This document discusses accounting concepts and how transactions affect the accounting equation for a sole proprietorship. It begins by defining key accounting terms like assets, liabilities, owner's equity, and the accounting equation. It then provides examples of common business transactions like receiving cash investments, paying expenses, making sales, and withdrawals and shows how each transaction impacts the accounting equation by increasing or decreasing assets, liabilities and owner's equity. The goal is to illustrate how the accounting equation must always be in balance and how business activities change the amounts and relationship between its elements.

1. CHAPTER ONE
STARTING A
PROPRIETORSHIP:
CHANGES THAT AFFECT THE
ACCOUNTING EQUATION
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

2. LESSON 1-1
The Accounting Equation
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

3. 3
WHAT IS ACCOUNTING?
 Accounting
 Planning, recording, analyzing, and interpreting financial
information
 Accounting system
 Planned process for providing financial information that will
be useful to management
 Accounting Records
 Organized summaries of a business’s financial activities
 Financial Statements
 Financial reports that summarize the financial condition and
operations of a business
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

4. 4
WHAT IS ACCOUNTING?
 Service business
 Business that performs an activity for a fee
 Proprietorship
 Business owned by one person
 AKA “sole proprietorship”
 Accounting Concept: Business Entity
 Applied when a business’s financial information is recorded
and reported separately from the owner’s personal financial
information
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

5. 5
PROPRIETORSHIP
 Advantages
 Ease of formation
 Total control by the owner
 Profits that are not shared
 Disadvantages
 Limited resources
 Unlimited liability
 Limited expertise
 Limited life
 Legal obligations
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

6. 6
THE ACCOUNTING EQUATION
 Asset
 Anything of value
 Includes:
 Cash
 Supplies
 Prepaid Insurance
 Used to acquire other assets or to operate a business
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

7. 7
THE ACCOUNTING EQUATION
 Equities
 Financial rights to the assets of a business
 2 types
 Equity of those to whom money is owed
 Liability- amount owed by a business
 Equity of the owner
 Owner’s Equity- Amount remaining after the value of all liabilities
are subtracted from the value of all assets
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

8. 8
THE ACCOUNTING EQUATION page 8
 Equation showing the relationship among assets, liabilities, and
owner’s equity
 Must be in balance
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

9. 9
CHARACTER COUNTS
 Ethics
 Principles of right and wrong that guide an individual in
making decisions
 Business Ethics
 Use of ethics in making business decisions
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

10. LESSON 1-2
How Business Activities
Change the Accounting
Equation
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

11. 11
RECEIVING CASH
 Account
 Record summarizing all the information pertaining to a single
item in the accounting equation
 Account title
 Name given to an account
 Account balance
 Amount in an account
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

12. 12
RECEIVING CASH
 Capital
 Account used to summarize the owner’s equity in a business
 Capital Account = Owner’s Equity Account
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

13. 13
RECEIVING CASH
 Transaction
 Business activity that changes assets, liabilities, or owner’s
equity
 Accounting Concept: Unit of Measurement
 Applied when business transactions are stated in numbers that
have common values (dollars, Euros, etc.)
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

14. 14
RECEIVING CASH page 10
Transaction 1 August 1. Received cash from owner as an investment,
$5,000.00.
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

15. 15
PAYING CASH
 A transaction does not always require than an
amount be recorded on both sides of the equation
 Paying CASH for SUPPLIES
 Both are Assets
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

16. 16
PAYING CASH page 11
Transaction 2 August 3. Paid cash for supplies, $275.00.
Transaction 3 August 4. Paid cash for insurance, $1,200.00.
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

17. 17
TRANSACTIONS ON ACCOUNT
 Buying something now, Paying later
 Accounts Payable
 Liability account
 Right side of the equation
 Paying a bill for past purchases
 Still use the Accounts Payable account
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

18. 18
TRANSACTIONS ON ACCOUNT page 12
Transaction 4 August 7. Bought supplies on account from Supply
Depot, $500.00.
Transaction 5 August 11. Paid cash on account to Supply
Depot, $300.00.
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

19. LESSON 1-3
How Transactions Change
Owner’s Equity in an
Accounting Equation
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

20. 20
REVENUE TRANSACTIONS
 Revenue
 Increase in owner’s equity resulting from the operation of a
business
 Money received from providing goods or services
 Sale on account
 Sale for which cash will be received at a later date
 Accounts Receivable
 Asset account
 Left side of equation
 Accounting Concept: Realization of Revenue
 Applied when revenue is recorded at the time goods or services
are sold
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

21. 21
REVENUE TRANSACTIONS page 14
Transaction 6 August 12. Received cash from sales, $295.00.
Transaction 7 August 12. Sold services on account to Oakdale
School, $350.00.
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

22. 22
EXPENSE TRANSACTIONS
 Expense
 Transaction to pay for goods or services needed to operate
a business results in a decrease in owner’s equity
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

23. 23
EXPENSE TRANSACTIONS page 15
Transaction 8 August 12. Paid cash for rent, $300.00.
Transaction 9 August 12. Paid cash for telephone bill, $40.00.
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

24. 24
OTHER CASH TRANSACTIONS
 When cash is received on account, the capital
account is not affected
 REMEMBER- the sale was recorded previously
 Withdrawals
 Assets taken out of a business for the owner’s personal use
 Decreases the owner’s equity
 Can withdraw any asset
 Cash, supplies, etc…
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-1

25. 25
OTHER CASH TRANSACTIONS page 16
Transaction 10 August 18. Received cash on account from
Oakdale School, $200.00.
Transaction 11 August 18. Paid cash to owner for personal use,
$125.00.
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-3