Chapter 1: Starting a Proprietorship OBJECTIVES: Define accounting terms related to starting a service business organized as a proprietorship Identify accounting concepts and practices related to starting a service business organized as a proprietorship Classify accounts as assets, liabilities, owner’s equity, and demonstrate their relationships in the accounting equation Analyze how transactions related to started a service business organized as a proprietorship affect accounts in the accounting equation Prepare a balance sheet for a service business organized as a proprietorship from information in an accounting equation

What is Accounting? Planning, recording, analyzing, and interpreting financial information Accounting system: planned process for providing financial info that will be useful to management Accounting records: organized summaries of a business’s financial activities Balance sheet, income statements, payroll, statement of owner’s equity, other financial statements

Types of Business: Service business: business that performs a service for a fee Merchandise business: provides a good to consumers Which type is Encore Music?

Classification of Business Ownership Proprietorship: business owned by one person Partnership: business in which 2 or more persons combine their assets and skills Corporation: organization with legal rights of a person and which may be owned by many persons Which type is Encore Music? Why might someone choose one form over the others? Why NOT?

Business Entity A business’ financial information is recorded and reported separately from the owner’s personal financial information ex) home, car, personal belongings Separate checking accounts VERY important for sole proprietorship

The Accounting Equation Assets: anything of value that is owned cash and supplies to conduct daily business can be used to acquire other assets (supplies) or to operate business Assets = Equities Equities: financial rights to the assets of a business _____________________________________________ 2 Types of Equities: Liability: amount owed by a business Equity of those to whom money is owed. Owner’s equity - amount remaining after value of all liabilities is subtracted from value of all assets Equity of the owner

The Accounting Equation: Assets = Liabilities + Owner’s Equity (OE) I Owe You Billing Assets - Liabilities = Owner’s Equity (OE)

THE ACCOUNTING EQUATION Lesson 01-1 (GJ) THE ACCOUNTING EQUATION The Equation must ALWAYS be in balance!!! Lesson 1-1, page 7

TERMS REVIEW accounting accounting system accounting records service business proprietorship asset equities liability owner’s equity accounting equation TO DO: Audit your understanding, pg 8 Work Together On your own Lesson 1-1, page 8

ASSETS = LIABILITIES + OWNER’S EQUITY 1-1 WORK TOGETHER, p.8 ASSETS = LIABILITIES + OWNER’S EQUITY 3,000 8,000 10,000 6,000 63,000 35,000 70,000 22,000 50,000 58,000 17,500 2,250 40,250 14,250 100,000 23,456 12,000

ASSETS = LIABILITIES + OWNER’S EQUITY 1-1 WORK TOGETHER, p.8 ASSETS = LIABILITIES + OWNER’S EQUITY 11,000 3,000 8,000 10,000 4,000 6,000 63,000 35,000 28,000 70,000 22,000 48,000 108,000 50,000 58,000 17,500 2,250 15,250 40,250 26,000 14,250 100,000 23,456 76,544 12,000

ASSETS = LIABILITIES + OWNER’S EQUITY 1-1 WORK TOGETHER, p.8 ASSETS = LIABILITIES + OWNER’S EQUITY 23,000 13,000 70,000 30,000 48,000 25,000 55,000 10,500 412,000 618,000 5,500 1,250 64,000 38,000 88,000 29,000 90,000 45,750

ASSETS = LIABILITIES + OWNER’S EQUITY 1-1 WORK TOGETHER, p.8 ASSETS = LIABILITIES + OWNER’S EQUITY 23,000 10,000 13,000 100,000 70,000 30,000 48,000 25,000 55,000 44,500 10,500 1,030,000 412,000 618,000 5,500 1,250 4,250 64,000 26,000 38,000 117,000 88,000 29,000 90,000 45,750

Chapter 1-2: How Business Activities Change the Accounting Equation Transaction: business activity that changes assets, liabilities, and OE Ie: Any time you buy or sell something A transaction always affects AT LEAST TWO accounts. ALWAYS: Read the transaction Identify the accounts Classify the accounts

Unit of Measurement An accounting concept that states numbers have a common value - a common unit of measurement. Followed for consistency and comparisons Example: In the U.S. amounts are stated in dollars, in Mexico it’s pesos.

