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Chapter 1 2010

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Lecture Chapter 1 - Section 1 and 2

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Chapter 1 2010

  1. 1. Chapter 1 Starting a Proprietorship Service Business - Techknow Consulting Chapters 1 - 8
  2. 2. Today’s Topics <ul><li>What is an Asset, Liability, OE? </li></ul><ul><li>Account Classification – Assets, Liabilities, OE </li></ul><ul><li>Accounting Equation </li></ul><ul><li>Analyze transactions that occur in a business and how they affect the accounting equation </li></ul>
  3. 3. Chart of Accounts <ul><li>100 Assets </li></ul><ul><li>200 Liabilities </li></ul><ul><li>300 Owner’s Equity </li></ul><ul><li>400 Revenue </li></ul><ul><li>500 Expenses </li></ul>
  4. 4. Today ’ s Objectives <ul><li>List and define the three elements of accounting - assets, liabilities and owner’s equity </li></ul><ul><li>Classify accounts as either, assets, liabilities, or owner’s equity </li></ul><ul><li>Analyze transactions and explain how they affect the accounting equation </li></ul>
  5. 5. What Do Accountants Do? <ul><li>Analyze business activities, and see how they affect the business </li></ul><ul><li>Organize financial information so that it is useful </li></ul><ul><li>Managers, owners, investors, government agencies, and others use accounting information as the basis for making business decisions </li></ul>
  6. 6. Accounting <ul><li>Accurate accounting records contribute to a business’ success and helps to avoid failure and bankruptcy. </li></ul><ul><li>Therefore, there needs to be some sort of accounting system in place. </li></ul><ul><li>Failure to understand accounting - poor business decisions. </li></ul>
  7. 7. Accounting is the Language of Business
  8. 8. GAAP <ul><li>Generally Accepted </li></ul><ul><li>Accounting Principals </li></ul><ul><li>Standards and rules that accountants follow while recording and reporting financial activities </li></ul><ul><li>SEC - Securities and Exchange Commission - establish GAAP </li></ul><ul><li>FASB - Financial Accounting Standards Board - is the organization that sets the accounting standards </li></ul>
  9. 9. Think for a moment about all the activity completed by a local business
  10. 10. Organize Numbers <ul><li>Accounting System - planned process for providing financial information that will be useful to management </li></ul><ul><li>Organized summaries of a business’s financial activities are called accounting records . </li></ul>
  11. 11. The financial position of a company is measured by the following items: <ul><li>1. Assets (what the business owns) </li></ul><ul><li>2. Liabilities (what the business owes to others) </li></ul><ul><li>3. Owner’s Equity (the difference between assets and liabilities – what the owner owns) </li></ul>
  12. 12. Accounting Elements <ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Owner’s Equity </li></ul>
  13. 13. Assets Anything of value that a business owns - things of monetary value Cash Supplies Prepaid Insurance Accounts Receivable Petty Cash
  14. 14. Economic Resources - Assets <ul><li>A business obtains its assets by either: </li></ul><ul><ul><li>Owner Investing personal money or goods </li></ul></ul><ul><ul><li>Owner may borrow from others </li></ul></ul><ul><ul><ul><ul><li>Liability </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Creditor </li></ul></ul></ul></ul>
  15. 15. Liability <ul><li>An amount owed </li></ul><ul><li>Creditor has legal claim against the assets of the business until the business pays its debts. </li></ul>
  16. 16. Liability <ul><li>Assets obtained by borrowing from others </li></ul><ul><li>Creditor - one who debt is owed </li></ul><ul><li>Accounts Payable </li></ul>
  17. 17. Owner’s Equity <ul><li>Definition : </li></ul><ul><ul><li>Is the financial interest of the owner in a business </li></ul></ul><ul><ul><li>The owner’s claim against the assets </li></ul></ul><ul><ul><li>The difference between the total assets owned and the total liabilities owed. </li></ul></ul>
  18. 18. Review <ul><li>Assets </li></ul><ul><li>Liability </li></ul><ul><li>Owner’s Equity </li></ul>
  19. 19. Classify the account!
  20. 20. Supplies Asset
  21. 21. Capital Owner’s Equity
  22. 22. Prepaid Insurance Asset
  23. 23. Accounts Payable, Mrs. Havice Liability
  24. 24. Accounting Equation Assets = Liabilities + Owner’s Equity Property = creditors financial claim + owner’s financial claim Must ALWAYS Balance!
  25. 25. Assets = Liabilities + Owner’s Equity Must ALWAYS Balance!
