Principles of Financial Accounting

Chapter 1 | Accounting in Action

1) The accounting equation, and its components.

2) Analyze the effects of business transactions on the accounting equation.
3) Four financial statements and how they are prepared.

TUTORIAL
Session 1
Expanded Accounting Equation

The accounting equation for Yummys Enterprises is:

Assets = Liabilities + Owner’s Equity
$120,000 = $60,000 + $60,000
Assets = Liabilities + O/Equity
$132,000 = $72,000 + $60,000
If Yummys Enterprises purchases office equipment on
account for $12,000, the accounting equation will change
to:
 Accounting Equation | Practice Question
Nuptse- Himalaya Ltd. (NUPTSE) compiled the following financial information as of December 31, 2018:
1) Revenues $140,000
2) Equity (1/1/18) 105,000
3) Equipment 40,000
4) Expenses 125,000
5) Cash 35,000
6) Cash Dividends 10,000
7) Supplies 5,000
8) Accounts payable 20,000
9) Accounts receivable 15,000

a) Calculate Nuptse – Himalaya Ltd. total assets on Dec. 31, 2018. Answer: $95,000
b) Calculate Nuptse-Himalaya Ltd. Net income for the year ended Dec. 31, 2018. Answer: $15,000
c) Calculate Nuptse–Himalaya Ltd. shareholder’s equity on Dec. 31, 2018. Answer: $110,000
Accounting Equation | Practice Question
The December 31, 2019 balance sheet of Broadway
Retailer reported total assets of PKR 900,000, total
liabilities of PKR 350,000, and owners' equity of PKR
550,000. The following transactions occurred in Assets = Liabilities + Equity
January of 2020:
O/B 900 = 350 + 550
(1) The business purchased land for PKR 250,000, (1) +250 land
paying PKR 100,000 cash and issuing a note payable
for the balance.
-100 Cash = +150 N/P
(2) The business collected accounts receivable (2) +45 Cash
totaling PKR 45,000.
-45 A/R
(3) The business sold land costing PKR 50,000 for PKR
60,000 cash. (3) -50 land
(4) The business paid PKR 50,000 of the note payable. +60 Cash = + 10
Identify the increase and decrease in each (4) -50 Cash = -50 N/P
component of accounting equation and Compute
the following as at January 31, 2020. C/B 1,010 = 450 + 560
Total assets
Total liabilities
Shareholders' equity
 Using Accounting Equation| Transaction Analysis
Assets = Liabilities + Equity
J&M Limited
Trans- Accounts Share Retained Earnings
Cash + Supplies + Equipment = + +
action Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. - 7,000 + 7,000
3. +1,600 +1,600

4. +1,200 +1,200
5. + 250 - 250
1. Jerry & Merry decide to start a smartphone app development company that they incorporate as J&M Ltd.
On September 1, 2019, they invest $15,000 cash in the business in exchange for $15,000 of ordinary shares.
2. J&M purchases computer equipment for $7,000 cash
3. J&M purchases for $1,600 headsets and other accessories expected to last several months. The supplier
allows the company to pay this bill in October
4. J&M receives $1,200 cash from customers for app development services it has performed
5. J&M receives a bill for $250 from the Programming News for advertising on its website but postpones payment
until a later date.
 Using Accounting Equation| Transaction Analysis
Assets = Liabilities + Equity
J&M Limited
Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

6. +1,500 +2,000 +3,500

7. - 1,700 - 600
- 900
- 200
8. - 250 - 250
9. +600 -600
10. -1,300 -1,300
6. J&M provides $3,500 of services. The company receives cash of $1,500 from customers, and it bills the
balance of $2,000 on account
7. J&M pays the following expenses in cash for September: office rent $600, salaries and wages of employees
$900, and utilities $200.
8. J&M pays its $250 Programming News bill in cash. The company previously (in Transaction 5) recorded the
bill as an increase in Accounts Payable.
9. J&M receives $600 in cash from customers who had been billed for services.
10. The company pays a dividend of $1,300 in cash to Jerry and Merry, the shareholders of J&M Ltd.
 Using Accounting Equation| Transaction Analysis
Assets = Liabilities + Equity
J&M Limited
Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. - 7,000 + 7,000
3. +1,600 +1,600

