Chapter 1 Starting a Proprietorship: Changes that Affect the Accounting Equation

1.1 Accounting in Action

What is Accounting  Accounting = Language of Business  Inaccurate Records= Failure  Accounting-Process of planning, recording, analyzing, and interpreting financial info

 Accounting System- A planned process designed to compile financial data and summarize the results in accounting records and reports  Financial Statements-Summarize the financial condition and operations of a business

Accounting in Personal Life  Personal Financial Data Sheet  Net Worth Statement- Shows what an individual owns, what an individual owes, and the difference between the two  Asset- Anything of value that you own  Liability- An amount owed

 Personal Net Worth- Difference between personal assets and personal liabilities  Net Worth could also be called equity  Equity-Difference between assets and liabilities

 Total Assets-Total Liabilities=Equity (Net Worth)

Personal Net Worth Statement Heading Assets Liabilities Net Worth  Double Rule= Amount is total  $ are NOT used

Ethics in Business  Ethics-The principles of right and wrong that guide an individual in making decisions  Business Ethics- Use of ethics in making business decisions

1.2 How Business Activities Change the Accounting Equation

The Business-Delgado Web Services  Service Business-Performs an activity for a fee  Proprietorship-Business owned by one person  Business Plan-Formal written document that describes the nature of a business and how it will operate

Accounting Standards and Rules  GAAP-Generally Accepted Accounting Principles  Concept: Unit of Measurement-In U.S. all accounting records in $  Concept: Business Entity-Business records separate from personal records

The Accounting Equation Assets= Liabilities + Owner’s Equity Left Right Side Side EQUATION ALWAYS STAYS IN BALANCE!

 Any time a business spends $, receives $, or owes $ it is a business activity  Transaction-Any business activity that changes assets, liabilities or owner’s equity  Account-A record that summarizes all the transactions pertaining to a single item in the accounting equation  Account Title-Name given to account  Account Balance-The difference between the increases and decreases in an account

 Capital Account-An account used to summarize the owner’s equity in a business  Creditor- A person or business to whom a liability is owed

1.3 How Transactions Change Owner’s Equity in an Accounting Equation

Transactions Affecting Owner’s Equity  Revenue- An increase in equity resulting from the sale of goods or services  Sale on Account- A sale for which payment will be received at a later date  Concept: Realization of Revenue: Revenue is recorded at the time goods or services are sold

 Expense- The cost of goods or services used to operate a business  Withdrawals- Assets taken from the business for the owner’s personal use

Owner’s Equity + Revenue - Expenses - Withdrawals