Accounting for a Service Business Organized As a Proprietorship -Chapter 3

Accounting for a Service Business Organized as a Proprietorship - Chapter 3 -

Starting a Proprietorship: Changes that Affect Owner’s Equity

Now that Julie knows how to invest money into her account, pay for items with cash, use an account at a store to buy supplies and pay the account back, let’s see how Julie Juniors’ service business journalizes (records) getting paid cash for her services or selling accessories to her friends, spending money on necessary expenses to run her business, as well as taking out money for personal use.

How Transactions Change Owner’s Equity in an Accounting Equation

Daily operations of a business involve transactions that either increase or decrease owner’s equity. Owner’s and managers, such as Julie, need detailed information about these changes to make good business decisions.

Every time Julie styles hair or does nails for her friends, she expects them to pay her for her time, expertise and any accessories Julie offers that they want Julie to use, such as hair clips or nail decorations.

In accounting, the money Julie receives from her friends is called revenue. Technically, Revenue - is an increase in owner’s equity resulting from the operation of a business, such as selling goods (hair accessories, clothes, shoes, jewelry CD’s) or services (cutting and styling hair, washing cars, cleaning carpets.).

Julie has set up an appointment with her friend Marissa who wants to get her hair styled for a date she has on Saturday with Ryan. Julie charges $20.00 for a Style and if Marissa wants hair clips, then there would be an additional charge for the clips, depending on the clips Marissa selects. After Julie is done with Marissa’s hair, Marissa pays Julie $20.00 cash for the style and $5.00 cash for hair accessories. Julie needs to journalize the revenue from Marissa.

The transition would read,

November 12, 20–. Received cash from sales, $25.00

To break down the increase into the accounts necessary Julie would want to write down the accounting equation, record the $ 25.00 in the correct accounts and from there figure out the balance of each account changed.

Assets / - / Liabilities / = / Owner’s Equity

The accounts affected are

Assets - Cash - because she received cash

Owner’s Equity - Julie Junior, Capital, Revenue - because she received money, making the business, and herself as the owner, worth more.

The equation started with Julie having $ 110 in the Asset - Cash, $ 140 in the Asset -Supplies, $150 in the Asset – Prepaid Insurance, $ 0 in the Liabilities -Hairgami, and $ 400.00 in the Owner’s Equity - Julie Junior, Capital.

W hen Julie received cash from Marissa – the cash increased the value of the Owner’s Equity to $ 425,00 and increased the business Asset – Cash – to $ 135.00. The Asset account – Supplies remained $140,00 the Asset account – Prepaid Insurance account remained $150.00 and Julie Junior, Capital, is now $ 425.00. If you take the Assets, Cash + Supplies + Prepaid Insurance it = $ 425.00 - Liabilities $ 0 = Owner’s Equity = $ 425.00 The equation still remains in balance.

The Winter Dance is come up and Julie decides to buy a cell phone to call up her friends and set appointments for them to get their hair done. Julie knows that she is always gone to debate meetings, so by having a cell phone handy, her friends can reach her at any time. The cell phone falls under the category of a business expense. An Expense is a decrease in owner’s equity resulting from the operation of a business, such as paying rent in a building, the telephone company, the utilities (power, gas , and water companies), etc.. The cell phone company will want Julie to either pay with cash, check or credit card, all of these are journalized (recorded) the same as a cash payment, except you need to write the check number where appropriate. Julie will need to journalize this expense.

The transition would read,

December 2, 20–. Paid cash for an expense (the cell phone bill), $52.00

To break down the decrease into the accounts necessary Julie would want to write down the accounting equation, record the $ 52.00 in the correct accounts and from there figure out the balance of each account changed.

Assets / - / Liabilities / = / Owner’s Equity
Cash / Supplies / Prepaid
Insurance / Hairagami / Julie Junior, Capital
Started with
$ 110.00 / Started with
$ 140.00 / Started with
$ 150.00 / - / Started with
$ 0 / = / Started with
$ 400.0
Transaction
+ $ 25.00 / Transaction
+ $ 25.00 (revenue)
New Balance
$ 135.00 / $ 140.00 / $ 150.00 / - / $ 0 / = / New Balance
$ 425.00
Started with
$ 135.00 / Started with
$ 140.00 / Started with
$ 150.00 / - / Started with
$ 0 / = / Started with
$ 425.00
Transaction
- $ 52.00 / Transaction
- $ 52.00 (expense)
New Balance
$ 83.00 / $ 140.00 / $ 150.00 / - / $ 0 / = / New Balance
$ 373.00
Assets / - / Liabilities / = / Owner’s Equity

The accounts affected are

Assets - Cash - because she paid with a check (recorded the same as cash)

Owner’s Equity - Julie Junior, Capital, Expense - because she paid money, making the business, and herself as the owner, worth less.

