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Chapter 1

Chapter 1. The Accounting Equation. General Info. Accounting is the language of business ! Understanding accounting helps managers & owners make better business decisions. Failure to understand accounting info. can result in poor business decisions.

chandler-nelson
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Chapter 1

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  1. Chapter 1 The Accounting Equation

  2. General Info • Accounting is the language of business! • Understanding accounting helps managers & owners make better business decisions. • Failure to understand accounting info. can result in poor business decisions. • Inaccurate accounting records often contribute to business failure and bankruptcy. ENRON! 1-2

  3. LESSON 1-1 What does an accountant do? Plans, records, analyzes, and interprets financial records Handles a broad range of responsibilities These are skills successful businesses cannot do without. If you are good, the sky’s the limit.

  4. Is Accounting Boring? Will it lead you to a career in the spotlight? Brad Pitt staring in an action thriller about a jet setting accountant??? Who develops and approves the budget for his films to go into production? Who advises Mr. Pitt how to invest his salary? 1-2 4

  5. 1-1 New Vocabulary • Service Business • A business that performs an activity for a fee • Examples: • Dr. Moser • Marcy Allen-Klaus, Attorney • Sole Proprietorship—Proprietor means “owner”. • A business owned by one person. • Examples: • Tresses • Dr. Haines • Mike’s Landscaping 1-2

  6. Proprietorships • Advantages • Easy to set up • All profits go to the owner • Owner has total control • Few regulations to follow • Disadvantages • Limited expertise • Hard to raise money • Owner has all the risks • Hard to attract talented employees Consider: Do the advantages outweigh the disadvantages? 1-2

  7. THE ACCOUNTING EQUATION page 8 1-2

  8. Key Terms • Asset- • Anything of value that is owned. They can be used to acquire other assets or be used to operate a business.For your note card: • Cash • Accounts Receivable • Supplies • Insurance • Petty Cash

  9. Key Terms • Equities- • Financial rights to the assets of a business. • Liability- (DEBT) • An amount owed by a business (at a later date). • Accounts Payable (on note card)

  10. Yes, More Terms Owner’s Equity- (the value of ownership) • The amount remaining after the value of all liabilities is subtracted from the value of all assets. • Assets-Liabilities = Owner’s Equity

  11. Financial Claims • Property = Creditor’s Financial Claim + Owner’s Financial Claim • Truck • $20,000 = 15,000 + 5,000 • Assets = Liabilities + Owner’s Equity 1-2

  12. The Accounting Equation • Shows the relationship among assets, liabilities and owner’s equity. • Assets = Liabilities + Owner’s Equity • Left side amounts = Right side amounts • It must be in balance to be correct • Remember: An equation must always have equal amounts on each side of the equalsigns 1-2

  13. The Accounting Equation • Assets = Liabilities + Owner’s Equity Left side amounts = Right side amounts 150 = 60 + ? 90 ? = 275 + 200 475 333 = ? + 222 111 1-2

  14. Audit Your Understanding • Give examples of service businesses • Dry Cleaners • Doctor’s Office • Auto Repair • What is a proprietorship? • A business owned by one person • State the accounting equation • Assets = Liabilities + Owner’s Equity 1-2

  15. Work Together 1-1 • On the O: drive • We will do this together ON YOUR OWN • Just like it says, you will be doing this by yourself 1-2

  16. LESSON 1-2 How Business Activities Change the Accounting Equation

  17. Quick Review • What is the Accounting Equation? • What is a Proprietorship?

  18. 1-2 – Notecard Time!!! • Note card #1 • Assets • Cash • Petty Cash • Accounts Receivable • Supplies • Prepaid Insurance #1

  19. 1-2 – Notecard Time!!! • Note card #2 • Liabilities • Accounts Payable #2

  20. 1-2 – Notecard Time!!! • Note card # 3 • Owner’s Equity • Capital • Drawing #3

  21. Accounting Concepts • Business Entity: This concept is applied when a business’s financial information is recorded and reported separately from the owner’s personal financial information. • Example: house, personal car, personal belongings • Unit of measurement: Business transactions are stated in numbers that have common values; that is, using a common unit of measurement. • Example: Canadian dollar • Realization of Revenue: Revenue is recorded at the time goods or services are sold.—even if it is a charge sale 1-2

  22. New Vocabulary • Transaction: A business activity that changes assets, liabilities, or owner’s equity. Example: paid cash for supplies • Account: A record summarizing all the information pertaining to a single item in the accounting equation. Example: Cash • Account Title:The name given to an account. • Account Balance: The amount in an account. • Capital: The account used to summarize the owner’s equity in a business. Example: Travis Smith, Capital 1-2

  23. Transaction 1August 1. Received cash from owner as an investment, $5,000.00. RECEIVING CASH page 10 +5,000 +5,000 inv. 1-2

  24. Transaction 2August 3. Paid cash for supplies, $275.00. PAYING CASH page 11 -275 +275 -1200 +1200 Transaction 3August 4. Paid cash for insurance, $1,200.00. 1-2

  25. Transaction 4August 7. Bought supplies on account from Supply Depot, $500.00. TRANSACTIONS ON ACCOUNT page 12 +500 +500 -300 -300 Transaction 5August 11. Paid cash on account to Supply Depot, $300.00. 1-2

  26. Audit Your Understanding What must be done if a transaction increases the left side of the accounting equation? • The right side must also be increased How can a transaction affect only one side of the accounting equation? • If one account is increased, another account on the same side of the equation must be decreased by the same amount. To what does the phrase “on account” refer? • Buying items and paying for them at a later date. 1-2

  27. LESSON 1-3 How Transactions Change Owner’s Equity in an Accounting Equation

  28. New Vocabulary • Revenue: An increase in owner’s equity resulting from the operation of a business. • Sales on Account: A sale for which cash will be received at a later date. (A.K.A. charge sale) • Expense: A decrease in owner’s equity resulting from the operation of a business. • Withdrawals: Assets taken out of the business for the owner’s personal use. (decreases Owner’s Equity) 1-2

  29. Transaction 6August 12. Received cash from sales, $295.00. REVENUE TRANSACTIONS page 14 +295 +295 rev. +350 +350 rev. Transaction 7August 12. Sold services on account to Oakdale School, $350.00. 1-2

  30. Transaction 8August 12. Paid cash for rent, $300.00. EXPENSE TRANSACTIONS page 15 -300 -300 (exp.) -40 -40 (exp.) Transaction 9August 12. Paid cash for telephone bill, $40.00. 1-2

  31. Transaction 10August 12. Received cash on account from Oakdale School, $200.00. OTHER CASH TRANSACTIONS page 16 +200 -200 -125 -125 withdrawal Transaction 11August 12. Paid cash to owner for personal use, $125.00. 1-2

  32. Audit Your Understanding How is owner’s equity affected when cash is received from sales? • increased How is owner’s equity affected when services are sold on account? • increased How is owner’s equity affected when cash is paid for expenses? • decreased 1-2

  33. Work Together • Download it from my site 1-2

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