Accounting

in Business

CHAPTER

PowerPoint Slides to accompany

Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
2013 McGraw-Hill Ryerson Limited.
 Learning Objectives
1. Describe the purpose and importance of
accounting. (LO1)
2. Describe forms of business organization.
(LO2)
3. Identify users and uses of, and
opportunities in, accounting. (LO3)
4. Identify and explain why ethics and social
responsibility are crucial to accounting.
(LO4)
2 2013 McGraw-Hill Ryerson Limited.
 Learning Objectives
5. Identify, explain, and apply accounting
principles. (LO5)
6. Identify and explain the content and
reporting aims of financial statements.
(LO6)
7. Analyze business transactions by applying
the accounting equation. (LO7)
8. Prepare financial statements reflecting
business transactions. (LO8)
3 2013 McGraw-Hill Ryerson Limited.
 What is Accounting?
Accounting is an information system that
identifies, measures, records, and
communicates information that has
relevance and is a faithful representation of
an organizations economic activities.
Its objective is to help people make better
decisions.

4 2013 McGraw-Hill Ryerson Limited. (LO1)

 What is Recordkeeping?
Recordkeeping, or bookkeeping, is the part
of accounting that involves recording
economic transactions, either electronically
or manually.
Accounting involves the recordkeeping
process but is much more.

5 2013 McGraw-Hill Ryerson Limited. (LO1)

 Forms of Organization
Sole Proprietorship
Partnership
Corporation

6 2013 McGraw-Hill Ryerson Limited. (LO2)

 Sole Proprietorships
One owner
Separate entity for accounting purposes
Not a separate legal entity from the
owner
Unlimited liability
Limited life
Owner taxed on profits

7 2013 McGraw-Hill Ryerson Limited. (LO2)

 Partnerships
Two or more owners
Separate entity for accounting purposes
Not a separate legal entity from the
owners
Unlimited liability
Limited life
Owners taxed on profits

8 2013 McGraw-Hill Ryerson Limited. (LO2)

 Corporations
One or more owners
Separate entity for accounting purposes
Separate legal entity from the owner(s)
Limited liability
Unlimited life
Corporation taxed on profits

9 2013 McGraw-Hill Ryerson Limited. (LO2)

Users of Accounting Information
Accounting is a service activity that
provides information to help internal and
external users make decisions.

10 2013 McGraw-Hill Ryerson Limited. (LO3)

 External Users
External users of accounting information are
not involved in running the organization.
They include:
Lenders

Shareholders

Governments

Consumer groups

External auditors

Customers
3 (LO )
11 2013 McGraw-Hill Ryerson Limited.
 External Reporting
Reports for external users are usually in the
form of financial statements.
The information in the statements needs to
be relevant and faithfully represented.
Generally accepted accounting principles
(GAAP)are the underlying concepts that
make up acceptable accounting practices.
GAAP are important in increasing the
usefulness of financial statements to users.
12 2013 McGraw-Hill Ryerson Limited. (LO3)
 Internal users
Internal users are involved in managing
and operating an organization.
Accounting provides information to these
users to help them improve the efficiency
and effectiveness of the organization.

13 2013 McGraw-Hill Ryerson Limited. (LO3)

 Typical Questions Asked by Internal
Users
What are the manufacturing expenses per
unit of product?
What is the most profitable mix of services?
What level of revenues is necessary to show
net income?
Which service activities are most profitable?
Which expenses change with a change in
revenue?

