Starting a Proprietorship

Accounting

The process planning, recording, analyzing, and interpreting financial information

Accounting system

-planned process: designed to compile financial data and summarizes results in accounting records and reports

Financial statements

-reports that summarize financial condition and operations of a business

-the language of business - essential to all parties

Net worth statement

person’s financial position on a specific date

-allows person extending loan to see financial position of borrower on specific date and make a lending decision

Asset

anything of value that is owned

Liability

amount owed

Personal Net Worth

difference between personal assets and personal liabilities

networth=

equity

equity

also difference between assets and liabilities

ethics

principles of right and wrong that guide an individual in making decisions

business ethics

use of ethics in making business decisions

service

a business that performs an activity for a FEE

proprietorship

a business owned by one person

-often referred to as a sole __________

business plan

formal written document that describes the nature of a business and how it will operate

GAAP

-Generally Accepted Accounting Principles

-standards and rules that accountants follow while recording and reporting financial statements

equities

financial rights to the assets of a business

-2 types

equities (type 1)

liabilities (amounts owned by a business to creditors)

equities (type 2)

owner’s equity

owner’s equity

amount remaining in a business after the value of all liabilities are subtracted from the value of all assets

accounting equation

assets=liabilites+owner’s equity

account

record summarizing all the information about a single item in the accounting equation

account title

name given to account (business decides)

account balance

actual value of account

transaction

any business activity that changes assets, liabilities, or owner’s equity

capital account

account used to summarize the owner’s equity in a business

creditor

a person or business to whom a liability is owed

buying on account

buying on credit results in or increases a liability - accounts payable

accounts payable

a company's short-term obligations owed to its creditors or suppliers, which have not yet been paid

paying on account

decreases liability accounts payable

revenues

an increase in owner’s equity resulting from the operation of a business

-ex:received cash from sales, sold services on account (sale that are charged to client account - cash received later)

expense

a decrease in owner’s equity resulting from the operation of a business

-bills, utilities, payroll

-owner’s equity decreases and assets decrease

withdrawls

-assets (cash/other assets) taken out of a business for the owner’s personal use

-owner’s equity and assets decreases

-not normal operation of the business - therefore, not considered an expense - must be recorded separately

received cash on account

a business collects the cash from a sale previously made on “account“

-NO effect owner’s equity, not revenue transaction

-increase cash and decreases accounts payable