Chapter 2: Chapter 2: Starting a Proprietorship: Changes that Starting a Proprietorship: Changes that Affect Owner’s EquityAffect Owner’s Equity

Chapter 2 Objectives: Chapter 2 Objectives:

Define accounting terms related to changes that affect owner’s equity for a service business organized as a proprietorship.

Identify accounting concepts and practices related to changes that affect owner’s equity for a service business organized as a proprietorship.

Analyze changes in an accounting equation that affect owner’s equity for a service business organized as a proprietorship.

Prepare a balance sheet for a service business organized as a proprietorship from information in an accounting equation.

Read page 24 together in class.

NEW OWNER’S EQUITY NEW OWNER’S EQUITY ACCOUNTSACCOUNTS

Revenue Expenses Withdrawals Investments Sale on Account (aka Accounts Receivable,

A/R)

Transaction: A business activity that changes assets, liabilities, or owner’s equity.

Each Transaction in this chapter will change owner’s equity: – Receive cash from sales– Sell services on account– Pay cash for rent and phone bill– Receive cash on account– Pay cash to owner for personal use

Receiving Cash from SalesReceiving Cash from Sales

A transaction for the sale of goods or services results in an increase in the owner’s equity.

– This is called REVENUE When cash is received from a sale,

assets and OE are increased Interest paid on a savings account and

an investment by the owner is NOT revenue.

– Has to be BUSINESS operation $$

Sold Services on AccountSold Services on Account

Sale on Account – a sale for which cash will be received at a later date– Aka: charge sale– THIS IS NOT THE SAME AS A CREDIT CARD

SALE

In Encore Music example, Barbara gives lessons to kids at a daycare. The daycare is allowed to pay at the end of the month for all of the hours Barbara put in – this is SERVICES ON ACCOUNT

New Asset Account: Accounts ReceivableNew Asset Account: Accounts Receivable

Accounts Receivable (A/R)– Regardless of when the money is received, the

revenue should be recorded at the time of the sale• This concept is called REALIZATION OF

REVENUE Selling on Account

– Both A/R and Owner’s Equity are increased

REVENUE TRANSACTIONS REVENUE TRANSACTIONS increase OE increase OE

Lesson 2-1, page 26Lesson 2-1, page 26

Transaction 6 August 12. Received cash from sales, $325.00.

Transaction 7 August 12. Sold services on account to Kids Time, $200.00.

Paying for ExpensesPaying for Expenses

Expense – A decrease in owner’s equity resulting from the operation of a business– Rent– Advertising– Donations to non-profit organizations– Equipment rentals

Cash is decreased, as well as Owner’s Equity

PAID CASH FOR EXPENSES PAID CASH FOR EXPENSES Decrease OE Decrease OE

Transaction 8 August 12. Paid cash for rent, $250.00.

Transaction 9 August 12. Paid cash for telephone bill, $45.00.

Lesson 2-1, page 27Lesson 2-1, page 27

Receiving Cash on AccountReceiving Cash on Account

When a company receives cash from a customer for a prior sale, it increases the cash balance and decreases the accounts receivable.

Paying Cash to the Owner for Personal UsePaying Cash to the Owner for Personal Use

Withdrawals – assets taken out of a business for the owner’s personal use– Decrease owner’s equity– Can decrease any asset, but usually Assets

A decrease in owner’s equity because of a withdrawal is not a result of the normal operations of a business. – Withdrawals are NOT expenses– Can be for simply paying him/herself

OTHER TRANSACTIONSOTHER TRANSACTIONS

Lesson 2-1, page 28Lesson 2-1, page 28

Transaction 10 August 12. Received cash on account from Kids Time, $100.00.

Transaction 11 August 12. Paid cash to owner for personal use, $100.00.

–100 (withdrawal)

Summary: The Owner’s Capital Summary: The Owner’s Capital AccountAccount Expenses - Withdrawals -

Revenue + Investment + Sale on Account +

Transaction Change in Number Kind of Transaction Owner’s Equity

6 Revenue (cash) +325.007 Revenue (on account) +200.008 Expense (rent) –250.009 Expense (telephone) –45.00

11 Withdrawal –100.00

Net change in owner’s equity +130.00

SUMMARY OF CHANGES IN OWNER’S EQUITYSUMMARY OF CHANGES IN OWNER’S EQUITY

Lesson 2-1, page 28Lesson 2-1, page 28

TO DO: TO DO:

Work Together, pg 29 On your own, pg 29

Ch 2-2: Reporting a Changed Ch 2-2: Reporting a Changed Accounting Equation on a Balance SheetAccounting Equation on a Balance Sheet

A balance sheet reports the business’s financial condition ON A SPECIFIC DATE: Assets, Liabilities, Owner’s Equity.

May be prepared at any time. **Most businesses prepare a balance sheet on the

last day of the month** Provide business owners, managers with frequent,

regular info for making business decisions. The ‘total’ lines MUST be on the same line

– Skip a line if needed to make them line up horizontally

5. Add and compare the totals.

BALANCE SHEET PREPARATIONBALANCE SHEET PREPARATION

5

1

3

4

2

76

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

Lesson 2-2, page 30Lesson 2-2, page 30

TTERMS REVIEWERMS REVIEWrevenue

sale on account

expense

withdrawals

Lesson 2-1, page 29Lesson 2-1, page 29

TO DO: Work Together, pg 31 On your own, pg 31 App 2-1, 2-2, 2-3

– Page 33-35

CHAPTER 2 QUIZ – TUESDAY!!!