Chart of Accounts

Account Account Type Financial Statement

Cash
Accounts Receivable
Coffee Inventory
Roasting Equipment
Accum. Depreciation - Roasting Equip.
Bank Loan Payable
Accounts Payable
Sales Revenue
Salaries Expense
Rent Expense
Advertising Expense
Depreciation Expense
Share Capital
Retained Earnings
Analyzing Transactions and Their Effects
on Financial Statements

Chapter 2
Accounting Standards
 IFRS = International Financial Reporting Standards
 Required for public companies
 International standards
 How “international” are they?
 ASPE = Accounting Standards for Private Enterprises
 Can be used by private companies only
 Easier to implement / more cost-effective
IFRS Conceptual Framework
 What’s the purpose of a conceptual framework?
 Purpose is to provide a structure for creating new accounting
standards and
 To assist preparers of financial statements when there are no
standards for guidance
Characteristics of Useful Information

5
Cash vs. Accrual Basis
of Accounting
Key Characteristics and Differences
Cash vs Accrual Basis of Accounting
 Under the Cash Basis:
 Revenues are recorded when the cash is received
 Expenses are recorded when cash is paid
 Under the Accrual Basis:
 Revenues are recorded when they are earned in accordance
with the revenue recognition criteria
 Expenses are recorded when they are incurred

7
 Accounting methods

Cash Accounting Accrual Accounting

All transactions recorded only Transaction recorded when

on exchange of cash main economic event occurs

(NOT necessarily when cash is

exchanged)

Eventually all transactions are

recorded
(TIMING!)
Accounting methods

Cash accounting Accrual accounting

When economic
When cash is activity takes
received place (i.e., when
revenue is
earned)

When should revenue

be recognized?
Accounting methods

Received deposit of $500 Received $1500

(full payment)
Started painting and
finishing painting (same
day)
Accounting methods

Received deposit of $500 Finished painting Received $1500

(full payment)
Started painting
Cash vs. Accrual Basis – Revenues and Expenses
 Four scenarios
 Cash collections on account from customers of $500
 $2,000 in wages paid during month, with $500 in wages
remaining unpaid at month end
 Credit sales to customers totalled $8,000
 Cash sales of $6,000

Cash Accrual
Revenue Expense Revenue Expense
Analyzing Transactions

“Template” Approach
The Accounting Equation

Assets Resources owned

=
Liabilities Amounts owed

+
Shareholders’ Shareholder investments
Equity
Transactions and the Accounting Equation
 Every transaction affects at least two accounts
 Each line must balance
 Assets = Liabilities + Shareholder’s Equity

A = L + SE
 Retained earnings will be affected by changes in
revenues, expenses and/or dividends

15
Shareholder’s Equity

A = L + SE

Direct Investment Reinvestment of Net Income

(share capital) (Revenue – Expenses)
Basic Retained Earnings Formula

Beginning Retained Earnings

+ Net Income
- Dividends
Ending Retained Earnings
Helpful Steps for Completing Transactions

Picture the documented activity.

Picture what is described in words. This is vital to succeeding in the next step.

Name what’s exchanged.

Assign names to what your business has received and given.

Analyze the financial effects.

Show how the costs cause elements of the accounting equation to increase and/or
decrease.
Example #1

An initial investment of $5,000 in common shares is

made by founding shareholders

A = L + SE
Accounts Accounts Common Retained
Cash Equipment
Receivable Payable Shares Earnings
Example #2

The entity obtains a $7,500 loan from its bank

A = L + SE
Prepaid Loan Common Retained
Cash Inventory
expenses payable Shares Earnings
Example #3

Purchased $500 of inventory ‘on account’

A = L + SE
Accounts
Accounts Common Retained
Cash Receivabl Inventory
Payable Shares Earnings
e
Example #4

Sold inventory (costing $400) to customers for

$1,000 for cash

A = L + SE
Accounts
Accts Common Retained
Cash Receivabl Inventory
Payable Shares Earnings
e
Example #5

Company’s Board of Directors declares a $3,000

dividend

A = L + SE
Prepaid Accounts Common Retained
Cash Inventory
expenses Payable Shares Earnings
Example #6

The entity purchases equipment for $30,000 cash

A = L + SE
Accounts
Accounts Common Retained
Cash Receivabl Equipment
Payable Shares Earnings
e
Depreciation of Assets
o When an asset is used up over time, some of the cost
of the asset should be shown as an expense in each
period in which it is used
o The amount shown as an expense in any period is
called the Depreciation of the asset

25
Depreciation of Assets

o Straight-line depreciation expense

Original Cost – Estimated Residual Value

Estimated Useful Life

26
Depreciation of Assets
o Our equipment has a 10-year lifespan and a residual value
of $6,000
o What is our monthly straight-line depreciation expense?

Original Cost – Estimated Residual Value

Estimated Useful Life

27
Example #7

Record depreciation expense of $200 for the month

A = L + SE
Accounts
Accounts Common Retained
Cash Receivabl Equipment
Payable Shares Earnings
e
Example #8

The entity purchases a 12-month insurance policy for

$1,200 cash

A = L + SE
Prepaid Accounts Common Retained
Cash Inventory
Expenses Payable Shares Earnings
Prepaid Expenses
o An amount paid in advance of the coverage period is
recorded as an asset (a prepaid expense)
o As time passes, the coverage is “consumed” and is then
recognized as an expense

30
Example #9

The insurance expense for the above policy was

recorded for January

A = L + SE
Prepaid Accounts Common Retained
Cash Inventory
Expenses Payable Shares Earnings
Accounting Equation Template

o Major limitations to this approach include:

o The number of columns that can be included with in
the template
o Lack of specific information regarding revenues,
expenses and dividend accounts

32
Financial Statements

So we can use the worksheet handouts (in-class) to prepare

the following financial statements:
 Income Statement
 Statement of Changes in Equity
 Statement of Financial Position
 Cash Flow Statement

33
Statement of Income
o The Income Statement reports the amount of revenues less
expenses for a specific period of time.
o This is also referred to as profit or net income
o Dividends
o Are not expenses
o Are distributions of earnings to shareholders

34
Statement of Changes in Equity
• The Statement of Changes in Equity reports the way that net
income and the distribution of dividends affected the financial
position of the company during a period of time.

35
Classified Statement of Financial Position
o The Statement of Financial Position (balance sheet)
reports the amount of assets, liabilities, and
shareholders’ equity of a business at a point in time.
o Current assets and liabilities are distinguished from
noncurrent assets and non current liabilities

36
Cash Flow Statement
o Measures the net cash position as a result of cash inflows and
outflows in the following three categories of business
activities:
o Operating Activities
o Investing Activities
o Financing Activities

37