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

1.1Accounting 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 StatementHeadingAssetsLiabilitiesNet 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

1.2How 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 EquationAssets = Liabilities + Owner’s EquityLeft Right SideSide

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

1.3How 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