Chapter 1 The Accounting Equation THE ACCOUNTING EQUATION

Chapter 1 The Accounting Equation

THE ACCOUNTING EQUATION 2 LESSON 1 -1 page 8

TERMS REVIEW – CH 1 Ø Ø Ø Ø accounting system accounting records financial statements service business proprietorship asset Ø Ø Ø Ø Ø 3 equities liability owner’s equity accounting equation Transaction Account title Account balance Capital Balance sheet LESSON 1 -1 page 9

CHAPTER 1. 1 STARTING A PROPRIETORSHIP

3 Different kinds of businesses Ø PROPRIETORSHIP – A business owned by one person Ø PARTNERSHIP – A business in which two or more people combine their assets and/or their skills Ø CORPORATION – An organization with the legal rights of a person and which may be owned by many people

What is Accounting? Ø ACCOUNTING – Planning, recording, analyzing, and interpreting financial information Accounting is the language of business Ø ACCOUNTING SYSTEM – A planned process for providing financial information that will be useful to management

Different kinds of accountants Ø CPA – Certified Public Accountant Ø Financial accountant Ø Cost accountant Ø Tax accountant Ø Auditor Ø Personal financial planners Ø Systems Accountant

More definitions……. YEAH! Ø ACCOUNTING RECORDS – Organized summaries of a business’s financial activities Inaccurate accounting records can easily contribute to business failure and bankruptcy Ø BUSINESS ENTITY – An accounting concept applied when business financial information is recorded and reported separately from the owner’s personal financial information

More terms Ø Assets l Anything of value that is owned • Cash • Supplies Insurance Ø Equities l Financial rights to the assets of a business Ø Liabilities l An amount owed by a business • Any business that we buy something from Ø Owner’s Equity l l The amount remaining after the value of all liabilities subtracted from the value of all assets (Owner’s Name), Capital Account

More terms Ø Transaction l A business activity that changes asset’s, liabilities , or owner’s equity Ø Account l Each transaction effects at least 2 accounts Ø Account Title l Each account has its own title

ENCORE MUSIC Ø Encore Music is the company we will discuss in Chapters 1 -9 Ø Gives music lessons and rents instruments Ø Owned by Barbara Trevino Ø SERVICE BUSINESS – A business that performs an activity for a fee Ø What are some other service businesses?

1 -1 The ACCOUNTING EQUATION ASSETS = LIABILITIES + OWNER’S EQUITY Pay attention to what is on the left (assets) and what is on the right (liabilities and owner’s equity)

What does this mean? Ø ASSETS – Anything that is owned Ø LIABILITIES – Anything that is owed Ø OWNER’S EQUITY – The amount remaining after the value of the liabilities is subtracted from the value of the assets

Ex. – The Accounting Equation Ø You go to the car dealer to buy a new truck. Ø You only have $8000 Ø The truck cost $15, 000 Ø Property = Credit + $15, 000 Equity $8000 $7000

Ø Each account has a ACCOUNT BALANCE l Each balance should be a positive number Ø Capital Account l The account that summarizes the owner’s equity

Ø EQUITIES – Financial rights to the assets of a business THE LEFT AND RIGHT SIDES OF THE ACCOUNTING EQUATION MUST ALWAYS REMAIN IN BALANCE

WT – Page 8 Text; Page 1 WB • Do • OYO – Page 8 Txtbk; Pg 2 wkbk • App – Page 17 Txtbk; Pg 7 wkbk

TRUE OR FALSE? Anything of value that is owned is True called an asset. 2. Liabilities are listed on the left side of the accounting equation. True 3. An amount owed by a business is called Owner’s Equity. True 4. A business owned by one person is called a proprietorship. True 1.