1.1 Establishing a Business

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Accounting 10Unit 1: Changes in Accounts

1.1 Establishing a Business


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+Lesson Outcomes

n define accounting.n describe the difference between bookkeeping and accounting.n define financial accounting, cost accounting, and management accounting.n list the main differences of a sole proprietorship, partnership, and corporation.n make a list of what is required to begin a business.n distinguish between such accounting terms as debtor and creditor.n define accounting terms.n explain the entity concept as it relates to accounting theory.n solve the one unknown element from an accounting equation when two elements are

given.

n classify various items commonly found in the accounting equation as being eitherassets, liabilities, or owner's equity accounts.

n calculate the amount of owner's equity after listing and totalling various asset andliability items.

n construct an accounting equation that itemizes the three elements for a given servicefirm.

n prepare in good form the opening balance sheet from previously constructedaccounting equations for given service firms.

n prepare in good form the opening balance sheet of a service firm from giveninformation and without the aid of an accounting equation.


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+What Is Accounting?

nAccounting is the process of recording, classifying,reporting and interpreting the financial data of an

organization, and it is often referred to as the

"language of business". Accounting enables

business people to talk to each other about

financial activities that take place every day, the

results of these activities, the financial plans a

company may have, and other pertinent topics.


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+What Is the Difference Between

Bookkeeping and Accounting?nBookkeeping is the recording, posting, and proving

of financial data. Accounting is the establishing

and maintaining of the entire accounting system,

the interpreting of the results of the recorded data,

and the assisting in the management or decision-

making aspects of the organization. Thus,

bookkeeping must be completed before

accounting can take place.


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+Types of Accounting

nFinancial accounting is concerned with thepreparation of financial statements.

nCost accounting is concerned with the reportingof costs (assets and expenses) as accurately as

possible.

nManagement accounting is concerned withdecision making and the preparation of special

reports to be used in making those decisions. This

course concentrates on financial accounting.


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+Forms of Business Ownership

Sole ProprietorshipnThis business has one owner or

"proprietor." In many cases the company

name serves to inform the customer whothe owner or owners are of the

organization. For example, "J. Barnby,

Lawyer" is a sole or single proprietorship.


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PartnershipnThis business has two or more owners or

proprietors. For example, the accounting

firm "Kelso, Hermes, and Petts,Accountants" has three partners.


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CorporationnA corporation is owned by a number of

people called shareholders and it is

operated under a government charter.Corporations must, by law, indicate to the

consumer that the business is a corporation

by using the terms "Limited" or

"Incorporated" in their company names.Thus, the company Technolinks

Incorporated is a corporation owned by its

shareholders. "Ltd." or "Inc." may be used

in place of "Limited" or "Incorporated."


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+Different Types of Business

ActivitiesnA business that provides the customer with a service in

exchange for payment is called a service business. Some

examples of service businesses are legal firms, dry cleaning

operations, golf driving ranges, management consultants,bowling alleys, taxi cabs, and so on.

nA business that buys goods and resells them to theircustomers for a profit is called a merchandising business.

n Finally, manufacturing businesses are businesses thatbuyraw materials such as steel, textiles, lumber, or paper and

convert them into finished products such as filing cabinets,

clothing, houses, or books.


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+Establishing the Accounting

EquationnTo start any type of profit-making business, a

person needs resources such as land, building,

furniture, goods for sale, equipment, and so on.

nSince these resources are scarce in the sense thatthey exist in limited quantities and since all require

effort to produce--through the combination of

input, such as machinery and also labour andmanagement--these resources are called

economic resources.


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How does any business obtain economic resources in order tostart business operations?n partly through borrowing from banks and suppliers of goods

called creditors by business. Until a debt that is owed by thebusiness is paid, a creditor has a claim against the economicresources of the business.

n partly through the investment of the owner or owners. Toestablish a business enterprise, the owner(s) must haveinvested some of their personal money and possibly some of

their personal furniture, equipment, and so on. Since theowner(s) have made this investment to establish thebusiness, it is important to remember they have claimsagainst these economic resources.


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+Introducing Accounting Theory

n Concepts are basic ideas that act as a foundation for allaccounting theory. These provide the theoretical foundationfor Generally Accepted Accounting Principles, usuallyreferred to as GAAPs.

n The first GAAP to study is the entity concept. Accountingtheory supports the idea that each business is an economicunit, separate and distinct from its owner(s) and any otherbusiness.

n These new ideas may be stated by using an equation(s).ECONOMIC RESOURCES = CLAIMS AGAINST

ECONOMIC RESOURCES


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+Who has claims against economic

resources?n Creditors

n Owner

n So now our equation looks a little different:ECONOMIC = CLAIMS OF + CLAIM OF

RESOURCES CREDITORS OWNER


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+Analyzing and Applying the

Accounting Equationn To put our equation into the language of accounting:

ASSETS = LIABILITIES + OWNERS EQUITY

nAssets are the economic resources of the business requiredto establish any business. They represent what a businessowns.

n Liabilities are the claims of the creditors against the assets.They represent the debts of the business.

n Owner's Equity is the claim of the owner against the assets;it is also the value of the owner's investment in the business.


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nLiabilities are listed before the owner's equity onthe right side of the equation. The claims of the

creditors come before those of the owner(s). For

example, if the business were to be declaredbankrupt (incapable of paying its debts), then in

any sale of the assets the creditors' claims on the

total assets would have to be satisfied before the

claims of the owner(s).


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+Practice Questions

n Solve for the unknown in each of the following equations:

ASSETS = LIABILITIES + EQUITY

1. $4300 = $1200 + _______

2. $2600 = _______ + $300

3. _______ = $300 + $650


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+Introducing the Balance Sheet

nAccountants show the financial position of anindividual or a business by means of a formal

statement called a balance sheet. The balance

sheet reports assets, liabilities, and owner's equityat a certain date.

nThe basic structure of a balance sheet is basedupon the equation previously discussed.


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+Setting up the Balance Sheet

All balance sheets are set up with the same basic structure:

n The heading has three lines1.

Who (the name of the business)2. What (the type of document that follows)3. When (the date on which the document was filed)n The body has two sides: assets listed on the left and

liabilities listed on the right

nAssets are itemizedn Liabilities are itemizednAccount payable are broken down by individual creditors


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+Example

n Construct a balance sheet for J Jameson, Inc. at March 31, 20given the following:

nAssets: Cash $40 000, Vehicles $55 000, Buildings $180 000,Furniture $36 000, Miscellaneous $22 000

n Liabilities: Mortgage $122 000, Vehicle Loans $51 000,Account Payable (Petes Paper Mill) $3 000, Account Payable

(Ingrids Ink) $2 000


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+ ______________________________________________________________

_______________________________

Assets Liabili+es

Owner'sEquity


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+Self Test

1. On March 10 of this year Jeanne Fung opened anaccounting office. The following is a list of her businesss

assets and liabilities on that date: Accounts Payable $300,

Office Equipment $4000, Cash $700, Bank Loan Payable

$3300, Office Furniture $1900. Prepare a balance sheet for

Ms. Fung.


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+Answers to Self Test

1.1 Establishing a Business

Documents

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