Starting a ProprietorshipStarting a ProprietorshipService Business - Techknow Service Business - Techknow

ConsultingConsultingChapters 1 - 8Chapters 1 - 8

TodayToday’’s Topicss Topics•What is Accounting?What is Accounting?•What do Accountants do?What do Accountants do?•What is an Asset, Liability, OE?What is an Asset, Liability, OE?

•Account ClassificationAccount Classification•Assets, Liabilities, OEAssets, Liabilities, OE

•Accounting EquationAccounting Equation

•Analyze transactions that occur in a Analyze transactions that occur in a business and how they affect the business and how they affect the accounting equationaccounting equation

TodayToday’’s Objectivess Objectives• List and define the three elements of List and define the three elements of accounting - assets, liabilities and accounting - assets, liabilities and ownerowner’’s equitys equity

• Classify accounts as either, assets, Classify accounts as either, assets, liabilities, or ownerliabilities, or owner’’s equitys equity

• Analyze transactions and explain how Analyze transactions and explain how they affect the accounting equationthey affect the accounting equation

What is Accounting?What is Accounting?

•Is a system that measures the Is a system that measures the activities of a business in activities of a business in financial terms.financial terms.

•Shows how the various Shows how the various transactions the business transactions the business undertook affected the undertook affected the businessbusiness

AccountingAccounting

•Accurate accounting records contribute to Accurate accounting records contribute to a businessa business’’ success and helps to avoid success and helps to avoid failure and bankruptcy.failure and bankruptcy.

•Therefore, there needs to be some sort of Therefore, there needs to be some sort of accounting system in place.accounting system in place.

•Failure to understand accounting - poor Failure to understand accounting - poor business decisions.business decisions.

Accounting is the Accounting is the process that:process that:

•Analyzes – transactions affect Analyzes – transactions affect businessbusiness

•Records – placing in accounting systemRecords – placing in accounting system

•Classifies – group same activities Classifies – group same activities togethertogether

•Summarizes – explains resultsSummarizes – explains results

•ReportsReports

•InterpretsInterprets

What Do Accountants What Do Accountants Do?Do?

•Analyze business activities, and see how they Analyze business activities, and see how they affect the businessaffect the business

•Organize financial information so that it is Organize financial information so that it is usefuluseful

•Managers, owners, investors, government Managers, owners, investors, government agencies, and others use accounting agencies, and others use accounting information as the basis for making business information as the basis for making business decisionsdecisions

Accounting is theAccounting is theLanguage of BusinessLanguage of Business

GAAPGAAPGenerally Accepted Generally Accepted

Accounting PrincipalsAccounting Principals

• Standards and rules that accountants follow while Standards and rules that accountants follow while recording and reporting financial activitiesrecording and reporting financial activities

• SECSEC - - Securities and Exchange CommissionSecurities and Exchange Commission - - establish GAAPestablish GAAP

• FASBFASB - - Financial Accounting Standards BoardFinancial Accounting Standards Board - is the - is the organization that sets the accounting standardsorganization that sets the accounting standards

Think for a moment Think for a moment about all the activity about all the activity completed by a local completed by a local

businessbusiness

Organize NumbersOrganize Numbers

•Accounting SystemAccounting System - planned process for - planned process for providing financial information that will be providing financial information that will be useful to managementuseful to management

•Organized summaries of a business’ Organized summaries of a business’ financial activities are called financial activities are called accounting accounting recordsrecords..

