Starting a Proprietorship Service Business - Techknow Consulting Chapters 1 - 8

Today ’ s Topics What is Accounting? What is Accounting? What do Accountants do? What do Accountants do? What is an Asset, Liability, OE? What is an Asset, Liability, OE? Account Classification Account Classification Assets, Liabilities, OE Assets, Liabilities, OE Accounting Equation Accounting Equation Analyze transactions that occur in a business and how they affect the accounting equation Analyze transactions that occur in a business and how they affect the accounting equation

Today’s Objectives List and define the three elements of accounting - assets, liabilities and owner ’ s equity List and define the three elements of accounting - assets, liabilities and owner ’ s equity Classify accounts as either, assets, liabilities, or owner ’ s equity Classify accounts as either, assets, liabilities, or owner ’ s equity Analyze transactions and explain how they affect the accounting equation Analyze transactions and explain how they affect the accounting equation

What is Accounting? Is a system that measures the activities of a business in financial terms.Is a system that measures the activities of a business in financial terms. Shows how the various transactions the business undertook affected the businessShows how the various transactions the business undertook affected the business

Accounting Accurate accounting records contribute to a business’ success and helps to avoid failure and bankruptcy. Accurate accounting records contribute to a business’ success and helps to avoid failure and bankruptcy. Therefore, there needs to be some sort of accounting system in place. Therefore, there needs to be some sort of accounting system in place. Failure to understand accounting - poor business decisions. Failure to understand accounting - poor business decisions.

Accounting is the process that: Analyzes – transactions affect businessAnalyzes – transactions affect business Records – placing in accounting systemRecords – placing in accounting system Classifies – group same activities togetherClassifies – group same activities together Summarizes – explains resultsSummarizes – explains results ReportsReports InterpretsInterprets

What Do Accountants Do? Analyze business activities, and see how they affect the business Analyze business activities, and see how they affect the business Organize financial information so that it is useful Organize financial information so that it is useful Managers, owners, investors, government agencies, and others use accounting information as the basis for making business decisions Managers, owners, investors, government agencies, and others use accounting information as the basis for making business decisions

Accounting is the Language of Business

GAAP Generally Accepted Accounting Principals Standards and rules that accountants follow while recording and reporting financial activities Standards and rules that accountants follow while recording and reporting financial activities SEC - Securities and Exchange Commission - establish GAAP SEC - Securities and Exchange Commission - establish GAAP FASB - Financial Accounting Standards Board - is the organization that sets the accounting standards FASB - Financial Accounting Standards Board - is the organization that sets the accounting standards

Think for a moment about all the activity completed by a local business

Organize Numbers Accounting System - planned process for providing financial information that will be useful to management Accounting System - planned process for providing financial information that will be useful to management Organized summaries of a business’ financial activities are called accounting records. Organized summaries of a business’ financial activities are called accounting records.

Accounting Elements Assets Assets Liabilities Liabilities Owner’s Equity Owner’s Equity

The financial position of a company is measured by the following items: 1. Assets (what the business owns) 1. Assets (what the business owns) 2. Liabilities (what the business owes to others) 2. Liabilities (what the business owes to others) 3. Owner’s Equity (the difference between assets and liabilities – what the owner owns) 3. Owner’s Equity (the difference between assets and liabilities – what the owner owns)

Assets Anything of value that a business owns - things of monetary value Cash Supplies Prepaid Insurance Accounts Receivable Petty Cash

Economic Resources - Assets A business obtains its assets by either: A business obtains its assets by either: Owner investing personal money or goods Owner investing personal money or goods Owner may borrow from others Owner may borrow from others Liability Liability Creditor Creditor

Liability An amount owed An amount owed Creditor has legal claim against the assets of the business until the business pays its debts. Creditor has legal claim against the assets of the business until the business pays its debts.

Liability Assets obtained by borrowing from others Creditor - one who debt is owed Accounts Payable

Owner’s Equity Definition: Definition: Is the financial interest of the owner in a business Is the financial interest of the owner in a business The owner ’ s claim against the assets The owner ’ s claim against the assets The difference between the total assets owned and the total liabilities owed. The difference between the total assets owned and the total liabilities owed.

Review Assets Assets Liability Liability Owner’s Equity Owner’s Equity

Classify the account!

Supplies Asset

Accounts Payable, Liability

Prepaid Insurance Asset

Capital Owner’s Equity

Capital The account used to summarize the owner’s equity in a business The account used to summarize the owner’s equity in a business

Accounting Equation Assets = Liabilities + Owner ’ s Equity Property = creditors financial claim + owner ’ s financial claim Must ALWAYS Balance!

