Chapter 1 The Accounting Equation

1-22 General Info Accounting is the language of business! Understanding accounting helps managers & owners make better business decisions. Failure to understand accounting info. can result in poor business decisions. Inaccurate accounting records often contribute to business failure and bankruptcy. ENRON!

LESSON 1-1 What does an accountant do? Plans, records, analyzes, and interprets financial records Handles a broad range of responsibilities These are skills successful businesses cannot do without. If you are good, the sky’s the limit.

1-24 Is Accounting Boring? Will it lead you to a career in the spotlight? Brad Pitt staring in an action thriller about a jet setting accountant??? Who develops and approves the budget for his films to go into production? Who advises Mr. Pitt how to invest his salary?

New Vocabulary Service Business –A business that performs an activity for a fee Examples: Dr. Moser Marcy Allen-Klaus, Attorney Sole Proprietorship—Proprietor means “owner”. –A business owned by one person. Examples: Tresses Dr. Haines Mike’s Landscaping

1-26Proprietorships Advantages –Easy to set up –All profits go to the owner –Owner has total control –Few regulations to follow Disadvantages –Limited expertise –Hard to raise money –Owner has all the risks –Hard to attract talented employees Consider: Do the advantages outweigh the disadvantages?

1-27 THE ACCOUNTING EQUATION page 8

Key Terms Asset- –Anything of value that is owned. They can be used to acquire other assets or be used to operate a business. For your note card: Cash Accounts Receivable Supplies Insurance Petty Cash

Key Terms Equities- –Financial rights to the assets of a business. Liability- (DEBT) –An amount owed by a business (at a later date). Accounts Payable (on note card)

Yes, More Terms Owner’s Equity- (the value of ownership) The amount remaining after the value of all liabilities is subtracted from the value of all assets. Assets-Liabilities = Owner’s Equity

1-211 Financial Claims Property = Creditor’s Financial Claim + Owner’s Financial Claim –Truck –$20,000=15,000+5,000 Assets=Liabilities+ Owner’s Equity

1-212 The Accounting Equation Shows the relationship among assets, liabilities and owner’s equity. Assets= Liabilities + Owner’s Equity –Left side amounts = Right side amounts It must be in balance to be correct Remember: An equation must always have equal amounts on each side of the equal signs

1-213 The Accounting Equation Assets = Liabilities + Owner’s Equity Left side amounts= Right side amounts 150= 60+? 90 ?= = ?

1-214 Audit Your Understanding Give examples of service businesses –D–Dry Cleaners –D–Doctor’s Office –A–Auto Repair What is a proprietorship? –A–A business owned by one person State the accounting equation –A–Assets = Liabilities + Owner’s Equity

1-215 Work Together 1-1 On the O: drive –We will do this together ON YOUR OWN –Just like it says, you will be doing this by yourself

LESSON 1-2 How Business Activities Change the Accounting Equation

Quick Review What is the Accounting Equation? What is a Proprietorship?

1-2 – Notecard Time!!! Note card #1 –Assets Cash Petty Cash Accounts Receivable Supplies Prepaid Insurance #1

1-2 – Notecard Time!!! Note card #2 –Liabilities Accounts Payable #2

1-2 – Notecard Time!!! Note card # 3 –Owner’s Equity Capital Drawing #3

1-221 Accounting Concepts Business Entity: This concept is applied when a business’s financial information is recorded and reported separately from the owner’s personal financial information. –Example: house, personal car, personal belongings Unit of measurement: Business transactions are stated in numbers that have common values; that is, using a common unit of measurement. –Example: Canadian dollar Realization of Revenue: Revenue is recorded at the time goods or services are sold.—even if it is a charge sale

1-222 New Vocabulary Transaction: A business activity that changes assets, liabilities, or owner’s equity. Example: paid cash for supplies Account: A record summarizing all the information pertaining to a single item in the accounting equation. Example: Cash Account Title: The name given to an account. Account Balance: The amount in an account. Capital: The account used to summarize the owner’s equity in a business. Example: Travis Smith, Capital

1-223 RECEIVING CASH Transaction 1 Transaction 1 August 1. Received cash from owner as an investment, $5, page 10 +5,000+5,000 inv.

1-224 PAYING CASH Transaction 2 Transaction 2 August 3. Paid cash for supplies, $ Transaction 3 Transaction 3 August 4. Paid cash for insurance, $1, page

1-225 TRANSACTIONS ON ACCOUNT Transaction 4 Transaction 4 August 7. Bought supplies on account from Supply Depot, $ Transaction 5 Transaction 5 August 11. Paid cash on account to Supply Depot, $ page

1-226 Audit Your Understanding What must be done if a transaction increases the left side of the accounting equation? The right side must also be increased How can a transaction affect only one side of the accounting equation? If one account is increased, another account on the same side of the equation must be decreased by the same amount. To what does the phrase “on account” refer? Buying items and paying for them at a later date.

LESSON 1-3 How Transactions Change Owner’s Equity in an Accounting Equation

1-228 New Vocabulary 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. (A.K.A. charge sale) Expense: A decrease in owner’s equity resulting from the operation of a business. Withdrawals: Assets taken out of the business for the owner’s personal use. (decreases Owner’s Equity)

1-229 REVENUE TRANSACTIONS Transaction 6 August 12. Received cash from sales, $ Transaction 7 August 12. Sold services on account to Oakdale School, $ page rev rev.

1-230 EXPENSE TRANSACTIONS Transaction 8 August 12. Paid cash for rent, $ Transaction 9 August 12. Paid cash for telephone bill, $ page (exp.) -300 (exp.)

1-231 OTHER CASH TRANSACTIONS Transaction 10 August 12. Received cash on account from Oakdale School, $ Transaction 11 August 12. Paid cash to owner for personal use, $ page withdrawal -200

1-232 Audit Your Understanding How is owner’s equity affected when cash is received from sales? increased How is owner’s equity affected when services are sold on account? increased How is owner’s equity affected when cash is paid for expenses? decreased

1-233 Work Together Download it from my site