Accounting Accounting ElementsElements

•AssetsAssets

•Liabilities Liabilities

•OwnerOwner’’s Equitys Equity

The financial position of a The financial position of a company is measured by the company is measured by the

following items:following items: 1. Assets (what the business owns)1. Assets (what the business owns)

2. Liabilities (what the business 2. Liabilities (what the business owes to others)owes to others)

3. Owner3. Owner’’s Equity (the difference s Equity (the difference between assets and liabilities – what between assets and liabilities – what the owner owns)the owner owns)

AssetsAssetsAnything of value that a Anything of value that a

business business ownsowns - things of - things of monetary valuemonetary value

Cash

Supplies

Prepaid Insurance

Accounts Receivable

Petty Cash

Economic Resources - Economic Resources - AssetsAssets

•A business obtains its assets by A business obtains its assets by either:either:

•Owner investing personal money Owner investing personal money or goodsor goods

•Owner may borrow from othersOwner may borrow from others• LiabilityLiability• CreditorCreditor

LiabilityLiability•An amount An amount owedowed

•Creditor has legal claim Creditor has legal claim against the assets of the against the assets of the business until the business until the business pays its debts.business pays its debts.

LiabilityLiabilityAssets obtained by borrowing from Assets obtained by borrowing from othersothers

CreditorCreditor - one who debt is owed - one who debt is owed

Accounts PayableAccounts Payable

OwnerOwner’’s Equitys Equity• DefinitionDefinition::•Is the financial interest of the Is the financial interest of the owner in a businessowner in a business

•The ownerThe owner’’s claim against the assetss claim against the assets

•The difference between the total The difference between the total assets owned and the total assets owned and the total liabilities owed.liabilities owed.

ReviewReview•AssetsAssets

•LiabilityLiability

•OwnerOwner’’s Equitys Equity

Classify Classify the the

account!account!

SuppliesSupplies

AssetAsset

Accounts Accounts Payable, Payable,

LiabilityLiability

Prepaid Prepaid InsuranceInsurance

AssetAsset

CapitalCapital

OwnerOwner’’s s EquityEquity

CapitalCapital

•The account used to The account used to summarizesummarize the the ownerowner’’s equitys equity in a business in a business

Accounting EquationAccounting Equation

Assets = Liabilities + Assets = Liabilities + OwnerOwner’’s Equitys Equity

Property = creditors financial claim + owner’s financial claim

Must ALWAYS Balance!

Assets = Liabilities + Assets = Liabilities + OwnerOwner’’s Equitys Equity

Must ALWAYS Balance!

Work TogetherWork Togetherand and

On Your OwnOn Your Own

Page 9Page 9

AssetsAssets•CashCash•SuppliesSupplies•Prepaid InsurancePrepaid Insurance•Accounts ReceivableAccounts Receivable•Petty CashPetty Cash

Anything of value that is OWNED

How Business Activities How Business Activities Change the Accounting Change the Accounting

EquationEquation

Section 1-2Section 1-2Page 10Page 10

Analyze how transactions Analyze how transactions affect accounts in the affect accounts in the accounting equationaccounting equation

Business activities Business activities change the amounts in change the amounts in

the accounting equationthe accounting equation

TransactionTransaction

•Is a business activity that Is a business activity that changes assets, liabilities, changes assets, liabilities, or owneror owner’’s equitys equity

Examples of Examples of TransactionsTransactions

•Received cash from owner as an investmentReceived cash from owner as an investment

•Paid cash for suppliesPaid cash for supplies

•Paid cash for insurancePaid cash for insurance

•Bought supplies on account from Supply Bought supplies on account from Supply DepotDepot

•Paid cash on account to Supply DepotPaid cash on account to Supply Depot

Examples of Examples of TransactionsTransactions

•Received cash from salesReceived cash from sales

•Sold services on account to Oakdale SchoolSold services on account to Oakdale School

•Paid cash for rentPaid cash for rent

•Paid cash for telephone billPaid cash for telephone bill

•Received cash on account from Oakdale SchoolReceived cash on account from Oakdale School

•Paid cash to owner for personal usePaid cash to owner for personal use

To keep track of To keep track of transactionstransactions

businesses use businesses use accountsaccounts

To keep a company’s financial data organized, accountants develop a system that sorts transactions into records called accounts.

