CHAPTER 1 Starting a Sole Proprietorship Changes That

CHAPTER 1 Starting a Sole Proprietorship: Changes That Affect the Accounting Equation

2 LESSON 1 -1 The Accounting Equation Accounting is planning, recording, analyzing, and interpreting financial information. An accounting system is the planned process for providing financial information that will be useful to management. Financial statements are reports that summarize the condition and operation of the business. A business owned by one person is a proprietorship. (sole)

3 Need to keep personal financial records separate from business records. Concept - Business Entity Assets - anything you own of value. -Financial rights to the assets of a business are called equities. oequity to whom money is owed oowner’s equity Money owed by a business is called a Liability. The amount of equity left after all liabilities are paid (subtracted) from assets would be called Owner’s Equity.

4 THE ACCOUNTING EQUATION The relationship between assets, liabilities, and owner’s equity is called the accounting equation. Assets = Liabilities + Owner’s Equity Left side must always = Right side page 8

LESSON 1 -2 How Business Activities Change the Accounting Equation A business activity that changes assets, liabilities, or owner’s equity is known as a transaction. After each transaction the equation must remain in balance. The account we use to summarize owner’s equity is called Capital. It is an owner’s equity account. Example: Kim Park, Capital 5

6 RECEIVING CASH Transaction 1 August 1. Received cash from owner as an investment, $5, 000. page 10

7 PAYING CASH Transaction 2 August 3. Paid cash for supplies, $275. 00. Transaction 3 August 4. Paid cash for insurance, $1, 200. page 11

8 TRANSACTIONS ON ACCOUNT Transaction 4 August 7. Bought supplies on account from Supply Depot, $500. Transaction 5 August 11. Paid cash on account to Supply Depot, $300. page 12

LESSON 1 -3 How Transactions Change Owner’s Equity in an Accounting Equation A transaction for the sale of goods or services results in an increase in owner’s equity. An increase in owner’s equity resulting from the operation of the business is revenue. When cash is received from a sale. Assets increase (cash). Owner’s Equity increases. (Kim Park, Capital) 9

10 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

11 EXPENSE TRANSACTIONS A transaction to pay for goods or services needed to operate a business results in a decrease in owner’s equity. A decrease in owner’s equity resulting from the operation of the business is an expense. When cash is paid for expenses. Assets decrease (cash). Owner’s Equity decreases. (Kim Park, Capital)

12 EXPENSE TRANSACTIONS Transaction 8 August 12. Paid cash for rent, $300. Transaction 9 August 12. Paid cash for telephone bill, $40. 00. page 15

13 OTHER CASH TRANSACTIONS A sale for which cash will be received at a later date is called a sale on account or charge sale. When selling a service on account (sale) Assets increase (accounts receivable) Owner’s Equity increases. (Kim Park, Capital) When assets are taken out of a business for the owner’s personal use they are called withdrawals. A withdrawal causes owner’s equity to decrease. Assets decrease (cash). Owner’s Equity decrease. (Kim Park, Capital)

14 OTHER CASH TRANSACTIONS Transaction 10 August 18. Received cash on account from Oakdale School, $200. Transaction 11 August 18. Paid cash to owner for personal use, $125. 00. page 16