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 Accounting Opportunities
Broad fields of accounting include:
Financial accounting

Managerial accounting

Taxation

Accounting-related fields

15 2013 McGraw-Hill Ryerson Limited. (LO3)

 Accounting Opportunities
Accountants may work as:
Private accountants

Public accountants

Government accountants

16 2013 McGraw-Hill Ryerson Limited. (LO3)

 Professional Certification
Professional certifications in Canada:
Certified General Accountant (CGA)

Certified Management Accountant (CMA)

Chartered Accountant (CA)

Chartered Professional Accountant (CPA)

17 2013 McGraw-Hill Ryerson Limited. (LO3)

Ethics and Social Responsibility
Ethics are beliefs that differentiate right
from wrong.
Ethics and ethical behaviour are important
to the accounting profession and to those
who use accounting information.
Ethical practices build trust, which
promotes loyalty and long-term
relationships with customers, suppliers,
employees, and investors.
18 2013 McGraw-Hill Ryerson Limited. (LO4)
 Ethics in Accounting
One of the primary goals of accounting is
to provide useful information for decision
making.
In order for the information to be useful, it
must be trusted.
Accountants must act in an ethical manner
in order for the information they produce to
be trusted.

19 2013 McGraw-Hill Ryerson Limited. (LO4)

 Ethical Obligations of
Accountants
Maintain a high level of professional
competence.
Treat sensitive information as confidential.
Exercise due care and professional
judgment.
Must not be associated with deceptive
information.

20 2013 McGraw-Hill Ryerson Limited. (LO4)

 Generally Accepted Accounting
Principles (GAAP)
GAAP are the underlying concepts that
make up acceptable accounting practices.
Canada has recently adopted International
Financial Reporting Standards (IFRS) for
publicly accountable enterprises (PAE).
There is also another set of standards
called Accounting Standards for Private
Enterprises (ASPE).
21 2013 McGraw-Hill Ryerson Limited. (LO5)
 IFRS
IFRS was established to try to achieve
global agreement on the use of a common
set of accounting standards.
This is intended to make accounting
information more comparable from country
to country.

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 ASPE
Private enterprises are privately owned so
they have some different reporting needs
than public enterprises.
ASPE have significant parallels to IFRS
but there are some differences.

23 2013 McGraw-Hill Ryerson Limited. (LO5)

 GAAP for Public vs. Private
Enterprises
Publicly Accountable Private
Enterprises (PAEs) Enterprises (PEs)
GAAP to IFRS ASPE or IFRS
be used

24 2013 McGraw-Hill Ryerson Limited. (LO5)

 Purpose of GAAP
The primary purpose of GAAP is to ensure
the usefulness of financial information.
In order for it to be useful, it must have the
characteristics of relevance and faithful
representation.
Usefulness is enhanced if the information
is comparable, verifiable, timely, and
understandable.
25 2013 McGraw-Hill Ryerson Limited. (LO5)
 GAAP
GAAP includes the following principles:
Business entity principle

Cost principle

Going concern principle

Monetary unit principle

Revenue recognition principle

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 Business Entity Principle
Every business is to be accounted for
separately from its owner(s) or any other
economic entity of the owner.

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 Cost Principle
All transactions are recorded based on the
actual cash amount received or paid.
In absence of cash, the cash equivalent
amount of the exchange is recorded.

28 2013 McGraw-Hill Ryerson Limited. (LO5)

 Going Concern Principle
Financial statement users can safely
assume that the statements reflect a
business that is going to continue its
operations instead of being closed or sold.

29 2013 McGraw-Hill Ryerson Limited. (LO5)

 Monetary Unit Principle
Requires that transactions be expressed
using units of money as the common
denominator.
It assumes that the monetary unit is
stable.
Adjustments are not made for changes in
currency value or inflation.

30 2013 McGraw-Hill Ryerson Limited. (LO5)

 Revenue Recognition Principle
Requires that revenue be recorded at the
time that it is earned regardless of whether
cash or another asset has been
exchanged.
The amount of revenue to be recorded is
measured by the cash plus the cash
equivalent of any other assets received.

31 2013 McGraw-Hill Ryerson Limited. (LO5)

 Financial Statements
Are an organizations primary means of
financial communication.
An organizations transactions are
recorded, classified, sorted, and
summarized in order to produce financial
statements.

