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# Accounting equations

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### Accounting equations

1. 1. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing Chapter 1 – Starting A ProprietorshipChapter 1 – Starting A Proprietorship What is Accounting? (see page 4) Do you know someone who works in accounting? Do you have a job that provides a paycheck? Your company uses accounting to keep accurate records for each employee
2. 2. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing Chapter 1 – Starting A ProprietorshipChapter 1 – Starting A Proprietorship First nine chapters will take you through the entire accounting cycle for a Service business organized as a proprietorship Chapter 1 describes: – How proprietorship is started – The transactions that occur when the business is organized – How the accounting equation is used to analyze these transactions – How to create a balance sheet and the relationship of the balance sheet to the accounting equation
3. 3. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing Encore Music – Business that is used for chapters 1-9Encore Music – Business that is used for chapters 1-9 Chart of Accounts – found on page 3 – will be used for the first 9 chapters. Chart of accounts is used for determining the classification of accounts and to identify which accounts are temporary and which are permanent Chart of accounts is extremely important to companies because they drive the accounting system. This is how businesses track various sources of income and expenses. Why would a business organize as a proprietorship? What are characteristics of a proprietorship? Can you name some service businesses in Middleville?
4. 4. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing Lesson 1-1: THE ACCOUNTING EQUATIONLesson 1-1: THE ACCOUNTING EQUATION Lesson 1-1, page 7Lesson 1-1, page 7
5. 5. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing TTERMS REVIEWERMS REVIEW Accounting – Planning, recording, analyzing and interpreting financial information Accounting System – A planned process for providing financial information that will be useful to management Accounting Records – Organized summaries of a business’s financial activities Service Business – Business that performs an activity for a fee Proprietorship – Business owned by one person Lesson 1-1, page 8Lesson 1-1, page 8
6. 6. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing TTERMS REVIEW – cont’dERMS REVIEW – cont’d Lesson 1-1, page 8Lesson 1-1, page 8 Asset – Anything of value that is owned Equities – Financial rights to the assets of a business Liability – An amount owed by a business Owner’s Equity – The amount remaining after the value of all liabilities is subtracted from the value of all assets Accounting Equation: Assets = Liabilities + Owner’s Equity Business Entity Concept – A business’s financial information is recorded and reported separately from the owner’s personal financial information
7. 7. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing Follow-up:Follow-up: Can you list assets you or your parents own? Can you identify possible liabilities you or your parents have? Can you identify assets owned by the school?
8. 8. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing Lesson 1-1: THE ACCOUNTING EQUATIONLesson 1-1: THE ACCOUNTING EQUATION Lesson 1-1, page 7Lesson 1-1, page 7
9. 9. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing TTERMS REVIEW Lesson 1-2ERMS REVIEW Lesson 1-2 Transaction – a business activity that changes assets, liabilities or owner’s equity Account – A record summarizing all 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 Capital – Account used to summarize the owner’s equity in a business Unit of Measurement Concept – Stating numbers that have common units of measurement; i.e. U.S. dollars. (see page 9) Lesson 1-2, page 12Lesson 1-2, page 12
10. 10. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing Lesson 1-2: How Business Activities Change theLesson 1-2: How Business Activities Change the Accounting Equation – General InfoAccounting Equation – General Info Assets = Liabilities + Owner’s Equity Equation must always remain equal When reading transactions, Received Cash always means cash increases; Paid Cash always means cash decreases Transactions don’t always affect both sides of the equation When analyzing transactions, always – Read the transaction – Identify the accounts – Classify the accounts (Asset, Liability or Owner’s Equity
11. 11. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing RECEIVING CASHRECEIVING CASH Lesson 1-2, page 9Lesson 1-2, page 9 Transaction 1 August 1. Received cash from owner as an investment, \$10,000.00.
12. 12. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing PAYING CASHPAYING CASH Lesson 1-2, page 10Lesson 1-2, page 10 Transaction 2 August 3. Paid cash for supplies, \$1,577.00. Transaction 3 August 4. Paid cash for insurance, \$1,200.00. These two transactions only affected the asset side of the equation – demonstrating that you won’t always have entries on each side of the equation
13. 13. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing TRANSACTIONS ON ACCOUNTTRANSACTIONS ON ACCOUNT Lesson 1-2, page 11Lesson 1-2, page 11 Transaction 4 August 7. Bought supplies on account from Ling Music Supplies, \$2,720.00. Transaction 5 August 11. Paid cash on account to Ling Music Supplies, \$1,360.00.
14. 14. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing TTERMS REVIEWERMS REVIEW Balance sheet – Common financial statement that reports assets, liabilities and owner’s equity on a specific date Going Concern concept – This is applied when financial statements are prepared with the expectation that a business will remain in operation indefinitely. (see page 13) Lesson 1-3, page 15Lesson 1-3, page 15
15. 15. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing 5. Add amounts and compare the totals. Lesson 1-3: PREPARING A BALANCE SHEETLesson 1-3: PREPARING A BALANCE SHEET Lesson 1-3, page 14Lesson 1-3, page 14 5 1 3 4 2 7 6 1. Write the heading. 2. Prepare the assets section. 3. Prepare the liabilities section. 4. Prepare the owner’s equity section. 6. Rule single lines. 7. Write the totals. 8. Rule double lines. 8
16. 16. © 2000 South-Western© 2000 South-Western Educational PublishingEducational Publishing More on Balance SheetsMore on Balance Sheets Financial statements usually have a three-line heading which answers the questions: who, what and when. Write account titles in full – abbreviations should be avoided whenever possible to prevent misunderstanding.