Chapter 2:
Starting a Proprietorship: Changes that
Affect Owner’s Equity
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
ACCOUNTS
 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 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 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 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  increase OE
Transaction 6 August 12. Received cash from sales,
$325.00.
Transaction 7 August 12. Sold services on
account to Kids Time, $200.00.
Lesson 2-1, page 26
Paying 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  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 27
Receiving 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 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 TRANSACTIONS
Transaction 10 August 12. Received cash on account
from Kids Time, $100.00.
–100 (withdrawal)
Transaction 11 August 12. Paid cash to owner for
personal use, $100.00.
Lesson 2-1, page 28
Summary: The Owner’s Capital
Account
 Expenses -
 Revenue +
 Withdrawals -
 Investment +
 Sale on Account +
SUMMARY OF CHANGES IN OWNER’S EQUITY
Transaction
Number
Change in
Owner’s Equity
Kind of Transaction
6
7
8
9
11
Revenue (cash)
Revenue (on account)
Expense (rent)
Expense (telephone)
Withdrawal
+325.00
+200.00
–250.00
–45.00
–100.00
Net change in owner’s equity
+130.00
Lesson 2-1, page 28
TO DO:
 Work Together, pg 29
 On your own, pg 29
Ch 2-2: Reporting a Changed Accounting
Equation on a Balance Sheet

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

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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
BALANCE SHEET PREPARATION
1. Write the heading.
2. Prepare the assets
section.
3. Prepare the liabilities
section.
4. Prepare the owner’s
equity section.
5. Add and compare the
totals.
6. Rule single lines.
7. Write the totals.
8. Rule double lines.
1
2
3
4
5
6
7
8
Lesson 2-2, page 30
TERMS REVIEW
revenue
sale on account
expense
withdrawals
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!!!
Lesson 2-1, page 29