Chapter 1 Accounting I When we think about accounting, it is the study of how money flows through a business. When you buy something from the store what happens to the money when you give it to the person behind the cash register? The hardest part of this class is getting you to think as a business owner, not as the customer. Over the next 16 weeks we will begin the process of getting you to understand what business owner’s have to do in order to keep track of their money, pay their employees, buy goods to sell, and then actually sell them.

Terms that you need to know Accounting Planning, recording, analyzing, and interpreting financial information Accounting System A process for providing financial information that will be useful to management So lets give you the textbook definition of what accounting means. ( Read the Accounting definition) we will spend almost all of the class time taking about Planning, recording, and analyzing. Unless you take the second year class we do not spend much time interpreting the financial information. We also have to have a system or process in place so that everyone does the same process, so that people can understand and interpret the information all the same way. To explain this a little bit more if we take a look at this balance sheet, there are reasons why this information looks the way it does. There are rules and guideline we must follow so that all accounting sheets look similar.

More terms Service Business Sole proprietorship Dog Groomer, carpet cleaners. Sole proprietorship A single owner business We will start with the simplest of all businesses that is a Service business, the examples I give are Dog groomer and Carpet cleaner, but this could also be someone who cuts grass, or even as simple as someone who has a lemonade stand. We are doing something for this person thus we call it a service business. Another example of this is could be a plumber or beautician. The simplest form of a business is a sole propriotorship, a single owner buiensss.

Accounting Records Assets Liabilities Equities Owner’s Equity Organized summaries of a business’s financial activities Assets Anything of value that is owned Cash Insurance Supplies Liabilities An amount owed by a business Any business that we buy something from Equities Financial rights to the assets of a business Owner’s Equity The amount remaining after the value of all liabilities subtracted from the value of all assets (Owner’s Name), Capital Account Accounting Records are just simply forms that are used to help record, or summarize how the business is doing. We will get more in-depth with how and what these forms are in later chapters. So now we have to begin to use accounting terms that will better help us describe what we are doing through the year. Asset – is anything of value to the business, when we think of someone being an asset, we consider them to be valuable for the team, the same is for a business. It is defined as anything of value that is OWNED. Cash Supplies Insurance Tables Computers Trucks Liabilities Something that is OWED by the business This is very similar to if you borrow money from someone, you owe them money, well the same occurs with businesses, For example Macy’s department store goes to Ralph Lauren and buys some shirts from them, they may not pay them until the end of the month ( this is considered a liability) Equity This is somewhat of a confusing term and we will come back to revisit this term in a few minutes. It is defined as the financial rights to the assets. Owner’s Equity ( Read definition) In basic terms it is how much the Owner is worth in the company.

Let me try to give you a simple example of what we mean by the three major components we just talked about. Lets say you want to buy a new truck The price of the truck is 15,000 You only have 8000 to put down on the truck How much would you have to borrow or owe to the bank?

The accounting equation Property = Credit + Equity Assets = Liability + Owner’s Equity $15,000 $8000 $7000 Now if we apply it to the accounting terms we will use the same example. Except we apply it to what we call the Accounting equation. Instead of Property = Credit + Equity we say Assets = Liabilities + owners Equity. The property or the thing of value is worth 15,000 The owner can give 8000 so his value towards the truck is 8000 We will have to borrow or OWE the bank 7000

Mr. Prosser how am I going to remember the accounting equation???? The simplest way to remember this equation is what happens when you get sun burned and you have to spread the grean lotion over your body to cool it off. What is that called? ALOE or Assets = Liabilities + owners equity.

How the accounting equation changes Assets = Liability + Owner’s Equity Just remember that the equation must always be in balance So if assets = 4 Then Liabilites and O.E must also equal 4 Obviously the math is very simple but do you understand the terms and how they relate to what we are talking about?

Work together page 9 Now you do On your own…………. Lets look at one more example I want you to try to think of these equations in this manner If I borrow 3000 from the bank, and I have 8000 to put forward to the new truck, what is the most expensive truck I can own? Answer 11000 If I want to buy a 10000 truck, and I have 6000 to give towards the truck, how much do I have to borrow? Answer 4000 Try the On your Own on page 9 of the textbook Stop video here Now you do On your own………….

Section 2 How business activities change the accounting equation Section 2 Chapter 1 This section begins our discussion of how the accounting equation changes when certain activities happen. For example what happens if we buy something or receive money from somebody.