Assets = Liabilities + Owner ’ s Equity Must ALWAYS Balance!

Work Together and On Your Own Page 9

Assets Cash Cash Supplies Supplies Prepaid Insurance Prepaid Insurance Accounts Receivable Accounts Receivable Petty Cash Petty Cash Anything of value that is OWNED

How Business Activities Change the Accounting Equation Section 1-2 Page 10

Analyze how transactions affect accounts in the accounting equation

Business activities change the amounts in the accounting equation

Transaction Is a business activity that changes assets, liabilities, or owner’s equity Is a business activity that changes assets, liabilities, or owner’s equity

Examples of Transactions Received cash from owner as an investment Received cash from owner as an investment Paid cash for supplies Paid cash for supplies Paid cash for insurance Paid cash for insurance Bought supplies on account from Supply Depot Bought supplies on account from Supply Depot Paid cash on account to Supply Depot Paid cash on account to Supply Depot

Examples of Transactions Received cash from sales Received cash from sales Sold services on account to Oakdale School Sold services on account to Oakdale School Paid cash for rent Paid cash for rent Paid cash for telephone bill Paid cash for telephone bill Received cash on account from Oakdale School Received cash on account from Oakdale School Paid cash to owner for personal use Paid cash to owner for personal use

To keep track of transactions businesses use accounts To keep a company’s financial data organized, accountants develop a system that sorts transactions into records called accounts.

Account is a record summarizing all the information pertaining to a single item in an accounting equation All assets, liabilities and OE have their own account

Chart of Accounts 100Assets 200Liabilities 300Owner’s Equity 400Revenue 500Expenses

Double Entry accounting Because two or more accounts are affected by every transaction, the accounting system is double entry accounting Because two or more accounts are affected by every transaction, the accounting system is double entry accounting

AssetsLiabilitiesOwner’s Equity Cash Accounts Receivable Supplies Prepaid Insurance Petty Cash Accounts Payable Capital

When a business transaction occurs, an accounting clerk analyzes the transaction to see how it affects each part of the accounting equation.

First 3 Steps in Analyzing a Transaction Identify accounts affected Identify accounts affected Classify each account (Asset, Liability, OE) Classify each account (Asset, Liability, OE) Is each account increased or decreased Is each account increased or decreased Make sure the accounting equation remains in balance Make sure the accounting equation remains in balance

Assets = Liabilities + Owner ’ s Equity $0 = $0 +$0 Before Business Starts

Received cash from owner as an investment, $10,000. What two accounts are affected? What two accounts are affected? Cash and Capital Cash and Capital Account classification? Account classification? AssetOwner’s Equity AssetOwner’s Equity Increased or decreased? Increased or decreased? IncreasedIncreased IncreasedIncreased

Paid cash for supplies, $1,577. What two accounts are affected? What two accounts are affected? Cash and Supplies Cash and Supplies Account classification? Account classification? AssetAsset AssetAsset Increased or decreased? Increased or decreased? DecreasedIncreased DecreasedIncreased

Paid cash for insurance, $1,200. What two accounts are affected? What two accounts are affected? Cash and Prepaid Insurance Cash and Prepaid Insurance Account classification? Account classification? AssetAsset AssetAsset Increased or decreased? Increased or decreased? DecreasedIncreased DecreasedIncreased

Bought supplies on account from Boyd Industries, $2, What two accounts are affected? What two accounts are affected? Supplies and Boyd Ind. Accounts Payable Supplies and Boyd Ind. Accounts Payable Account classification? Account classification? AssetLiability AssetLiability Increased or decreased? Increased or decreased? IncreasedIncreased IncreasedIncreased

Paid cash on account to Boyd Industries, $1, What two accounts are affected? What two accounts are affected? Cash and Wyatt Ind. Accounts Payable Cash and Wyatt Ind. Accounts Payable Account classification? Account classification? AssetLiability AssetLiability Increased or decreased? Increased or decreased? DecreasedDecreased DecreasedDecreased

Work Together And On Your Own Page 13

Can you? List and define the three elements of accounting List and define the three elements of accounting Classify accounts as either, assets, liabilities, or owner ’ s equity Classify accounts as either, assets, liabilities, or owner ’ s equity Analyze transactions and explain how they affect the accounting equation Analyze transactions and explain how they affect the accounting equation

Assignment