32 2013 McGraw-Hill Ryerson Limited. (LO6)

 Financial Statements
There are four major financial statements:
Income statement
Balance sheet
Statement of changes in equity
The statement of cash flows
These statements provide different
information but are linked together.

33 2013 McGraw-Hill Ryerson Limited. (LO6)

 Financial Statements

Balance Sheet Income Statement of Balance Sheet

(at the Statement Changes in (at the end of
beginning of Equity the period)
the period)

Statement of
Cash Flows

Period of time
Point in time Point in time

34 2013 McGraw-Hill Ryerson Limited. (LO6)

 Income Statement
The income statement reports:
Revenues of the organization.
Expenses (costs incurred in earning the
revenues).
Net income or loss.
The income statement covers a period of
time.

35 2013 McGraw-Hill Ryerson Limited. (LO6)

 Income Statement
Vertically Inclined Rock Gym
Income S tatement
Value of assets For Month Ended March 31, 2014
exchanged for
products and Revenues:
services Teaching revenue $3,800
provided to Equipment rental revenue 300
customers. Total revenues $ 4,100
Operating Expenses:
Rent expense $1,000
S alaries expense 700
Total operating expenses 1,700
Net income $ 2,400
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2013 McGraw-Hill Ryerson Limited. (LO6)
 Income Statement
Vertically Inclined Rock Gym
Income S tatement
For Month Ended March 31, 2014

Revenues:
Teaching revenue $3,800
Equipment rental revenue 300
Total revenues $ 4,100
Costs incurred
or the using up Operating Expenses:
of assets from Rent expense $1,000
generating S alaries expense 700
revenue Total operating expenses 1,700
Net income $ 2,400
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2013 McGraw-Hill Ryerson Limited. (LO6)
Statement of Changes in Equity
Equity is equal to total assets minus
total liabilities.
It represents how much of the assets
belong to the owner.
Owners equity increases with owner
investments and net income.
Owners equity decreases with owner
withdrawals and net loss.

38 2013 McGraw-Hill Ryerson Limited. (LO6)

 Statement Of Changes in Equity
Vertically Inclined Rock Gym
Covers a S tatement of Changes in Equity
period For Month Ended March 31, 2014
of time.
Virgil Klimb, capital, March 1 $ -
Add:
From the Investment by owner $10,000
Income Net income 2,400 12,400
statement. Total $12,400
Less: Withdrawal by owner 600
Virgil Klimb, capital, March 31 $11,800

39 2013 McGraw-Hill Ryerson Limited. (LO6)

 Balance Sheet

The balance sheet reports the:

Assets
Liabilities
Owners equity
of an organization at a point in time.
It is linked to the Statement of Owners
Equity.

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 Balance Sheet
Vertically Inclined Rock Gym
Balance Sheet
March 31, 2014
Properties or
economic Assets Liabilities
resources Cash $ 8,400 Accounts payable $ 200
owned by a Supplies 3,600 Notes payable 6,000
business Equipment 6,000 Total liabilities $ 6,200
Owner's Equity
Virgil Klimb,capital 11,800
Total liabilities
and owner's
Total assets $ 18,000 equity $ 18,000
41 2013 McGraw-Hill Ryerson Limited.
(LO6)
 Balance Sheet
Vertically Inclined Rock Gym
Balance Sheet
March 31, 2014
Debts or Assets Liabilities
obligations Cash $ 8,400 Accounts payable $ 200
of the Supplies 3,600 Notes payable 6,000
business
Equipment 6,000 Total liabilities $ 6,200
Owner's Equity
Virgil Klimb,capital 11,800
Total liabilities
and owner's
Total assets $ 18,000 equity $ 18,000
42 2013 McGraw-Hill Ryerson Limited.
(LO6)
 Balance Sheet
Owners Vertically Inclined Rock Gym
claim on the Balance Sheet
assets March 31, 2014
Assets Liabilities
Cash $ 8,400 Accounts payable $ 200
From the Supplies 3,600 Notes payable 6,000
Statement of Equipment 6,000 Total liabilities $ 6,200
Changes in
Owner's Equity
Equity
Virgil Klimb,capital 11,800
Total liabilities
and owner's
Total assets $ 18,000 equity $ 18,000
43 2013 McGraw-Hill Ryerson Limited.
(LO6)
 Statement of Cash Flow

