CHAPTER 1 Starting a Proprietorship Changes That Affect

CHAPTER 1 Starting a Proprietorship Changes That Affect the Accounting Equations

OBJECTIVES The student will… • define accounting terms related to starting a service business organized as a proprietorship and to changes that affect the accounting equation. • identify accounting concepts and practices related to starting a service business organized as a proprietorship and to changes that affect the accounting equation. LESSON 1 -1 2

What is Accounting? Planning, recording, analyzing, and interpreting financial information. ACCOUNTING = Language of Business A planned process for providing financial information that will be useful to management is called an accounting system. LESSON 1 -1 3

What is Accounting? Accounting Records Organized summaries of a business’s financial activities Many individuals in a business complete accounting forms. o Owners, managers, and accounting personnel LESSON 1 -1 4

What is Accounting? • Suppliers that are considering extending credit to businesses need financial information. o Financial Statements- financial reports that summarize the financial condition and operations of a business. o Used to make business decisions o Inaccurate accounting records could contribute to a business failing. LESSON 1 -1 5

THE BUSINESS • Service Business • A business that performs an activity for a fee. • Proprietorship • A business owned by one person. • AKA: Sole Proprietorship LESSON 1 -1 6

Proprietorship Advantages • Ease of formation • Total control by the owner • Profits that are not shared LESSON 1 -1 Disadvantages Limited Resources Unlimited Liability Limited Expertise Limited Life Obligation to follow the laws 7

page 8 THE ACCOUNTING EQUATION LESSON 1 -1 8

page 8 THE ACCOUNTING EQUATION • Asset-anything of value that is owned o Can be used to acquire other assets o Can be used to operate a business o EXAMPLE: Tech. Know Consulting will use cash to buy supplies. LESSON 1 -1 9

page 8 THE ACCOUNTING EQUATION • Types of Assets 1. 2. 3. 4. 5. Cash Supplies Prepaid Insurance Office Equipment Accounts Receivable LESSON 1 -1 10

page 8 THE ACCOUNTING EQUATION • Equity-financial rights to the assets of a business • A business has 2 types of equities: 1. Equity of those to whom money is owned. § AKA: Liability 2. Equity of the owner § AKA: Owner’s Equity LESSON 1 -1 11

page 8 THE ACCOUNTING EQUATION • Types of Liabilities 1. 2. 3. 4. 5. Accounts Payable Short-term loans Salaries Payable Interest Payable Notes Payable LESSON 1 -1 12

page 8 THE ACCOUNTING EQUATION • Types of Owner’s Equity 1. Common Stock 2. Retained earnings-amount earned by a corporation and not yet districted to stockholders LESSON 1 -1 13

page 8 THE ACCOUNTING EQUATION • Relationship among assets, liabilities, and owner’s equity can be written in an equation. • The Accounting Equation MUST ALWAYS be in BALANCE. LESSON 1 -1 14

page 9 …LET’S REVIEW… Page 9 - Audit Your Understanding What is accounting? Give two examples of service businesses. What is a proprietorship? State the accounting equation. LESSON 1 -1 15