Chapter 2: Starting a Proprietorship: Changes that Affect Owner’s Equity

Chapter 2 Objectives: Define accounting terms related to changes that affect owner’s equity for a service business organized as a proprietorship. Identify accounting concepts and practices related to changes that affect owner’s equity for a service business organized as a proprietorship. Analyze changes in an accounting equation that affect owner’s equity for a service business organized as a proprietorship. Prepare a balance sheet for a service business organized as a proprietorship from information in an accounting equation.

Read page 24 together in class.

NEW OWNER’S EQUITY ACCOUNTS Revenue Expenses Withdrawals Investments Sale on Account (aka Accounts Receivable, A/R)

Each Transaction in this chapter will change owner’s equity: Transaction: A business activity that changes assets, liabilities, or owner’s equity. Each Transaction in this chapter will change owner’s equity: Receive cash from sales Sell services on account Pay cash for rent and phone bill Receive cash on account Pay cash to owner for personal use

Receiving Cash from Sales A transaction for the sale of goods or services results in an increase in the owner’s equity. This is called REVENUE When cash is received from a sale, assets and OE are increased Interest paid on a savings account and an investment by the owner is NOT revenue. Has to be BUSINESS operation $$

Sold Services on Account Sale on Account – a sale for which cash will be received at a later date Aka: charge sale THIS IS NOT THE SAME AS A CREDIT CARD SALE In Encore Music example, Barbara gives lessons to kids at a daycare. The daycare is allowed to pay at the end of the month for all of the hours Barbara put in – this is SERVICES ON ACCOUNT

New Asset Account: Accounts Receivable Accounts Receivable (A/R) Regardless of when the money is received, the revenue should be recorded at the time of the sale This concept is called REALIZATION OF REVENUE Selling on Account Both A/R and Owner’s Equity are increased

REVENUE TRANSACTIONS  increase OE Lesson 02-1 (GJ) REVENUE TRANSACTIONS  increase OE Transaction 6 August 12. Received cash from sales, $325.00. Transaction 7 August 12. Sold services on account to Kids Time, $200.00. Lesson 2-1, page 26

Paying for Expenses Expense – A decrease in owner’s equity resulting from the operation of a business Rent Advertising Donations to non-profit organizations Equipment rentals Cash is decreased, as well as Owner’s Equity

PAID CASH FOR EXPENSES  Decrease OE Transaction 8 August 12. Paid cash for rent, $250.00. Transaction 9 August 12. Paid cash for telephone bill, $45.00. Lesson 2-1, page 27

Receiving Cash on Account When a company receives cash from a customer for a prior sale, it increases the cash balance and decreases the accounts receivable.

Paying Cash to the Owner for Personal Use Withdrawals – assets taken out of a business for the owner’s personal use Decrease owner’s equity Can decrease any asset, but usually Assets A decrease in owner’s equity because of a withdrawal is not a result of the normal operations of a business. Withdrawals are NOT expenses Can be for simply paying him/herself

OTHER TRANSACTIONS Transaction 10 August 12. Received cash on account from Kids Time, $100.00. –100 (withdrawal) Transaction 11 August 12. Paid cash to owner for personal use, $100.00. Lesson 2-1, page 28

Summary: The Owner’s Capital Account Expenses - Withdrawals - Revenue + Investment + Sale on Account +

SUMMARY OF CHANGES IN OWNER’S EQUITY Transaction Change in Number Kind of Transaction Owner’s Equity 6 Revenue (cash) +325.00 7 Revenue (on account) +200.00 8 Expense (rent) –250.00 9 Expense (telephone) –45.00 11 Withdrawal –100.00 Net change in owner’s equity +130.00 Lesson 2-1, page 28

TO DO: Work Together, pg 29 On your own, pg 29

Ch 2-2: Reporting a Changed Accounting Equation on a Balance Sheet A balance sheet reports the business’s financial condition ON A SPECIFIC DATE: Assets, Liabilities, Owner’s Equity. May be prepared at any time. **Most businesses prepare a balance sheet on the last day of the month** Provide business owners, managers with frequent, regular info for making business decisions. The ‘total’ lines MUST be on the same line Skip a line if needed to make them line up horizontally

BALANCE SHEET PREPARATION Lesson 02-1 (GJ) BALANCE SHEET PREPARATION 1. Write the heading. 1 2. Prepare the assets section. 2 3 3. Prepare the liabilities section. 4 6 4. Prepare the owner’s equity section. 5 7 8 5. Add and compare the totals. 6. Rule single lines. 7. Write the totals. 8. Rule double lines. Lesson 2-2, page 30

TERMS REVIEW TO DO: Work Together, pg 31 On your own, pg 31 App 2-1, 2-2, 2-3 Page 33-35 revenue sale on account expense withdrawals CHAPTER 2 QUIZ – TUESDAY!!! Lesson 2-1, page 29