Chapter 1 Accounting in Action Prepared by: Debbie Musil Kwantlen University College

Agenda Learning goals Vocabulary Ethics in financial accounting Who uses accounting information Building blocks of accounting Forms of business organization Accounting equation Transaction analysis Financial statements

Learning goals Explain why accounting is important to accountants and non-accountants. Explain generally accepted accounting principles and assumptions Use the accounting equation and explain the meaning of assets, liabilities and owner's equity. Analyze the affects of business transaction on the accounting equation Prepare financial statements

Vocabulary Accounting equation Economic entity assumption Monetary unit assumption Assets Ethics Net income/loss Assumption Expenses Owner’s equity Balance sheet GAAP Proprietorship Partnership Cash flow statement Going concern assumption Statement of owner’s equity Corporation Income statement Transactions Cost principle Investment Drawings Liabilities

Accounting & Ethics Accounting - “The Language of Business” Must be understandable, useful, truthful Ethics Standards of conduct used to judge actions To Solve Ethical Dilemmas Recognize situation and ethical issues involved Identify and analyse elements: stakeholder who may be harmed or benefited Identify alternatives and weigh effects on stakeholders Select the most ethical alternative

Users of Accounting Information Internal Users Includes Marketing, Human Resources, Production, Senior Management Used for planning, organizing and running the business External Users Investors, Creditors, Labour Unions, Customers, Regulators and other authorities Used for decisions of ownership, credit, lending, assess compliance, performance

Accounting as an Information System Is a an information system that identifies, records, and communicated the economic event of an organization to internal and external users.

GAAP “Generally Accepted Accounting Principles” Common set of accounting standards Developed by the Canadian Institute of Chartered Accountants (“CICA”) Consult with organizations and individuals Authority through Canadian and provincial business and securities statutes Moving towards international financial reporting standards (“IFRS”)

GAAPS Cost Principle – assets are recorded at original cost Assumptions: Going concern – organization will continue to operate in the foreseeable future Monetary unit – only transaction data that can be expressed as an amount of money be included in the accounting records. Economic entity – activities of a unit or organization in society are kept separate and distinct from other entities and owner

Forms of business Organization Proprietorship: a business owned by one person. Examples: hair stylists, plumber… Partnership: similar to a proprietorship only owned by two or more people. Corporation: is a separate legal entity from it’s owners. The corporate ownership is divided between the shareholders.

Forms of business Organization Public corporation: shares are publicly traded and companies issue financial report on regular basis (quarterly) Private corporation: shares are not publicly owned and financial statement are not available to the general public.

Assets & Liabilities Assets Liabilities Owner’s Equity Resources owned by the organization Liabilities Claims against assets Existing debts and obligations Owner’s Equity Equals total assets less total liabilities Represents ownership claim on assets Components: Investments – assets put into business by owner Drawings – cash or other assets withdrawn by owner for personal use Net income (loss) – revenues less expenses

Owner’s Equity Equals total assets less total liabilities Represents ownership claim on assets Components of owner’s equity: Investments – assets put into business by owner Drawings – cash or other assets withdrawn by owner for personal use Net income (loss) – revenues less expenses

Revenues & Expenses Revenues Expenses Result from business activities that are performed to earn income Result in an increase in an asset and in owner’s equity Expenses The cost of assets consumed or services used in order to earn revenue Result in an decrease in an asset and in owner’s equity

Accounting Equation Revisited Assets = Liabilities + Owner’s Equity 1444444444244444444444443 Investments - Drawings +/- Net Income (Loss) 14444244443 Revenues - Expenses

Accounting Equation Distinctions by Type of Organization Sole Proprietorship: Assets = Liabilities + Owner’s Equity Partnership: Assets = Liabilities + Partner’s Equity Corporation: Assets = Liabilities + Shareholders’ Equity

Transaction Analysis Review how to record transaction analysis from page 16-20 Do the exercise on the bottom on page 20

Financial Statements Prepared after all transactions identified, recorded and summarized: Income Statement – presents revenues, expenses and net income (loss) for a specific period of time Statement of Owner’s Equity – summarizes the changes in owner’s equity for a specific time period Balance Sheet – reports assets, liabilities and owner’s equity at a specific date Cash Flow Statement – summarizes cash inflows and outflows for a specific period of time

Income Statement

Statement of Owner’s Equity

Balance Sheet Owner’s capital of $16,450 is brought forward from the Statement of Owner’s Equity

Cash Flow Statement Cash shown on the Balance Sheet equals ending cash on the Cash Flow Statement

Exercise Do the demonstration problem on page 25 Homework: self study questions 1-10 Homework: questions 6, 14, 20 Homework: exercises: BE1-3, BE1-4, E1-2, P1-5A