Accounts Account: record summarizing all info pertaining to a single item in the equation Account title: name given to an account Ie: One asset account is called ‘Cash’ Cash tells how much money the business has available Account Balance: the amount in an account Capital: account used to summarize the owner’s equity in a business

Review Account Titles: Assets = Liabilities + Owner’s Equity Asset Accounts: CASH SUPPLIES Pre-PAID INSURANCE (Insurance Premiums) Liabilities Accounts: ACCOUNTS PAYABLE A/P (ie: a bill) Owner’s Equity CAPITAL

Analysis a Transaction Ask these three questions: What accounts are affected? What is the account classification? How is the account affected - or + ? EX) Received $10,000 cash as an Investment Cash and Capital Asset / Owner’s Equity Cash + / Capital +

Lesson 01-1 (GJ) RECEIVING CASH Transaction 1 August 1. Received cash from owner as an investment, $10,000.00. Lesson 1-2, page 9

Transaction 2 August 3. Paid cash for supplies, $1,577.00. PAYING CASH Transaction 2 August 3. Paid cash for supplies, $1,577.00. Transaction 3 August 4. Paid cash for insurance, $1,200.00. Lesson 1-2, page 10

TRANSACTIONS ON ACCOUNT Transaction 4 August 7. Bought supplies on account from Ling Music Supplies, $2,720.00. Transaction 5 August 11. Paid cash on account to Ling Music Supplies, $1,360.00. Lesson 1-2, page 11

Helpful Reminders ***THE TRANSACTION does NOT ALWAYS require that an amount be recorded on both sides of the equation.*** ***The same amount may be added or subtracted from the same side and still be in balance***

TERMS REVIEW transaction account account title account balance capital TO DO: Audit your Understanding Work Together, pg 12 On your own App prob 1-1, 1-2 – pg. 17 Page 7, 9 in workbook Lesson 1-2, page 12

Make up 5 of your own transactions… REMEMBER!!!! When analyzing a transaction… WHAT IS THE ACCOUNT TITLE? (cash, supplies, prepaid insurance, account payable, capital) WHICH SIDE OF THE ACCOUNTING EQUATION WILL BE AFFECTED???  IS IT AN ASSET? LIABILITY? OWNER’S EQUITY? HOW IS IT AFFECTED? DO THE ACCOUNTS INCREASE, DECREASE, STAY THE SAME? Make up 5 of your own transactions… On Work Together, pg 3

Concept of ‘Going Concern’: Applied when financial statements are prepared with the expectation that a business will remain in operation indefinitely.

Ch 1-3: Reporting Financial Info on a Balance Sheet Balance sheet: financial statement that reports assets, liabilities, and OE on a specific date Heading : Who What When Body of a balance sheet: 3 major sections: Assets (left side) Liabilities (right side) Owner’s Equity (right side)

PREPARING A BALANCE SHEET Lesson 01-1 (GJ) PREPARING A BALANCE SHEET 1. Write the heading. 2. Prepare the assets section. 1 3. Prepare the liabilities section. 2 3 4 4. Prepare the owner’s equity section. 6 5 7 8 5. Add amounts and compare the totals. 6. Rule single lines after the last account/transaction listed. 7. Write the totals for each column. 8. Rule double lines if the two totals match. Lesson 1-3, page 14

TERMS REVIEW balance sheet TO DO : Audit you Understanding Work Together, pg 15 On your own App 1-3, 1-4, 1-5 App 1-3 – Create a balance sheet on pg 16 Cases for Critical Thinking 1, 2, pg 21 Lesson 1-3, page 15

Accounting News Article Summary: EXTRA Accounting News Article Summary: Go to nytimes.com, mcall.com, Wall Street Journal (or any news site) Find TWO articles that are related to accounting. Write a summary for each including: Title of article, date, author, website Accounting terms used in article Summary of article – one paragraph Explain how article is related to Accounting

True/False Anything that is of value that is owned is called an asset. Liabilities are listed on the left side of the accounting equation. An amount owned by a business is called owner’s equity. A business owned by one person is called a proprietorship. When supplies are bought on account, Cash is decreased and Supplies is increased in the accounting equation. When cash is paid for Insurance, two assets are changed on the left side of the accounting equation.

7. When cash is paid on account, one asset is increased, and one liability is decreased in the accounting equation. 8. The left side of the accounting equation must always equal the right side. 9. Owner’s equity is listed on the right side of the balance sheet. 10. Double rules on a balance sheet mean that the totals have been verified as correct. 11. The accounting concept of Business entity is applied when the balance sheet is prepared with the expectation that the business will continue to operate indefinitely 12. The first step in preparing a balance sheet is to complete the assets section.