4. +1,200 +1,200
5. + 250 - 250
6. +1,500 +2,000 +3,500
7. - 1,700 - 600
- 900
- 200
8. - 250 - 250
9. +600 -600
10. -1,300 -1,300
8,050 +1,400 +1,600 +7,000 = 1,600 +15,000 +4,700 -1,950 -1,300

$18,050 $18,050
Financial Statements | Types

Income Statement
• Statement of operation / profit and loss

Retained Earnings Statement Notes to the Accounts

• Statement of Changes in Equity
• Significant accounting policies
Statement of Financial Position
• Balance Sheet • Direct information
Statement of Cash Flows
• Indirect information
`
Statement of Comprehensive Income
Preparing Financial Statements
Assets = Liabilities + Equity J&M Limited
Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = +
Receivable Payable + Capital Rev. – Exp. – Div.

8,050 +1,400 +1,600 +7,000 = 1,600 +15,000 +4,700 -1,950 -1,300

 Reports the profitability

of the company’s
operations over a
specific period of time.

 Lists revenues first,

followed by expenses.

 Shows net income (or

net loss).
Statement of
Retained Earnings
Preparing Financial Statements
J&M Limited
Assets = Liabilities + Equity
Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = +
Receivable Payable + Capital Rev. – Exp. – Div.

8,050 +1,400 +1,600 +7,000 = 1,600 +15,000 +4,700 -1,950 -1,300

 Reports the changes in

retained earnings for a
specific period of time.
Income Statement
 Indicates the reasons
why retained earnings
increased or decreased. Statement of
Financial Position
Preparing Financial Statements
J&M Limited
Assets = Liabilities + Equity
Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = +
Receivable Payable + Capital Rev. – Exp. – Div.

8,050 +1,400 +1,600 +7,000 = 1,600 +15,000 +4,700 -1,950 -1,300

 Snapshot of assets, liabilities, and

equity at a specific date.

 Lists assets at the top, followed by Statement of

liabilities and equity. Cash Flows

 Total assets must equal total

liabilities and equity.
Statement of
Retained Earnings
Preparing Financial Statements
J&M Limited
Assets = Liabilities + Equity
Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = +
Receivable Payable + Capital Rev. – Exp. – Div.

8,050 +1,400 +1,600 +7,000 = 1,600 +15,000 +4,700 -1,950 -1,300

 Information on the cash receipts and

payments for a specific period of time.

 Answers the following:

 Where did cash come from?

 What was cash used for?

 What was the change in the cash

balance?

Statement of
Financial Position
Preparing Financial Statements
Assets = Liabilities + Equity
J&M Limited
Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
Receivable Payable Capital Rev. – Exp. – Div.

8,050 +1,400 +1,600 +7,000 = 1,600 +15,000 +4,700 -1,950 -1,300

 Other comprehensive
income items are not part
of net income.

 Reported either by

 Combining with
income statement, or

 Separate statement.
Practice Question Emerald Corporation
P1-4 Emerald Corporation provided the following summary balance sheet information:

Amounts in PRK Dec. 31, 2018 Dec. 31, 2019

Total Assets 2,500,000 3,800,000

Total Liabilities 900,000 1,300,000

Compute the net income for the year ending December 31, 2019, under each of the following
independent scenarios:

a) Emerald paid no dividends, and no additional capital was raised via share issuances.
b) Emerald paid PKR 3mln dividends, and no additional capital was raised via share issuances.
c) Emerald paid no dividends, but raised PKR 1.5mln via issuance of additional shares of stock.
d) Emerald paid PKR 3mln in dividends, and raised PKR 1.15mln via issuance of additional shares of stock.
Practice Question - Solution Emerald Corporation