Chapter 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

2000 South-Western
Educational Publishing
Chapter 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

2000 South-Western
Educational Publishing
Encore 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? 2000 South-Western
Educational Publishing
Lesson 1-1: THE ACCOUNTING EQUATION

Lesson 1-1, page 7

2000 South-Western
Educational Publishing
TERMS 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 businesss financial activities
Service Business Business that performs
an activity for a fee
Proprietorship Business owned by one
person
Lesson 1-1, page 8
2000 South-Western
Educational Publishing
TERMS REVIEW contd
Asset Anything of value that is owned
Equities Financial rights to the assets of a
business
Liability An amount owed by a business
Owners Equity The amount remaining after the
value of all liabilities is subtracted from the value
of all assets
Accounting Equation:
Assets = Liabilities + Owners Equity
Business Entity Concept A businesss financial
information is recorded and reported separately
from the owners personal financial information Lesson 1-1, page 8
2000 South-Western
Educational Publishing
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?

2000 South-Western
Educational Publishing
Lesson 1-1: THE ACCOUNTING EQUATION

Lesson 1-1, page 7

2000 South-Western
Educational Publishing
TERMS REVIEW Lesson 1-2
Transaction a business activity that changes
assets, liabilities or owners 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
owners equity in a business
Unit of Measurement Concept Stating numbers
that have common units of measurement;Lesson i.e.1-2, page 12
U.S. dollars. (see page 9) 2000 South-Western
Educational Publishing
Lesson 1-2: How Business Activities Change the
Accounting Equation General Info
Assets = Liabilities + Owners Equity
Equation must always remain equal
When reading transactions, Received Cash always
means cash increases; Paid Cash always means
cash decreases
Transactions dont always affect both sides of the
equation
When analyzing transactions, always
Read the transaction
Identify the accounts
Classify the accounts (Asset, Liability or Owners
Equity

2000 South-Western
Educational Publishing
RECEIVING CASH

Transaction 1 August 1. Received cash from

owner as an investment, $10,000.00.

Lesson 1-2, page 9

2000 South-Western
Educational Publishing
 PAYING CASH

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 wont always
have entries on each side of the equation Lesson 1-2, page 10
2000 South-Western
Educational Publishing
TRANSACTIONS ON ACCOUNT

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.
Lesson 1-2, page 11
2000 South-Western
Educational Publishing
TERMS REVIEW
Balance sheet Common financial statement
that reports assets, liabilities and owners
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 15

2000 South-Western
Educational Publishing
 Lesson 1-3: PREPARING A BALANCE SHEET

1. Write the heading.

1
2. Prepare the assets
section.
3. Prepare the 2 3
liabilities section.
4
4. Prepare the 6
owners equity 5
8
7
section.
5. Add amounts and compare the totals.
6. Rule single lines.
7. Write the totals.
8. Rule double lines. Lesson 1-3, page 14
2000 South-Western
Educational Publishing
More 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.

2000 South-Western
Educational Publishing