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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



           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              LESSON 1-1
4



           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          LESSON 1-1
5



           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   LESSON 1-1
6



           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         LESSON 1-1
7



           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                           LESSON 1-1
8



           THE ACCOUNTING EQUATION                                          page 8




        Equation showing the relationship among assets, liabilities, and
         owner’s equity
        Must be in balance




CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning          LESSON 1-1
9



           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 1-1
LESSON 1-2

           How Business Activities
           Change the Accounting
           Equation




CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
11



           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          LESSON 1-1
12



           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        LESSON 1-1
13



           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                LESSON 1-1
14



           RECEIVING CASH                                           page 10



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




CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning     LESSON 1-1
15



           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   LESSON 1-1
16



           PAYING CASH                                               page 11



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




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

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning      LESSON 1-1
17



           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   LESSON 1-1
18



           TRANSACTIONS ON ACCOUNT                                      page 12



    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.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning         LESSON 1-1
LESSON 1-3

           How Transactions Change
           Owner’s Equity in an
           Accounting Equation




CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
20



           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                       LESSON 1-1
21



           REVENUE TRANSACTIONS                                       page 14



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




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

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning       LESSON 1-1
22



           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         LESSON 1-1
23



           EXPENSE TRANSACTIONS                                         page 15



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




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

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning         LESSON 1-1
24



           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         LESSON 1-1
25



           OTHER CASH TRANSACTIONS                                      page 16



    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.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning         LESSON 1-3

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UpdatesTest

  • 1. CHAPTER ONE STARTING A PROPRIETORSHIP: CHANGES THAT AFFECT THE ACCOUNTING EQUATION CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
  • 2. LESSON 1-1 The Accounting Equation CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
  • 3. 3 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 LESSON 1-1
  • 4. 4 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 LESSON 1-1
  • 5. 5 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 LESSON 1-1
  • 6. 6 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 LESSON 1-1
  • 7. 7 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 LESSON 1-1
  • 8. 8 THE ACCOUNTING EQUATION page 8  Equation showing the relationship among assets, liabilities, and owner’s equity  Must be in balance CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1
  • 9. 9 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 1-1
  • 10. LESSON 1-2 How Business Activities Change the Accounting Equation CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
  • 11. 11 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 LESSON 1-1
  • 12. 12 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 LESSON 1-1
  • 13. 13 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 LESSON 1-1
  • 14. 14 RECEIVING CASH page 10 Transaction 1 August 1. Received cash from owner as an investment, $5,000.00. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1
  • 15. 15 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 LESSON 1-1
  • 16. 16 PAYING CASH page 11 Transaction 2 August 3. Paid cash for supplies, $275.00. Transaction 3 August 4. Paid cash for insurance, $1,200.00. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1
  • 17. 17 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 LESSON 1-1
  • 18. 18 TRANSACTIONS ON ACCOUNT page 12 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. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1
  • 19. LESSON 1-3 How Transactions Change Owner’s Equity in an Accounting Equation CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
  • 20. 20 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 LESSON 1-1
  • 21. 21 REVENUE TRANSACTIONS page 14 Transaction 6 August 12. Received cash from sales, $295.00. Transaction 7 August 12. Sold services on account to Oakdale School, $350.00. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1
  • 22. 22 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 LESSON 1-1
  • 23. 23 EXPENSE TRANSACTIONS page 15 Transaction 8 August 12. Paid cash for rent, $300.00. Transaction 9 August 12. Paid cash for telephone bill, $40.00. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1
  • 24. 24 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 LESSON 1-1
  • 25. 25 OTHER CASH TRANSACTIONS page 16 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. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-3