1. Starting a Proprietorship: Changes That Affect the Accounting Equation
Lesson 1
Starting a Proprietorship: Changes That Affect the Accounting Equation

2. What is Accounting?
Accounting – planning, recording, analyzing, and interpreting financial information
Accounting System – a planned process for providing financial information that will be useful to management
Accounting Records – organized summaries of a business’s financial activities
Financial Statements – financial reports that summarize the financial condition and operations of a business

3. Types of Businesses
Service Business – a business that performs an activity for a fee
Examples: ?
Proprietorship – a business owned by one person

4. ACCOUNTING CONCEPT: Business Entity
A business’s financial information is recorded and reported separately from the owner’s personal financial information.

5. Ethical Decisions
Ethics – The principles of right and wrong that guide an individual in making decisions
Business Ethics – The use of ethics in making business decisions

6. The Accounting Equation Assets = Liabilities + Owner’s Equity
Assets (Cash, Supplies, Prepaid Insurance)
** Used either to acquire other assets or to operate a business
Equities - Financial rights to the assets of a business
Liabilities (Accounts Payable-Co. Name)
Owner’s Equity (Capital)
** Amount remaining after the value of all liabilities is subtracted from the value of all assets

7. THE ACCOUNTING EQUATION
Lesson 1-1
5/22/2018
THE ACCOUNTING EQUATION
page 8
An equation showing the relationship among assets, liabilities, and owner’s equity
Work Together/OYO 1-1 p. 9
LESSON 1-1

8. CONCEPT: Units of Measure
Business transactions are stated in numbers that have common values.
U.S. records transactions in dollars.

9. Terminology
Transaction – A business activity that changes assets, liabilities or owner’s equity.
Account - A record summarizing all the information pertaining to a single item in the accounting equation.
Account Title -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.

10. Record a Transaction Read the transaction.
Identify the accounts involved.
Classify the accounts:
(Asset, Liability, Owner’s Equity)
**Both sides of the accounting equation must ALWAYS equal.

11. Received Cash Investment from Owner
Asset (Cash) increase +
Owner’s Equity (Capital) increase +
Equity of the owner - The owner will invest in the assets of the business.

12. 2. Paid Cash for Supplies
When changes are made on only one side of accounting equation, the equation must still be in balance.
Ex. One asset exchanged for another asset
Asset (Cash) decreases -
Asset (Supplies) increases +

13. 3. Paid Cash for Insurance
Insurance premiums must be paid in advance.
Insurance coverage is something of value owned by the sole proprietorship.
Ex. One asset exchanged for another asset
Asset (Cash) decreases -
Asset (Prepaid Insurance) increases +

14. 4. Bought Supplies “on Account”
“Bought on Account” - Common business practice to buy items and pay for them at a future date.
Asset (Supplies) increases +
Liability (Accounts Payable) increases +

15. 5. Paid Cash “on Account” Asset (Cash) decreases -
Liability (Accounts Payable) decreases -
Work Together/OYO 1-2, p. 13

16. Revenue
Definition - Increase in Owner’s Equity resulting from the operation of the business.
** When cash is received from a sale, the total amount of both (1) assets and (2) owner’s equity is increased.
Sale on Account – A sale on which cash will be received at a later date.

17. Revenue Transaction: Received Cash From Sales
Asset (Cash) increases +
Owner’s Equity (Capital) Revenue increases +

18. Revenue Transaction: Sold Services on Account
Sale on Account – Sale for which cash will be received at a later date.
Assets (Accounts Receivable) increases +
Owner’s Equity (Capital) Revenue increases +
CONCEPT: Realization of Revenue –
Revenue is recorded at the time goods or services are SOLD

19. Expense
Definition – Decrease in Owner’s Equity resulting from the operation of a business.
** When cash is paid for expenses, the business has less cash.
Asset (Cash) decreases -
Owner’s Equity (Capital) Expense decreases –
Examples:
Paid Cash for Rent Expense
Paid Cash for Telephone Bill Expense

20. Other Cash Transactions: (1 )Received Cash on Account
When a company receives cash from a customer for a prior sale.
Assets (Cash) increases +
Assets (Accounts Receivable) decreases -

21. Other Cash Transactions: (2) Paid Cash to Owner-Personal Use
Withdrawal - Assets taken out of a business for the owner’s personal use.
Decrease in owner’s equity because a withdrawal is not a result of normal operations of a business.
Withdrawal is NOT an expense.
Asset (Cash) decreases -
Owner’s Equity (Drawing) decreases -

22. Summary of Changes in Owner’s Equity
Increase:
Sales (Revenue) paid by cash +
Sales (Revenue) on Account +
Decrease:
Expenses (Rent, Telephone, Advertising) -
Withdrawals:
(Asset for personal use; Cash or Supplies) -
Work Together/OYO 1-3, p. 17