Reports the sources and uses of cash

for a period of time.
Organized by the companys major
activities:
Operating
Investing
Financing

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 Statement of Cash Flow
Vertically Inclined Rock Gym
Statement of Cash Flow
For Month Ended March 31, 2014
Cash flows from operating activities:
Cash received from clients $4,100
Cash paid for supplies (3,400)
From Cash paid for rent (1,000)
the Cash paid to employee (700)
balance Net cash used by operating acitivities ($1,000)
Cash flows from investing activities: 0
sheet Cash flows from financing activities:
Investment by owner $10,000
Withdrawal by owner (600)
Net cash provided by financing activities 9,400
Net increase in cash $8,400
Cash balance, January 1 -
Cash balance, January 31 $8,400

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(LO6)
 The Accounting Equation

Assets = Liabilities + Equity

Describe
what an
organization
has invested
in.

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 The Accounting Equation

Assets = Liabilities + Equity

Describe Describe
what an non-owner
organization financing
has invested (borrowing)
in.

47 2013 McGraw-Hill Ryerson Limited. (LO7)

 The Accounting Equation

Assets = Liabilities + Equity

Describe Describe Describe

what an non-owner owner
organization financing financing .
has invested (borrowing).
in.

48 2013 McGraw-Hill Ryerson Limited. (LO7)

 The Accounting Equation

Assets = Liabilities + Equity

The accounting equation is used to keep track

of changes in a companys assets, liabilities,
and equity.

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 The Accounting Equation

Assets = Liabilities + Equity

Business transactions cause changes in assets,

liabilities, and equity.

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 Transaction Analysis
We need to determine:
1. Which accounts are being affected.
2. If the accounts are increasing or
decreasing.

51 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis

(1) Virgil Klimb invests $10,000 cash in the business.

Analysis: Cash increases by $10,000.
Owners capital increases by $10,000.

Owner's
Assets = Liabilities + Equity
Accounts Notes V.Klimb
Cash Supplies Equipment Payable Payable Capital
(1) $10,000 $10,000

New bal. $10,000 $0 $0 $0 $0 $10,000

$10,000 = $10,000

52 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis

(2) Purchased supplies for $2,500 cash.

Analysis: Supplies increase by $2,500.
Cash decreases by $2,500.

Owner's
Assets = Liabilities + Equity
Accounts Notes V.Klimb
Cash Supplies Equipment Payable Payable Capital
Old bal. $10,000 $10,000
(2) -$2,500 $2,500
New bal. $7,500 $2,500 $0 $0 $0 $10,000
$10,000 = $10,000

53 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis
(3a) Purchased $1,100 of supplies on credit.
Analysis: Supplies increase by $1,100.
Accounts Payable increases by $1,100

Owner's
Assets = Liabilities + Equity
Accounts Notes V.Klimb,
Cash Supplies Equipment Payable Payable Capital
Old bal. $7,500 $2,500 $10,000
(3a) $1,100 $1,100
New bal. $7,500 $3,600 $0 $1,100 $0 $10,000
$11,100 = $11,100

54 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis

(3b) Purchased $6,000 of equipment on credit.

A promissory note was signed.
Analysis: Equipment increases by $6,000.
Notes payable increases by $6,000.

