a business Accounting is the Language of business

TechKnow Consulting The business that will be used to illustrate all chapters in Part 1 Service Business – performs an activity for a fee Proprietorship – business owned by one person CONCEPT: Business Entity – business financial information is recorded and reported separately from the owner’s personal information.

Why do you think more businesses are organized as proprietorships than any other form of business organization? ADVANTAGES DISADVANTAGES Limited resources Unlimited Liability Limited expertise Limited life Ease of formation Total control by owner Profits not shared

ASSETS = LIABILTIES + OWNER’S EQUITY Accounting Equation ASSETS = LIABILTIES + OWNER’S EQUITY What is an asset? Anything of value that is owned by a company What are some examples of an asset? What is a liability? An amount owed by a business What are some examples of a liability? What is owner’s equity? The amount remaining after the value of liabilities is subtracted from the value of assets Includes revenue and capital

Remember! The accounting equation must always have equal amounts on each side It is important to keep a business’s financial information separate from the owner’s personal financial information The accounting equation will be used throughout the study of accounting

Practice Assets = Liabilities + Owner’s Equity 30,000 = ? + 13,000 ? = 60,000 + 20,000 51,000 = 25,000 + ?

Do Now: Assets = Liabilities + Owner’s Equity ? = 3,000 + 8,000 Work Together 1-1 WB pg. 5 Assets = Liabilities + Owner’s Equity ? = 3,000 + 8,000 10,000= ? + 6,000 63,000= 35,000 + ? On Your Own 1-1 WB pg. 6

How Business Activities Change the Accounting Equation 1-2 What affects the accounting equation? Transactions A business activity that changes assets, liabilities, or owner’s equity What is an Account? A record summarizing all the information pertaining to a single item in the accounting equation - the name given to an account is called the Account Title – the amount in an account is call the Account Balance It is important to establish the habit of 1) reading the transaction, 2) identifying the accounts, 3) classifying the accounts

Received Cash Investment from Owner Transaction 1: August 1. Received cash from owner as an investment, $5,000.00 Beginning New Balance Assets = Liabilities + OE Kim Park, Capital Cash $0 $0 $0 + 5,000 + 5,000 $5,000 $0 $5,000 The account used to summarize the owner’s equity in a business is called Capital.

Paid Cash for Supplies Transaction 2: August 3, Paid cash for supplies, $275.00 Cash + Supplies Capital Bal $5,000 $0 $0 $5,000 (Sup.) -275 +275 New Bal $4,725 $275 $0 $5,000 Assets = Liabilities + OE

Paid Cash for Insurance Transaction 3: August 4, Paid cash for insurance, $1,200.00 Assets = Liabilities + OE Cash + Supplies + Insurance Capital Bal $4,725 $275 $0 $0 $5,000 (Ins.) -1,200 +1,200 New Bal $3,525 $275 $1,200 $0 $5,000

Bought Supplies on Account Transaction 4: August 7, bought supplies on account from Supply Depot, $500.00 Assets = Liabilities + OE Cash + Supplies + Insurance AP - SD Capital Bal $3,525 $275 $1,200 $0 $5,000 AP +500 +500 New $3,525 $775 $1,200 $500 $5,000 Accounts Payable – AP – is a liability account – bought “on account”

Paid Cash on Account Transaction 5: August 11, Paid cash on account to Supply Depot, $300.00 Assets = Liabilities + OE Cash + Supplies + Insurance AP - SD Capital Bal $3,525 $775 $1,200 $500 $5,000 Paid -300 -300 New $3,225 $775 $1,200 $200 $5,000

Do Now: Work Together 1-2 WB pg. 7 On Your Own 1-2 WB pg. 8 Trans. No. Assets = Liabilities + Owner’s Equity 1. 2. 3. 4.

Do Now: On Your Own 1-2 WB pg. 8 Homework: Application Problem 1-2 Text Pg. 19 WB pg. 12 Trans. No. Assets = Liabilities + Owner’s Equity 1. + 2. 3. +, - 4. 5. -

How Transactions Change Owner’s Equity in an Accounting Equation 1-3 What is revenue? Revenue comes from the sale of goods or services (sales) Revenue is an increase in owner’s equity resulting from the operation of a business “Received cash” always means an increase in Cash account (asset) and Capital account (owner’s equity) What is a sale on account? A sale for which cash will be paid at a later date “Sold on account” in a transaction statement always means that Accounts Receivable (asset) increases and Capital (owner’s equity) increases CONCEPT: Realization of Revenue - revenue is recorded at the time of sale, regardless of whether the cash is received at the time or is to be received in the future

What is an Expense? What is a Withdrawal? A decrease in owner’s equity resulting from the operation of a business ex. Rent, phone bills, electric bills, etc. Expense transactions decrease Capital (owner’s equity) and decrease Cash (asset) What is a Withdrawal? Assets taken out of a business for the owner’s personal use, usually Cash but can be other Assets A withdrawal decreases Capital (owner’s equity) and decreased Cash (asset) A withdrawal is not an expense because it is not a result of the normal operations of a business Revenue, Expenses and Withdrawals all result in changes in owner’s equity

Revenue Transaction Transaction 6: Received cash from sales, $295 Assets = Liabilities + OE Accts. Rec. Oakdale Kim Park, Cash + school + Supplies + Ins. = AP - SD Capital Bal $3,225 $0 $775 $1,200 $200 + $5,000 +295 +295 (revenue) New $3,520 $0 $775 $1,200 $200 + $5,295

Revenue Transaction Transaction 7: Sold services on account to Oakdale School for 350.00 Assets = Liabilities + OE Accts. Rec. Oakdale Kim Park, Cash + school + Supplies + Ins. = AP - SD Capital Bal $3,520 $0 $775 $1,200 $200 + $5,295 7. +350 +350 (revenue) New $3,520 $350 $775 $1,200 $200 + $5,645

Expense Transaction Transaction 8: Aug. 12 Paid cash for rent $300 Assets = Liabilities + OE Accts. Rec. Oakdale Kim Park, Cash + school + Supplies + Ins. = AP - SD Capital Bal $3,520 $350 $775 $1,200 $200 + $5,645 8. -300 -300 (expense) New $3,220 $350 $775 $1,200 $200 + $5,345

Expense Transaction Transaction 9: Aug. 12 Paid cash for telephone bill $40 Assets = Liabilities + OE Accts. Rec. Oakdale Kim Park, Cash + school + Supplies + Ins. = AP - SD Capital Bal $3,220 $350 $775 $1,200 $200 + $5,345 9. -40 -40 (expense) New $3,180 $350 $775 $1,200 $200 + $5,305

Other Cash Transactions Transaction 10: Aug. 18 Received cash on account from Oakdale School $200 Transaction 11: Aug. 18 paid cash to owner for personal use $125 Assets = Liabilities + OE Accts. Rec. Oakdale Kim Park, Cash + school + Supplies + Ins. = AP - SD Capital Bal $3,180 $350 $775 $1,200 $200 + $5,305 10. +200 -200 New $3,380 $150 $775 $1,200 $200 + $5,305 -125 -125(withdrawal) New $3,255 $150 $775 $1,200 $200 + $5,180