1. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen University College Chapter 1 Accounting in Action

2. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Accounting in Action Why is accounting important? Why is accounting important? Ethics and users; an information systemEthics and users; an information system Building blocks of accounting Building blocks of accounting Generally accepted accounting principlesGenerally accepted accounting principles Forms of business organizationsForms of business organizations The accounting equationThe accounting equation Using the building blocks Using the building blocks Transaction analysis and financial statementsTransaction analysis and financial statements

3. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Why is Accounting Important? To accountants To accountants Reliance on financial Information by othersReliance on financial Information by others Important to a country’s economyImportant to a country’s economy To non-accountants To non-accountants Helpful for all business endeavoursHelpful for all business endeavours Solid foundation for other business disciplinesSolid foundation for other business disciplines Relevant and useful in other disciplinesRelevant and useful in other disciplines

4. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Accounting & Ethics Ethics Standards of conduct used to judge actions Standards of conduct used to judge actions Ethics - “The Language of Business” Ethics - “The Language of Business” Must be understandable, useful, truthful Must be understandable, useful, truthful To Solve Ethical Dilemmas 1.Recognize situation and ethical issues involved 2.Identify and analyse elements 3.Identify alternatives and weigh effects on stakeholders  Select the most ethical alternative

5. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Users of Accounting Information Internal Users Internal Users Includes Marketing, Human Resources, Production, Senior ManagementIncludes Marketing, Human Resources, Production, Senior Management Used for planning, organizing and running the businessUsed for planning, organizing and running the business External Users External Users Investors, Creditors, Labour Unions, Customers, Regulators and other authoritiesInvestors, Creditors, Labour Unions, Customers, Regulators and other authorities Used for decisions of ownership, credit, lending, assess compliance, performanceUsed for decisions of ownership, credit, lending, assess compliance, performance

6. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. An Information System Accounting identifies, records and communicates economic events to users Accounting identifies, records and communicates economic events to users Identify – decide which events indicate economic activityIdentify – decide which events indicate economic activity Record – chronological diary of events measured in currency, summarized and classifiedRecord – chronological diary of events measured in currency, summarized and classified Communicate – report recorded data in a standardized way (financial statements)Communicate – report recorded data in a standardized way (financial statements)

7. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. GAAP “Generally Accepted Accounting Principles” Common set of accounting standardsCommon set of accounting standards Developed by the Canadian Institute of Chartered Accountants (“CICA”)Developed by the Canadian Institute of Chartered Accountants (“CICA”) Consult with organizations and individualsConsult with organizations and individuals Authority through Canadian and provincial business and securities statutesAuthority through Canadian and provincial business and securities statutes Moving towards international financial reporting standards (“IFRS”)Moving towards international financial reporting standards (“IFRS”)

8. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. GAAP: Cost Principle Assets are recorded at original cost Assets are recorded at original cost Value exchanged when something is acquiredValue exchanged when something is acquired Reliable – based on factReliable – based on fact Verifiable – can be objectively measuredVerifiable – can be objectively measured Relevant – subject to argument:Relevant – subject to argument: Market value more useful?Market value more useful? Cost is widely used due to its reliability Cost is widely used due to its reliability

9. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. GAAP - Assumptions Going concern – organization will continue to operate in the foreseeable future Going concern – organization will continue to operate in the foreseeable future Monetary unit – only include transactions that can be expressed as an amount of money Monetary unit – only include transactions that can be expressed as an amount of money Economic entity – activities of a unit or organization in society are kept separate and distinct from other entities and owner Economic entity – activities of a unit or organization in society are kept separate and distinct from other entities and owner

10. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Business Organizations Proprietorship – a business owned by one person Proprietorship – a business owned by one person Partnership – a business owned by two or more persons associated as partners Partnership – a business owned by two or more persons associated as partners Corporation - a business organized as a separate legal entity under corporation law with ownership divided into transferable shares Corporation - a business organized as a separate legal entity under corporation law with ownership divided into transferable shares

11. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Assets = Liabilities + Owner’s Equity Assets = Liabilities + Owner’s Equity Accounting Equation

12. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Assets & Liabilities Assets Assets Resources owned by the organizationResources owned by the organization Used to carry out activities such as production and distributionUsed to carry out activities such as production and distribution Can provide future services or benefitsCan provide future services or benefits Liabilities Liabilities Claims against assetsClaims against assets Existing debts and obligationsExisting debts and obligations

13. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Owner’s Equity Equals total assets less total liabilities Equals total assets less total liabilities Represents ownership claim on assets Represents ownership claim on assets Components of owner’s equity: Components of owner’s equity: Investments – assets put into business by ownerInvestments – assets put into business by owner Drawings – cash or other assets withdrawn by owner for personal useDrawings – cash or other assets withdrawn by owner for personal use Net income (loss) – revenues less expensesNet income (loss) – revenues less expenses

14. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Revenues & Expenses Revenues Revenues Result from business activities that are performed to earn incomeResult from business activities that are performed to earn income Result in an increase in an asset and in owner’s equityResult in an increase in an asset and in owner’s equity Expenses Expenses The cost of assets consumed or services used in order to earn revenueThe cost of assets consumed or services used in order to earn revenue Result in an decrease in an asset and in owner’s equityResult in an decrease in an asset and in owner’s equity

15. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Assets = Liabilities + Owner’s Equity Assets = Liabilities + Owner’s Equity Accounting Equation Revisited Investments - Drawings +/- Net Income (Loss) Investments - Drawings +/- Net Income (Loss) Revenues - Expenses Revenues - Expenses  

16. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Accounting Equation Distinctions by Type of Organization Sole Proprietorship: Sole Proprietorship: Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity Partnership: Partnership: Assets = Liabilities + Partner’s EquityAssets = Liabilities + Partner’s Equity Corporation: Corporation: Assets = Liabilities + Shareholders’ EquityAssets = Liabilities + Shareholders’ Equity Income Trust: Income Trust: Assets = Liabilities + Unitholders’ EquityAssets = Liabilities + Unitholders’ Equity

17. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Transaction Analysis Transactions – the economic events of a business that are recorded Transactions – the economic events of a business that are recorded Each transaction is analyzed to determine its effect on the accounting equation Each transaction is analyzed to determine its effect on the accounting equation Accounting equation must always equal Accounting equation must always equal Each transaction will have a “dual effect” on the equationEach transaction will have a “dual effect” on the equation

18. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. 1: Investment by Owner Owner invests $15,000 in computer business and names it “Softbyte” Owner invests $15,000 in computer business and names it “Softbyte” Result: increase cash and owner’s equity by $15,000 Result: increase cash and owner’s equity by $15,000

19. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Softbyte purchases computer equipment for $7,000 cash Softbyte purchases computer equipment for $7,000 cash Result: increase equipment and decrease cash by $7,000 Result: increase equipment and decrease cash by $7,000 2: Purchase Equipment

20. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Softbyte purchases supplies that will last several months for $1,600 on account Softbyte purchases supplies that will last several months for $1,600 on account Result: increase supplies and accounts payable by $1,600 Result: increase supplies and accounts payable by $1,600 3: Purchases Supplies on Credit

21. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Softbyte receives from customers $1,200 cash for programming services it provided Softbyte receives from customers $1,200 cash for programming services it provided Result: increase cash and owner’s equity (revenue) by $1,200 Result: increase cash and owner’s equity (revenue) by $1,200 4: Services Provided for Cash

22. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Softbyte receives a bill for advertising for $250, which it pays at a later date Softbyte receives a bill for advertising for $250, which it pays at a later date Result: increase accounts payable and decrease owner’s equity by $250 (due to increase in expense) Result: increase accounts payable and decrease owner’s equity by $250 (due to increase in expense) 5: Purchase Advertising on Credit

23. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Softbyte provides $3,500 of programming services and receives payment of $1,500 Softbyte provides $3,500 of programming services and receives payment of $1,500 Result: increase cash by $1,500, accounts receivable by $2,000 and owner’s equity by $3,500 Result: increase cash by $1,500, accounts receivable by $2,000 and owner’s equity by $3,500 6: Services Provided for Cash & Credit

24. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Expenses paid in cash: rent of $600, salaries of $900, utilities of $200 Expenses paid in cash: rent of $600, salaries of $900, utilities of $200 Result: decrease cash and owner’s equity by $1,700 (due to increase in expense) Result: decrease cash and owner’s equity by $1,700 (due to increase in expense) 7: Payment of Expenses

25. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Softbyte pays its outstanding advertising bill of $250 in cash Softbyte pays its outstanding advertising bill of $250 in cash Result: decrease cash and accounts payable by $250 Result: decrease cash and accounts payable by $250 8: Payment of Accounts Payable

26. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Softbyte receives $600 in cash from customers billed in transaction 6 Softbyte receives $600 in cash from customers billed in transaction 6 Result: increase cash and decrease accounts receivable by $600 Result: increase cash and decrease accounts receivable by $600 9: Receipt of Cash on Account

27. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Softbyte’s owner withdraws $1,300 for his personal use Softbyte’s owner withdraws $1,300 for his personal use Result: decrease cash and owner’s equity by $1,300 Result: decrease cash and owner’s equity by $1,300 10: Owner Withdrawal of Cash

28. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Financial Statements Prepared after all transactions identified, recorded and summarized: Prepared after all transactions identified, recorded and summarized: Income Statement – presents revenues, expenses and net income (loss) for a specific period of timeIncome 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 periodStatement 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 dateBalance 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 timeCash Flow Statement – summarizes cash inflows and outflows for a specific period of time

29. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Income Statement

30. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Statement of Owner’s Equity

31. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Balance Sheet Owner’s capital of $16,450 is brought forward from the Statement of Owner’s Equity

32. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Cash Flow Statement Cash shown on the Balance Sheet equals ending cash on the Cash Flow Statement

33. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. COPYRIGHT Copyright © 2007 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.