ACCOUNTING PRINCIPLES SIXTH CANADIAN EDITION Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 1 Accounting in Action

ACCOUNTINGPRINCIPLES

S I X T H C A N A D I A N E D I T I O N

Prepared by:

Debbie Musil

Kwantlen Polytechnic University

Chapter 1Accounting in Action

STUDY OBJECTIVE:

CHAPTER 1: Accounting in Action

1. Identify the use and users of accounting and the objective of financial reporting.

2. Compare different forms of business organizations and explain how Canadian accounting standards apply to these organizations.

3. Describe the components of the financial statements and explain the accounting equation.

4. Determine what events are recognized in the financial statements and how the events are measured.

5. Analyze the effects of business transactions on the accounting equation.

6. Prepare financial statements.Copyright John Wiley & Sons Canada, Ltd. 22

Why is Accounting Important?

• The information system that identifies, records and communicates economic events to users

• Important to the world economy• Helpful for all business endeavours• Solid foundation for other business

disciplines• Relevant and useful in other disciplines

Copyright John Wiley & Sons Canada, Ltd. 3

Using Accounting Information

• Internal Users– Used for planning, organizing and

running companies– Includes finance, marketing, human

resources, production, company officers• External Users

– Investors, creditors, labour unions, customers, regulators and other authorities

– Used for decisions of ownership, credit, lending, assess compliance, performance


Objective of Financial Reporting

• Accounting information is communicated to external users via financial statements.– The main objective of financial

statements is to provide useful information to investors and creditors (external users) to make decisions about a business.


Accounting & Ethics

To Solve Ethical Dilemmas

1. Recognize situation and ethical issues involved

2. Identify and analyse elements3. Identify alternatives and weigh

effects on stakeholders

Select the most ethical alternative

• For information to have value, must be prepared by individuals with high standards of ethical behaviour

Ethics

Standards of conduct used to judge actions


STUDY OBJECTIVE:








Business Organizations


Generally Accepted Accounting Principles

(GAAP)• Common set of accounting standards• Responsibility of the Accounting

Standards Board (AcSB)– Publicly accountable enterprises must

adopt International Financial Reporting Standards (IFRS)

– Private companies may adopt Accounting Standards for Private Enterprises (ASPE) or IFRS


Concepts & Assumptions

• Economic entity concept – activities of a unit or organization in society are kept separate and distinct from other entities and owner

• Going concern assumption – organization will continue to operate in the foreseeable future

• Monetary unit – only include transactions that can be expressed as an amount of money


STUDY OBJECTIVE:








Balance Sheet

• Assets– Resources owned or controlled by a

business– Used to carry out activities such as

production and distribution– Provide future services or benefits

• Liabilities– Obligations arising from past events to

make a future payment of assets or services

– Present debts and obligations


Balance Sheet(Continued)

• Owner’s Equity– Represents owner’s claim on assets– Owner’s Equity = Assets − Liabilities– Components of owner’s equity (Shown in

the Statement of Owner’s Equity):• Investments: Assets put into business by

owner• Drawings: Cash or other assets withdrawn

by owner for personal use• Profit = Revenues − Expenses


Accounting Equation

• Assets must equal the sum of liabilities and owner’s equity

• Liabilities are shown before owner’s equity because creditors’ claims are paid before ownership claims


Income Statement

• Revenues: Increase Owner’s Equity– Result from business activities that are

performed to earn profit– Result in an increase in an asset or a decrease

in a liability• Expenses: Decrease Owner’s Equity

– The cost of assets consumed or services used– Result in an decrease in an asset or an

increase in a liability– Exclude withdrawals made by owners


Accounting Differences by Type of Organization


Accounting Equation Expanded


STUDY OBJECTIVE:








Recognition and Measurement

• Recognition – the process of recording a transaction in the accounting records

• Measurement – determining the amount that should be recognized– Historical cost is the primary basis used

– reliable and verifiable, however may not be relevant

– Fair value may be more relevant – the amount of consideration if sold in the open market


STUDY OBJECTIVE:








Transaction Analysis

• Accounting identifies, records and communicates the economic events of an organization

• Only events that cause changes in assets, liabilities or owner’s equity are recorded

• Accounting equation must always equal– Each transaction will have a “dual effect”

on the equationCopyright John Wiley & Sons Canada, Ltd. 21

• Owner invests $15,000 in computer business and names it “Softbyte”

1: Investment by Owner


• Softbyte purchases computer equipment for $7,000 cash

2: Purchase Equipment


• Softbyte purchases supplies that will last several months for $1,600 on account

3: Purchases Supplies on Credit


• Softbyte receives from customers $1,200 cash for programming services it provided

4: Services Provided for Cash


• Softbyte receives a bill for advertising for $250, which it pays at a later date

5: Purchase Advertising on Credit


• Softbyte provides $3,500 of programming services and receives payment of $1,500

6: Services Provided for Cash & Credit


• Expenses paid in cash: rent of $600, salaries of $900, utilities of $200

7: Payment of Expenses


• Softbyte pays its outstanding advertising bill of $250 in cash

8: Payment of Accounts Payable


• Softbyte receives $600 in cash from customers billed in transaction 6

9: Receipt of Cash on Account


10: Signed Contract to Rent Equipment

• No effect on the accounting equation because assets, liabilities and owner’s equity have not changed

• Accounting transaction has not occurred


• Softbyte’s owner withdraws $1,300 for his personal use

11: Owner Withdrawal of Cash


STUDY OBJECTIVE:








Financial Statements

• Prepared after all transactions identified, recorded and summarized and are prepared in the following order:1. Income Statement – presents revenues, expenses and profit or loss for a specific period of time

2. Statement of Owner’s Equity – summarizes the changes in owner’s equity for a specific time period

3. Balance Sheet – reports assets, liabilities and owner’s equity at a specific date

4. Cash Flow Statement – summarizes cash inflows and outflows for a specific period of time


Interrelationship of the Financial Statements


Interrelationship of the Financial Statements -

continued


Copyright John Wiley & Sons Canada, Ltd.

37

Documents

ACCOUNTING PRINCIPLES SIXTH CANADIAN EDITION Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 1 Accounting in Action