Chapter 1

Accounting in Action

Accounting Principles
Ninth Canadian Edition
Weygandt; Kieso; Kimmel; Trenholm; Warren; Novak
Prepared by Debbie Musil, FCPA, FCMA
Copyright ©2022 John Wiley & Sons Canada, Ltd.
Chapter 1: Learning Objectives
1. Identify the uses and users of accounting and the objective of
financial reporting.
2. Compare the different forms of business organization.
3. Explain the building blocks of accounting: ethics and the
concepts included the conceptual framework.
4. Describe the elements of the financial statements and explain
the accounting equation.
5. Analyze the effects of business transactions on the accounting
equation.
6. Prepare financial statements.
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Learning Objective 1
Identify the uses and users of accounting and the
objective of financial reporting.

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Why is Accounting Important?
• The system that identifies, records, and
communicates economic events to users
• Important to the world economy
• Provides relevant, reliable financial information
• Helpful for all business endeavours
• Solid foundation for other business disciplines
• Relevant and useful in other disciplines

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Using Accounting Information
• Internal Users
o Used for planning, organizing, and running companies
o Includes finance, marketing, human resources,
production, company officers
• External Users
o Investors, creditors, labour unions, customers,
regulators and other authorities
o Used for decisions of ownership, credit, lending, to
assess compliance, performance

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Using Accounting Information
continued
• Data Analytics
o Involves analyzing data to draw inferences
o Used by business decision makers to make more
informed business decisions
o Accounting information is used to support business
decisions using data analytics

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Objective of Financial Reporting
• Accounting information is communicated to external
users via financial statements.
o The main objective of financial reporting is to provide
useful information to existing and potential investors
and creditors (external users) to make decisions about
providing resources to a business.

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Learning Objective 2
Compare the different forms of business organization.

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Business Organizations

Characteristic Proprietorship Partnership Corporation

Owners Proprietor: one Partners: two or more Shareholders: one or more

Owner's liability Unlimited Unlimited Limited

Private or public Private Usually private Private or public

Taxation of profits Paid by the owner Paid by the partners Paid by the corporation

Life of organization Limited Limited Unlimited

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Learning Objective 3
Explain the building blocks of accounting: ethics and the
concepts included the conceptual framework.

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Generally Accepted Accounting
Principles (GAAP)
• Common set of accounting standards, generally
accepted and universally practised
• Developed from the guiding principles, assumptions,
and concepts

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Accounting and Ethics (1 of 2)

• For information to have value, must be prepared by

individuals with high standards of ethical behaviour
• The standards of conduct by which actions are judged
as right or wrong, honest or dishonest, fair or not fair
are ethics
• Of the utmost importance to accountants and
decision-makers who rely on the financial information
they produce
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Accounting and Ethics (2 of 2)
Ethics Steps used to analyze ethics cases and
• Standards of conduct situations
used to judge actions 1. Identify ethical issues involved
2. Identify the stakeholders − the
persons or groups that may benefit
or face harm
3. Consider the alternative courses of
action and the consequences of
each for the various shareholders
• Select the most ethical alternative

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Conceptual Framework (1 of 3)

• Coherent system that guides development and

application of accounting principles and standards
• Leads to the objective of financial reporting
o to provide information to assist users in making
decisions

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Conceptual Framework (2 of 3)

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Conceptual Framework (3 of 3)

• Fundamental Qualitative Characteristics

o Relevance, faithful representation, neutrality
• Enhancing Qualitative Characteristics
o Comparability, consistency, verifiability, timeliness,
understandability

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Recognition and Measurement
• Recognition – the process of recording a transaction
in the accounting records
• Measurement – determining the amount that should
be recognized
o Historical cost is the primary basis used – reliable and
verifiable, however may not be relevant
o Fair value may be more relevant – the amount of
consideration if sold in the open market