AccountAccount

is a record summarizing all the is a record summarizing all the information pertaining to a single item information pertaining to a single item

in an accounting equationin an accounting equation

All assets, liabilities and OE have All assets, liabilities and OE have their their own accountown account

Chart of AccountsChart of Accounts

100100 AssetsAssets

200200 LiabilitiesLiabilities

300300 OwnerOwner’’s Equitys Equity

400400 RevenueRevenue

500500 ExpensesExpenses

Double Entry Double Entry accountingaccounting

•Because two or more Because two or more accounts are affected accounts are affected by every transaction, by every transaction, the accounting system the accounting system is double entry is double entry accountingaccounting

Assets Liabilities Owner’s Equity

CashAccounts ReceivableSuppliesPrepaid InsurancePetty Cash

Accounts Payable

Capital

When a business transaction When a business transaction occurs, an accounting clerk occurs, an accounting clerk

analyzes the transaction to see how analyzes the transaction to see how it affects each part of the it affects each part of the

accounting equation.accounting equation.

First 3 Steps in First 3 Steps in Analyzing a TransactionAnalyzing a Transaction

• IdentifyIdentify accounts affected accounts affected

• ClassifyClassify each account (Asset, Liability, OE) each account (Asset, Liability, OE)

• Is each account Is each account increasedincreased or or decreaseddecreased

• Make sure the accounting equation remains in balanceMake sure the accounting equation remains in balance

Assets = Liabilities + Owner’s Equity

$0 = $0 + $0

Before Business StartsBefore Business Starts

Received cash from owner Received cash from owner as an investment, $10,000.as an investment, $10,000.

• What two accounts are affected?What two accounts are affected?

• Cash and CapitalCash and Capital

• Account classification?Account classification?

• AssetAssetOwnerOwner’’s Equitys Equity

• Increased or decreased?Increased or decreased?

• IncreasedIncreased IncreasedIncreased

Paid cash for Paid cash for supplies, $1,577.supplies, $1,577.

• What two accounts are affected?What two accounts are affected?

• Cash and SuppliesCash and Supplies

• Account classification?Account classification?

• AssetAsset AssetAsset

• Increased or decreased?Increased or decreased?

• DecreasedDecreased IncreasedIncreased

Paid cash for Paid cash for insurance, $1,200.insurance, $1,200.

• What two accounts are affected?What two accounts are affected?

• Cash and Prepaid InsuranceCash and Prepaid Insurance

• Account classification?Account classification?

• AssetAsset AssetAsset

• Increased or decreased?Increased or decreased?

• DecreasedDecreased IncreasedIncreased

Bought supplies on account from Bought supplies on account from Boyd Industries, $2,720.00Boyd Industries, $2,720.00

• What two accounts are affected?What two accounts are affected?

• Supplies and Boyd Ind. Accounts PayableSupplies and Boyd Ind. Accounts Payable

• Account classification?Account classification?

• AssetAssetLiabilityLiability

• Increased or decreased?Increased or decreased?

• IncreasedIncreased IncreasedIncreased

Paid cash on account to Paid cash on account to Boyd Industries, Boyd Industries,

$1,360.00.$1,360.00.• What two accounts are affected?What two accounts are affected?

• Cash and Wyatt Ind. Accounts PayableCash and Wyatt Ind. Accounts Payable

• Account classification?Account classification?

• AssetAssetLiabilityLiability

• Increased or decreased?Increased or decreased?

• DecreasedDecreased DecreasedDecreased

Work TogetherWork TogetherAndAnd

On Your OwnOn Your Own

Page 13Page 13

Can you?Can you?• List and define the three elements of List and define the three elements of accountingaccounting

• Classify accounts as either, assets, Classify accounts as either, assets, liabilities, or ownerliabilities, or owner’’s equitys equity

• Analyze transactions and explain how Analyze transactions and explain how they affect the accounting equationthey affect the accounting equation

AssignmentAssignment1-11-11-21-2