CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

CHAPTER ONE

STARTING A PROPRIETORSHIP: CHANGES THAT AFFECT THE ACCOUNTING EQUATION

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

LESSON 1-1

The Accounting Equation

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

3

LESSON 1-1

WHAT IS ACCOUNTING?

Accounting Planning, recording, analyzing, and interpreting financial

information Accounting system

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

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

4

LESSON 1-1

WHAT IS ACCOUNTING?

Service business Business that performs an activity for a fee

Proprietorship Business owned by one person AKA “sole proprietorship”

Accounting Concept: Business Entity Applied when a business’s financial information is recorded

and reported separately from the owner’s personal financial information

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

5

LESSON 1-1

PROPRIETORSHIP

Advantages Ease of formation Total control by the owner Profits that are not shared

Disadvantages Limited resources Unlimited liability Limited expertise Limited life Legal obligations

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

6

LESSON 1-1

THE ACCOUNTING EQUATION

Asset Anything of value

Includes: Cash Supplies Prepaid Insurance

Used to acquire other assets or to operate a business

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

7

LESSON 1-1

THE ACCOUNTING EQUATION

Equities Financial rights to the assets of a business 2 types

Equity of those to whom money is owed Liability- amount owed by a business

Equity of the owner Owner’s Equity- Amount remaining after the value of all liabilities

are subtracted from the value of all assets

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

8

LESSON 1-1

THE ACCOUNTING EQUATION

Equation showing the relationship among assets, liabilities, and owner’s equity

Must be in balance

page 8

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

9

LESSON 1-1

CHARACTER COUNTS

Ethics Principles of right and wrong that guide an individual in

making decisions

Business Ethics Use of ethics in making business decisions

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

LESSON 1-2

How Business Activities Change the Accounting Equation

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

11

LESSON 1-1

RECEIVING CASH

Account Record summarizing all the information pertaining to a single

item in the accounting equation

Account title Name given to an account

Account balance Amount in an account

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

12

LESSON 1-1

RECEIVING CASH

Capital

Account used to summarize the owner’s equity in a business

Capital Account = Owner’s Equity Account

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

13

LESSON 1-1

RECEIVING CASH

Transaction Business activity that changes assets, liabilities, or owner’s

equity

Accounting Concept: Unit of Measurement Applied when business transactions are stated in numbers that

have common values (dollars, Euros, etc.)

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

14

LESSON 1-1

RECEIVING CASH

Transaction 1 August 1. Received cash from owner as an investment, $5,000.00.

page 10

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

15

LESSON 1-1

PAYING CASH

A transaction does not always require than an amount be recorded on both sides of the equation Paying CASH for SUPPLIES

Both are Assets

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

16

LESSON 1-1

PAYING CASH

Transaction 2 August 3. Paid cash for supplies, $275.00.

Transaction 3 August 4. Paid cash for insurance, $1,200.00.

page 11

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

17

LESSON 1-1

TRANSACTIONS ON ACCOUNT

Buying something now, Paying later Accounts Payable Liability account

Right side of the equation

Paying a bill for past purchases Still use the Accounts Payable account

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

18

LESSON 1-1

TRANSACTIONS ON ACCOUNT

Transaction 4 August 7. Bought supplies on account from Supply Depot, $500.00.

Transaction 5 August 11. Paid cash on account to Supply Depot, $300.00.

page 12

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

LESSON 1-3

How Transactions Change Owner’s Equity in an Accounting Equation

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

20

LESSON 1-1

REVENUE TRANSACTIONS

Revenue Increase in owner’s equity resulting from the operation of a

business Money received from providing goods or services

Sale on account Sale for which cash will be received at a later date

Accounts Receivable Asset account

Left side of equation Accounting Concept: Realization of Revenue

Applied when revenue is recorded at the time goods or services are sold

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

21

LESSON 1-1

REVENUE TRANSACTIONS

Transaction 6 August 12. Received cash from sales, $295.00.

Transaction 7 August 12. Sold services on account to Oakdale School, $350.00.

page 14

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

22

LESSON 1-1

EXPENSE TRANSACTIONS

Expense Transaction to pay for goods or services needed to operate

a business results in a decrease in owner’s equity

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

23

LESSON 1-1

EXPENSE TRANSACTIONS

Transaction 8 August 12. Paid cash for rent, $300.00.

Transaction 9 August 12. Paid cash for telephone bill, $40.00.

page 15

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

24

LESSON 1-1

OTHER CASH TRANSACTIONS

When cash is received on account, the capital account is not affected REMEMBER- the sale was recorded previously

Withdrawals Assets taken out of a business for the owner’s personal use Decreases the owner’s equity Can withdraw any asset

Cash, supplies, etc…

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

25

LESSON 1-3

OTHER CASH TRANSACTIONS

Transaction 10 August 18. Received cash on account from Oakdale School, $200.00.

Transaction 11 August 18. Paid cash to owner for personal use, $125.00.

page 16