The equation started with Julie having $ 135 in the Asset - Cash, $ 140 in the Asset -Supplies, $150 in the Asset – Prepaid Insurance, $ 0 in the Liabilities -Hairagami, and $ 425.00 in the Owner’s Equity - Julie Junior, Capital.

W hen Julie paid cash for the cell phone – it decreased the value of the Owner’s Equity to

$ 373,00 and decreased the business Asset – Cash – to $ 83.00. The Asset account – Supplies remained $140,00 the Asset account – Prepaid Insurance account remained $150.00, the Liabilities account – Hairagami remained $0 and Julie Junior, Capital, is now $ 373.00. If you take the Assets, Cash + Supplies + Prepaid Insurance it = $ 373.00 - Liabilities $ 0 = Owner’s Equity = $ 373.00, the equation still remains in balance.

Julie has asked Jake Johnson, who is also a Junior, to the Winter Dance, and she will need to buy herself some material to sew herself a new formal dress, in 3rd period, Mrs. Robinson’s sewing class. Julie doesn’t have much of her own spending money because she puts most of her money into her business, so Julie decides to take borrow money from her business. In accounting, you always need to journalize (record) where money goes even if you are the boss and taking the money for yourself. When an owner or manager of the company takes any asset (whether it be cash, merchandise, supplies, etc.) from the company for personal use, it is called a Withdrawal. A WITHDRAWAL decreases the amount of the owner’s equity, because the business has given up an asset (something of value), and the company is worth less. Julie will need to journalize the $50.00 withdrawal for the material and other supplies needed to make the dress.

The transition would read,

December 8, 20–. Paid cash to owner for personal use (material for the Winter Dance), $50.00

To break down the decrease into the accounts necessary Julie would want to write down the accounting equation, record the $ 50.00 in the correct accounts and from there figure out the balance of each account changed.

Assets / - / Liabilities / = / Owner’s Equity

The accounts affected are

Assets - Cash - because she paid herself with cash for the material and supplies needed

Owner’s Equity - Julie Junior, Capital, Withdrawal - because she paid herself money, making the business, and herself as the owner, worth less.

Assets / - / Liabilities / = / Owner’s Equity
Cash / Supplies / Prepaid
Insurance / Hairagami / Julie Junior, Capital
Started with
$ 110.00 / Started with
$ 140.00 / Started with
$ 150.00 / - / Started with
$ 0 / = / Started with
$ 400.0
Transaction
+ $ 25.00 / Transaction
+ $ 25.00 (revenue)
New Balance
$ 135.00 / $ 140.00 / $ 150.00 / - / $ 0 / = / New Balance
$ 425.00
Started with
$ 135.00 / Started with
$ 140.00 / Started with
$ 150.00 / - / Started with
$ 0 / = / Started with
$ 425.00
Transaction
- $ 52.00 / Transaction
- $ 52.00 (expense)
New Balance
$ 83.00 / $ 140.00 / $ 150.00 / $ 0 / New Balance
$ 373.00
Started with
$ 83.00 / Started with
$ 140.00 / Started with
$ 150.00 / - / Started with
$ 0 / = / Started with
$ 373.00
Transaction
- $ 50.00 / Transaction
- $ 50.00
New Balance
$ 33.00 / $ 140.00 / $ 150.00 / - / $ 0 / = / New Balance
$ 323.00

The equation started with Julie having $ 83 in the Asset - Cash, $ 140 in the Asset -Supplies, $150 in the Asset – Prepaid Insurance, $ 0 in the Liabilities -Hairagami, and $ 373.00 in the Owner’s Equity - Julie Junior, Capital.

W hen Julie paid herself cash to get the material for her dress – it decreased the value of the Owner’s Equity to $ 323,00 and decreased the business Asset – Cash – to $ 33.00. The Asset account – Supplies remained $140,00 the Asset account – Prepaid Insurance account remained $150.00, the Liabilities account – Hairagami remained $0 and Julie Junior, Capital, is now $ 323.00. If you take the Assets, Cash + Supplies + Prepaid Insurance it = $ 323.00 - Liabilities $ 0 = Owner’s Equity = $ 323.00, the equation still remains in balance.

Reporting a Changed Accounting Equation on a Balance Sheet

Julie has made some changes since she created the last Balance Sheet on October 15, 20 -. She will need to update the balance with the new transactions. You can prepare a balance sheet on any date. (Most businesses prepare a balance sheet only on the last day of each month). The most important thing to do when preparing a balance sheet is to include the most up to date information, and to make sure that the total of the left side of the balance sheet = the total of the right side of the balance sheet.

Julie Junior’s
Balance Sheet
December 31, 20--
Assets / Liabilities
Cash / $ 33.00 / Hairagami / $ 0
Supplies / $ 140.00 / Owner’s Equity
Prepaid Insurance / $ 150.00 / Julie Junior, Capital / $ 323.00
Total Assets / $ 323.00 / Total Liab. And Owner’s Eq. / $ 323.00