More terms Transaction Account Account Title A business activity that changes asset’s, liabilities , or owner’s equity Account Each transaction effects at least 2 accounts Account Title Each account has its own title When something happens within the business that affects an asset, liability or Owner’s Equity it is called a TRANSACTION. Each transaction or change in the equation has an account. In our studies it will affect at least two accounts. Each transaction will have account titles to them ( we will discuss this furthur later in this chaptrer)

Remember the accounts ASSETS = Liabilities + Owners Equity Accts Pay – Name of Company Name of Owner, Capital Cash Supplies Prepaid Insurance So lets talk a little bit more about account titles….. So when we talk about Assets we will have a couple of accounts that we will call Cash Supplies Prepaid Insurance Liabilities will be named with the term ( Accounts payable- name of the company) The Owner’s Equity account will be named ( the name of the owner, Capital)

Transaction #1 Assets = Liability + Owner’s Equity August 1. Received cash from owner as an investment, $10,000. Assets = Liability + Owner’s Equity Cash Barbara Trevino, Cap $10,000 $10,000 So lets try our first transaction Using the list of accounts from the previous slide What 2 accounts are being affected here?? Cash and the Capital Account ( we are just going to call the Owner Barbara Trevino) So when we ( as the business) receive cash – do we have more or less cash? When the owner invests money into the business is she worth more to the business or less ( remember our example of the truck) Finally does the equation balance?? Do Assets = Liabilities + Owner’s Equity?

Transaction #2 Assets = Liability + Owner’s Equity August 3. Paid cash for Supplies $1577. Assets = Liability + Owner’s Equity Cash Supplies Barbara Trevino, Cap $10,000 $10,000 $1577 $1577 Lets look at the second transaction Do Assets = Liabilities + Owner’s Equity?

Transaction #3 Assets = Liability + Owner’s Equity August 4 Paid cash for insurance $1,200 Assets = Liability + Owner’s Equity Cash Supplies Prepaid Ins Barbara Trevino, Cap $10,000 $10,000 $1577 $1577 $1200 $1200 $7223 1577 1200 10,000 Do Assets = Liabilities + Owner’s Equity?

Transaction #4 Assets = Liability + Owner’s Equity August 7 Bought supplies on account from Ling Music Supplies $2,720 Assets = Liability + Owner’s Equity Cash Supplies Prepaid Ins Acct Pay Ling Music Supplies Barbara Trevino, Cap $10,000 $10,000 $1577 $1577 $1200 $1200 $2720 $2720 Do Assets = Liabilities + Owner’s Equity?

Transaction #5 Assets = Liability + Owner’s Equity August 11. Paid cash on account to Ling Music Supplies $1360 Assets = Liability + Owner’s Equity Cash Supplies Prepaid Ins Acct Pay Ling Music Supplies Barbara Trevino, Cap $10,000 $10,000 $1577 $1577 $1200 $1200 $2720 $2720 $1360 $1360 Do Assets = Liabilities + Owner’s Equity?

Work Together Page 13

Now work on your own on page 13 Please check the answers with me or the key in the back of the room.

Chapter 1 section 2 Review Can you do these Transactions????? Received Cash from Owner $2000 Bought Supplies with cash $20 Bought Pre-Paid Insurance $300 Bought Supplies on Account Mr. Prosser-Supplies $50.00 Paid Cash on account - Mr. Prosser-Supplies $50.00

Assets Liabilities Owners Equity Cash Supplies Pre-Paid Insurance A/P – Mr. Prosser Alston Eubanks, Cap T1   Bal T2 T3 T4 T5 2000 2000 2000 2000 20 20 1980 20 2000 300 300 1680 20 300 2000 50 50 1680 70 300 50 2000 50 50 1630 70 300 2000

Transactions that change Owner’s Equity in the accounting equation Chapter 1 Section 3 Transactions that change Owner’s Equity in the accounting equation

Terms that you need to know.. Revenue An increase in owner's equity resulting from the operation of a business Sales on account A sale for which cash will be received at a later date Expenses A decrease in owner’s equity resulting from the operation of a business

New Asset Accounts Receivable Can you name the ones we already know? Cash Supplies Pre-paid Insurance Accounts Receivable When someone buys something From us on account

Balances from the first part of the chapter

Received Cash from Sales Transaction #6 August 12 Received cash from sales, $325

Received Cash from Sales Transaction #7 August 12, sold services on account to Kids time $200

Received Cash from Sales Transaction #8 August 12 Paid cash for rent, $250.00

Received Cash from Sales Transaction #9 August 12 Paid cash for telephone bill,$45.00

Received Cash from Sales Transaction #10 August 12 Received cash on account from Kids Time $100.

Received Cash from Sales Transaction #11 August 12. Paid cash to owner for personal use $100.00

Do the “work together” together Do “on your own”

Application Problems 1-1,2,3,4

Assets = Liabilities + Owners Eq CASH $10,000 $10,000 Accts Pay- Mr. Parks Mr. Parks, Capital Supplies $10,000 $10,000 $2000 $2000 $8000 $10,000 $2000 $1000 $1000 $8000 $3000 $1000 $10,000 $500 $500 $7500 $3000 $500 $10,000

Assets Liabilities Owners Equity Cash Supplies Pre-Paid Insurance A/P – Mr. Prosser Alston Eubanks, Cap T1   Bal T2 T3 T4 T5