Owner's
Assets = Liabilities + Equity
Accounts Notes V.Klimb,
Cash Supplies Equipment Payable Payable Capital
Old bal. $7,500 $2,500 $10,000
(3b) $1,100 $6,000 $1,100 $6,000
New bal. $7,500 $3,600 $6,000 $1,100 $6,000 $10,000
$17,100 = $17,100

55 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis
(4) Services rendered for $2,200 cash.
Analysis: Cash increases $2,200
Owners equity increases $2,200

Owner's
Assets = Liabilities + Equity
Accounts Notes V.Klimb,
Cash Supplies Equipment Payable Payable Capital
Old bal. $7,500 $3,600 $6,000 $1,100 $6,000 $10,000
(4) $2,200 $2,200
New bal. $9,700 $3,600 $6,000 $1,100 $6,000 $12,200
$19,300 = $19,300

56 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis
(5) Payment of $1,000 rent expense in cash.
Analysis: Cash decreases $1,000
Owners equity decreases $1,000

Owner's
Assets = Liabilities + Equity
Accounts Notes V.Klimb,
Cash Supplies Equipment Payable Payable Capital
Old bal. $9,700 $3,600 $6,000 $1,100 $6,000 $12,200
(5) -$1,000 -$1,000
New bal. $8,700 $3,600 $6,000 $1,100 $6,000 $11,200
$18,300 = $18,300

57 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis
(6) Payment of $700 salaries expense in cash.
Analysis: Cash decreases $700
Owners equity decreases $700

Owner's
Assets = Liabilities + Equity
Accounts Notes V.Klimb,
Cash Supplies Equipment Payable Payable Capital
Old bal. $8,700 $3,600 $6,000 $1,100 $6,000 $11,200
(6) -$700 -$700
New bal. $8,000 $3,600 $6,000 $1,100 $6,000 $10,500
$17,600 = $17,600

58 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis
(7) Service contract signed for April.
Analysis: No economic exchange has taken place
All accounts remain unaffected

Owner's
Assets = Liabilities + Equity
Accounts Notes V.Klimb,
Cash Supplies Equipment Payable Payable Capital
Old bal. $8,000 $3,600 $6,000 $1,100 $6,000 $10,500
(7)
New bal. $8,000 $3,600 $6,000 $1,100 $6,000 $10,500
$17,600 = $17,600

59 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis

(8)Services and rental revenues of $1,900 rendered

for credit. ($1,600 Teaching Revenue and $300 Equipment
Rental Revenue)
Analysis: Accounts receivable increases $1,900
Owners equity increases $1,900

O wne r's
Asse ts = Lia bilitie s + Equity
Note s V . Klimb,
Ca sh A/ R S upplie s Equipme nt A/ P P a ya ble Ca pita l
Old bal. $8,000 $3,600 $6,000 $ 1, 10 0 $6,000 $ 10 , 5 0 0
(8) $ 1, 9 0 0 $ 1, 9 0 0
New bal. $ 8 , 0 0 0 $ 1, 9 0 0 $3,600 $6,000 $ 1, 10 0 $6,000 $ 12 , 4 0 0
$ 19 , 5 0 0 = $ 19 , 5 0 0

60 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis
(9) Receipt of $1,900 cash on account.
Analysis: Cash increases $1,900
Accounts receivable decreases $1,900

Owner's
Assets = Liabilities + Equity
Notes V.Klimb,
Cash A/ R Supplies Equipment A/ P P ayable Capital
Old bal. $ 8,000 $ 1,900 $ 3,600 $ 6,000 $ 1,100 $ 6,000 $ 12,400
(9) $ 1,900 -$ 1,900
New bal. $ 9,900 $0 $ 3,600 $ 6,000 $ 1,100 $ 6,000 $ 12,400
$ 19,500 = $ 19,500

61 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis
(10) Payment of $900 accounts payable.
Analysis: Cash decreases $900
Accounts payable decreases $900

Owner's
Assets = Liabilities + Equity
Notes V.Klimb,
Cash A/ R Supplies Equipment A/ P P ayable Capital
Old bal. $ 9,900 $0 $ 3,600 $ 6,000 $ 1,100 $ 6,000 $ 12,400
(10) -$ 900 -$ 900
New bal. $ 9,000 $0 $ 3,600 $ 6,000 $ 200 $ 6,000 $ 12,400
$ 18,600 = $ 18,600