  26. 26. Financial rights to the assets of a business are called equities <ul><li>A business has two types of equities </li></ul><ul><ul><li>Equity to those whom money is owed </li></ul></ul><ul><ul><li>Equity of the owner </li></ul></ul>
  27. 27. Work Together and On Your Own Page 9
  28. 28. Assets <ul><li>Cash </li></ul><ul><li>Supplies </li></ul><ul><li>Prepaid Insurance </li></ul><ul><li>Accounts Receivable </li></ul><ul><li>Petty Cash </li></ul>Anything of value that is OWNED
  29. 29. Handout Find the Missing Number
  30. 30. How Business Activities Change the Accounting Equation Section 1-2 Page 10
  31. 31. Analyze how transactions affect accounts in the accounting equation Objective
  32. 32. Business activities change the amounts in the accounting equation
  33. 33. Transaction <ul><li>Is a business activity that changes assets, liabilities, or owner’s equity </li></ul>
  34. 34. Examples of Transactions <ul><li>Received cash from owner as an investment </li></ul><ul><li>Paid cash for supplies </li></ul><ul><li>Paid cash for insurance </li></ul><ul><li>Bought supplies on account from Supply Depot </li></ul><ul><li>Paid cash on account to Supply Depot </li></ul>
  35. 35. Examples of Transactions <ul><li>Received cash from sales </li></ul><ul><li>Sold services on account to Oakdale School </li></ul><ul><li>Paid cash for rent </li></ul><ul><li>Paid cash for telephone bill </li></ul><ul><li>Received cash on account from Oakdale School </li></ul><ul><li>Paid cash to owner for personal use </li></ul>
  36. 36. To keep track of transactions businesses use accounts
  37. 37. Account is a record summarizing all the information pertaining to a single item in an accounting equation All assets, liabilities and OE have their own account
  38. 38. Capital <ul><li>The account used to summarize the owner’s equity in a business </li></ul>
  39. 39. The number of accounts needed by a business will vary Capital Accounts Payable Cash Accounts Receivable Supplies Prepaid Insurance Petty Cash Owner’s Equity Liabilities Assets
  40. 40. When a business transaction occurs, an accounting clerk analyzes the transaction to see how it affects each part of the accounting equation.
  41. 41. First 3 Steps in Analyzing a Transaction <ul><li>Identify accounts affected </li></ul><ul><li>Classify each account (Asset, Liability, OE) </li></ul><ul><li>Is each account increased or decreased </li></ul><ul><ul><li>Make sure the accounting equation remains in balance </li></ul></ul>
  42. 42. Before Business Starts Assets = Liabilities + Owner’s Equity $0 = $0 + $0
  43. 43. Received cash from owner as an investment, $10,000. <ul><li>What two accounts are affected? </li></ul><ul><li>Cash and Capital </li></ul><ul><li>Account classification? </li></ul><ul><li>Asset Owner’s Equity </li></ul><ul><li>Increased or decreased? </li></ul><ul><li>Increased Increased </li></ul>
  44. 44. Paid cash for supplies, $1,577. <ul><li>What two accounts are affected? </li></ul><ul><li>Cash and Supplies </li></ul><ul><li>Account classification? </li></ul><ul><li>Asset Asset </li></ul><ul><li>Increased or decreased? </li></ul><ul><li>Decreased Increased </li></ul>
  45. 45. Paid cash for insurance, $1,200. <ul><li>What two accounts are affected? </li></ul><ul><li>Cash and Prepaid Insurance </li></ul><ul><li>Account classification? </li></ul><ul><li>Asset Asset </li></ul><ul><li>Increased or decreased? </li></ul><ul><li>Decreased Increased </li></ul>
  46. 46. Bought supplies on account from Wyatt Industries, $2,720.00 <ul><li>What two accounts are affected? </li></ul><ul><li>Supplies and Wyatt Ind. Accounts Payable </li></ul><ul><li>Account classification? </li></ul><ul><li>Asset Liability </li></ul><ul><li>Increased or decreased? </li></ul><ul><li>Increased Increased </li></ul>
  47. 47. Paid cash on account to Wyatt Industries, $1,360.00. <ul><li>What two accounts are affected? </li></ul><ul><li>Cash and Wyatt Ind. Accounts Payable </li></ul><ul><li>Account classification? </li></ul><ul><li>Asset Liability </li></ul><ul><li>Increased or decreased? </li></ul><ul><li>Decreased Decreased </li></ul>
  48. 48. Work Together And On Your Own Page 13
  49. 49. Can you? <ul><li>List and define the three elements of accounting </li></ul><ul><li>Classify accounts as either, assets, liabilities, or owner’s equity </li></ul><ul><li>Analyze transactions and explain how they affect the accounting equation </li></ul>
  50. 50. Assignment 1-1 1-2

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