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Foundational Concepts and Assumptions
• Reporting entity concept – the recording and
reporting of activities of a unit or organization in
society are kept separate and distinct from other
reporting entities and owner
• Going concern assumption – reporting entity will
continue to operate in the foreseeable future
• Periodicity concept – users require relevant
accounting information; business divides up economic
activities into distinct time periods

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Accounting Standards
• Responsibility of the Accounting Standards Board
(AcSB)
o Publicly accountable enterprises must adopt
International Financial Reporting Standards (IFRS)
o Non-publicly traded(private) companies may adopt
Accounting Standards for Private Enterprises (ASPE) or
IFRS

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Learning Objective 4
Describe the elements of the financial statements and
explain the accounting equation.

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Balance Sheet (1 of 2)
• Assets
o Economic resources controlled by a business
o Used to carry out activities such as production and
distribution
o Have the potential to produce economic benefits

• Liabilities
o Obligations arising from past events to make a future
payment of assets or services
o Present debts and obligations

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Balance Sheet (2 of 2)
• Owner’s Equity
o Represents owner’s claim on assets
o Owner’s Equity = Assets − Liabilities
o 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
Summary of Changes to Owner’s Equity
Increases in owner’s equity Decreases in owner’s equity
Investments by the owner Drawings by the owner
Revenues Expenses

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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

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Income Statement
• Revenues: Increase Owner’s Equity
o Result from business activities that are performed to
earn profit
o Result in an increase in an asset or a decrease in a
liability
• Expenses: Decrease Owner’s Equity
o The cost of assets consumed or services used
o Result in a decrease in an asset or an increase in a
liability
o Exclude withdrawals made by owners

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Cash Flow Statement
• Gives information about the cash receipts and cash
payments for a specific period of time
o Reports cash inflows and outflows:
• As a result of operating activities during a period
• From investing transactions
• From financing transactions

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Accounting for and Reporting Equity—
Differences by Form of Organization

Proprietorship Partnership Corporation (reporting

under IFRS)
Equity section Owner’s equity Partners’ equity Shareholder’s equity

Investments by owners ↑ Owner’s capital ↑ Partners’ capital ↑ Share capital

Profits ↑ Owner’s capital ↑ Partners’ capital ↑ Retained earnings

Withdrawals ↑ Drawings account and ↑ Drawings account and ↑ Dividends account and
↓ Owner’s capital ↓ Partners’ capital ↓ Retained earnings
Statement Statement of Owner’s Equity Statement of Partners’ Equity Statement of Changes in
Equity

↑ means the account is increased or added to.

↓ means the account is decreased or subtracted from.

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Accounting Equation Expanded

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

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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 balance
o Each transaction will have a “dual effect” on the
equation

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1: Investment by Owner
• Owner invests $15,000 cash in computer business and
names it “Softbyte”

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2: Purchase of Equipment for Cash
• Softbyte purchases computer equipment for $7,000
cash

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3: Purchase of Supplies on Credit
• Softbyte purchases supplies that will last several
months for $1,600 on account

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4: Services Provided for Cash
• Softbyte receives from customers $1,200 cash for
programming services it has provided

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5: Purchase of Advertising on Credit
• Softbyte receives a bill for advertising for $250, which
it pays at a later date

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6: Services Provided for Cash and Credit
• Softbyte provides $3,500 of programming services
and receives payment of $1,500

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

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8: Payment of Accounts Payable
• Softbyte pays its outstanding advertising bill of $250
in cash

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9: Receipt of Cash on Account
• Softbyte receives $600 in cash from customers billed
in transaction (6)

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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

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11: Withdrawal of Cash by Owner
• Softbyte’s owner, Andrew Leonid, withdraws $1,300 in
cash for his personal use

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Summary of Transactions

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Learning Objective 6
Prepare financial statements.

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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 time period
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 time period
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Interrelationship of the Financial Statements
(1 of 2)

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Interrelationship of the Financial Statements
(2 of 2)

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Copyright
Copyright © 2022 John Wiley & Sons Canada, Ltd.
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