62 2013 McGraw-Hill Ryerson Limited. (LO7)

 Transaction Analysis
(11) Withdrawal of $600 cash by owner.
Analysis: Cash decreases $600
Owners capital decreases $600

Owner's
Assets = Liabilities + Equity
Notes V.Klimb,
Cash A/ R Supplies Equipment A/ P P ayable Capital
Old bal. $ 9,000 $0 $ 3,600 $ 6,000 $ 200 $ 6,000 $ 12,400
(11) -$ 600 -$ 600
New bal. $ 8,400 $0 $ 3,600 $ 6,000 $ 200 $ 6,000 $ 11,800
$ 18,000 = $ 18,000

63 2013 McGraw-Hill Ryerson Limited. (LO7)

 Financial Statement Preparation
The final balances of the accounts after all
of the transactions have been recorded are
as follows:
O wne r' s
A ssets = Lia bilit ie s + E quit y
N o tes V .Klim b,
C ash A/R S upplie s E quipm e nt A/P P a ya ble C a pit a l

Fin a l b a l. $ 8 ,4 0 0 $0 $ 3 ,6 0 0 $ 6 ,0 0 0 $ 200 $ 6 ,0 0 0 $ 11,8 0 0

$ 18 ,0 0 0 = $ 18 ,0 0 0

This information will be used to prepare the

financial statements.

64 2013 McGraw-Hill Ryerson Limited. (LO7)

 Financial Statement Preparation
The Income Statement is prepared
first by using revenue and expense
information from the Equity
column.
Ve rti cal l y Incl i ne d Rock Gym
Income State me nt
For Month Ende d March 31, 2014

Re ve nue s:
Transactions 4 and 8 Te achi ng re ve nue $ 3,800
Transaction 8 Equi pme nt re ntal re ve nue 300
Total re ve nue s $ 4,100
O pe rati ng Expe nse s:
Transaction 5 Re nt e xpe nse $ 1,000
Transaction 6 Sal ari e s e xpe nse 700
Total ope rati ng e xpe nse s 1,700
Ne t i ncome $ 2,400

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2013 McGraw-Hill Ryerson Limited. (LO8)
 Ve rti cal l y Incl i ne d Rock Gym
The Statement Income State me nt
of Owners For Month Ende d March 31, 2014

Equity is Re ve nue s:
Te achi ng re ve nue $ 3,800
prepared next Equi pme nt re ntal re ve nue 300
Total re ve nue s $ 4,100
O pe rati ng Expe nse s:
Re nt e xpe nse $ 1,000
Sal ari e s e xpe nse 700
Total ope rati ng e xpe nse s 1,700
Ne t i ncome $ 2,400

Vertically Inclined Rock Gym

S tatement of Owner's Equity
For Month Ended March 31, 2014

Virgil Klimb, capital, March 1 $ -

Add:
Transaction 1 Investment by owner $10,000
Income Statement Net income 2,400 12,400
Total $12,400
Transaction 11 Less: Withdrawal by owner 600
Virgil Klimb, capital, March 31 $11,800
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2013 McGraw-Hill Ryerson Limited. (LO8)
 The Balance Sheet is prepared
using the final balances of the
accounts

Ve rtically Incline d Rock Gym

Balance She e t
March 31, 2014
Asse ts Liabilitie s
Cash $ 8,400 Accounts payable $ 200
Supplie s 3,600 Note s payable 6,000
Equipme nt 6,000 Total liabilitie s $ 6,200
Owne r's Equity
From the Statement Virgil Klimb,capital 11,800
of Owners Equity Total liabilitie s
and owne r's
Total asse ts $ 18,000 e quity $ 18,000
67 2013 McGraw-Hill Ryerson Limited.
(LO8)
 End of Chapter

68 2013 McGraw-Hill Ryerson Limited.