Accounting Chapter One Starting a Proprietorship

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AccountingChapter OneStarting a Proprietorship
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Accounting Concepts

• Business Entity
• The financial information of a business is
  recorded and reported separately from the owners
  personal financial information.
• Unit of Measurement
• Business transactions are stated in numbers that
  have common values.
• Going Concern
• Financial statements are prepared with the
  expectation that a business will remain in
  operation indefinitely.

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The Business

• Service Business
• A business that performs an activity for a fee.
• Proprietorship
• A business owned by one person.
• Encore Music
• Owned by Barbara Trevino
• Her personal records are kept separate from his
  business records (Business Entity)

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The Accounting Equation

• Asset
• Anything of value that is owned.
• Used to obtain other assets or operate a
  business.
• Examples cash, supplies, prepaid insurance.
• Equities (financial rights to a business)
• Two types
• Liabilities
• Equity of those to whom money is owed
• A company to whom you owe money.
• Owners Equity (Capital)
• Equity of the owner
• Amount remaining after liabilities are subtracted
  from assets.
• Accounting Equation - Must always be in balance!!
• Assets Liabilities Owners Equity
• Totals on the left side of the equation must
  always be equal to the totals on the right side
  of the equation.
• When the business is started, the equation will
  look like this
• Assets Liabilities Owners Equity
• 0 0 0

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How Business Activities Change the Accounting
Equation

• Transaction
• A business activity that changes the balance in
  an asset, liability, or owners equity (capital)
  account.
• We will be begin with five basic transactions
• Receiving cash from the owner as an investment
• Paying cash for supplies
• Paying cash for insurance
• Buying supplies on account
• Paying cash on account (for purchase of supplies)
• Must Know Vocabulary
• Account
• A record summarizing all of the information
  pertaining to a single item in the accounting
  equation
• Account title
• The name given to an account
• Account balance
• The amount in an account

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Transaction 1 Received Cash from the Owner as
an Investment

• Ms. Trevino will invest 10,000 of his own money
  into the business.
• We are not concerned about how this will effect
  her personal finances
• The accounting equation will be affected by this
  transaction
• Assets Liabilities Owners Equity
• (Cash) (Barbara
  Trevino, Capital)
• 10,000 10,000
• The accounting equation has changed....
• The left-hand side of the accounting equation has
  increased
• Cash, an asset account, has increased by 10,000
• The right-hand side of the accounting equation
  has increased
• Capital, an owners equity account, has increased
  by 10,000
• But, it has remained in balance
• The left and the right side of the accounting
  equation both equal 10,000

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Transaction 2 - Paid Cash for Supplies

• Encore Music needs supplies to operate
• Encore Musics cash is used to pay for the
  supplies
• The cost of the supplies is 1,577.00
• The accounting equation will be affected by this
  transaction
• Assets Liabilities Owners Equity
• (Cash) (Supplies)
• -1,577 1,577
• The accounting equation has changed....
• The left-hand side of the accounting equation has
  decreased, and...
• Cash, an asset account, has decreased by 1,577
• The left-hand side of the accounting equation has
  increased
• Supplies, another asset account, has increased by
  1,577
• But, it has remained in balance
• The left and the right side of the accounting
  equation both equal 0.
• (Notice when a transaction affects two asset
  accounts, only the left side of the accounting
  equation changes. This change includes one
  negative amount and one positive amount. When an
  account on each side of the accounting equation
  is affected, both must show either a decrease or
  an increase. One of each will throw the
  accounting equation out of balance.)

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Transaction 3 - Paid Cash for Insurance

• Insurance premiums must be paid in advance
• Encore Musics cash is used to pay for the
  insurance
• Because it is paid before it is used, this
  account is known as Prepaid Insurance.
• The cost of the prepaid insurance 1,200.
• The accounting equation will be affected by this
  transaction
• Assets Liabilities Owners Equity
• (Cash) (Prepaid Insurance)
• -1,200 1,200
• The accounting equation has changed...
• The left-hand side of the accounting equation has
  decreased, and...
• Cash, an asset account, has decreased by 1,200
• The left-hand side of the accounting equation has
  increased, and
• Prepaid Insurance, an asset account, has
  increased by 1,200
• But, it has remained in balance
• The left and the right side of the accounting
  equation both equal 0.

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Transaction 4 - Bought Supplies on Account

• Businesses often buy items and pay for them
  later.
• This is known as buying on account.
• Encore Music bought supplies on account from
  Butler Cleaning Supplies, with a total of 2,720.
• Remember, we are not using cash at this time.
• Butler Cleaning Supply now is a liability
  account.
• Since, we owe money to this company, it is
  considered a liability.
• The accounting equation will be effected by this
  transaction.
• Assets Liabilities Owners
  Equity
• (Supplies) (Butler Cleaning Supplies)
• 2,720 2,720
• The accounting equation has changed...
• The left-hand side of the accounting equation has
  increased, and...
• Supplies, an asset account, has increased
• The right-hand side of the accounting equation
  has increased
• Butler Cleaning Supplies, a liability account,
  has increased because we now owe them more money.
• But, it has remained in balance
• The left and the right side of the accounting
  equation both equal 2,720.

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Transaction 5 - Paying Cash on Account

• When we buy on account, the liability must be
  paid off.
• Encore Musics cash is used to pay on the
  liability.
• We will pay for half of the purchase of supplies
  on account from Butler Cleaning Supplies, which
  comes to 1,360.
• The accounting equation will be affected by this
  transaction
• Assets Liabilities Owners Equity
• (Cash) (Butler Cleaning Supplies)
• -1,360 -1,360
• The accounting equation has changed...
• The left-hand side of the accounting equation has
  decreased, and...
• Cash, an asset account, has decreased by 1,360.
• The right-hand side of the accounting equation
  has decreased.
• Butler Cleaning Supplies, a liability account,
  has decreased by 1,360.
• But, it has remained in balance
• The left and right side of the accounting
  equation are equal.

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Reporting Financial Information on a Balance Sheet

• A balance sheet reports information about assets,
  liabilities, and owners equity on a specific
  date.
• The owner assumes he/she will stay in business
  indefinately.
• The body of a balance sheet has three major
  sections
• Assets, which are recorded on the left side of
  the balance sheet
• Liabilities, which are recorded on the right side
  of the balance sheet.
• Owners Equity, which are also recorded on the
  right side of the balance sheet
• (Note the similarities of the accounting equation)

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The Six Steps to Prepare a Balance Sheet

• Prepare the heading
• Name of the business
• Name of the report
• Date of the report
• Prepare the assets section.
• Prepare the liabilities section.
• Prepare the owners equity section.
• Determine if the balance sheet is in balance.
• Complete the balance sheet.
• Single lines mean that numbers are to be added or
  subtracted.
• Double lines mean that totals have been verified
  and are correct.

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Rules for Transactions in the Accounting Equation

• Each transaction changes at least two accounts.
• When all changes occur on one side of the
  accounting equation, increases on that side must
  be matched by decreases on the same side.
• When a transactions increases one side of the
  accounting equation, the other side of the
  equation must also be increased by the same
  amount.
• When a transaction decreases one side of the
  equation, the other side of the equation must be
  decreased by the same amount.