1. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 1 Accounting in Action

2. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting in Action Why is accounting important? Why is accounting important? Using accounting informationUsing accounting information Forms of business organizationsForms of business organizations Building blocks of accounting Building blocks of accounting Generally accepted accounting principlesGenerally accepted accounting principles Accounting equationAccounting equation Using the building blocks Using the building blocks Transaction analysisTransaction analysis Financial statements Financial statements

3. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 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 Applicable in our personal livesApplicable in our personal lives

4. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 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)

5. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Users of Accounting Information Internal Users Internal Users Used for planning, organizing and running companiesUsed for planning, organizing and running companies Includes finance, marketing, human resources, production, company officersIncludes finance, marketing, human resources, production, company officers 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, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting & Ethics Ethics Standards of conduct used to judge actions Standards of conduct used to judge actions For information to have value, must be prepared by individuals with high ethical standards For information to have value, must be prepared by individuals with high ethical standards 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

7. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Business Organizations

8. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Generally Accepted Accounting Principles (GAAP) Common set of accounting standards Common set of accounting standards Responsibility of the Accounting Standards Board (AcSB) Responsibility of the Accounting Standards Board (AcSB) Separate strategies effective Jan 1, 2011: Separate strategies effective Jan 1, 2011: Publicly accountable enterprises must adopt International Financial Reporting Standards (IFRS)Publicly accountable enterprises must adopt International Financial Reporting Standards (IFRS) Private companies may adopt Canadian GAAP for Private EnterprisesPrivate companies may adopt Canadian GAAP for Private Enterprises

9. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 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 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 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

10. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Recognition and Measurement Recognition – the process of recording a transaction in the accounting records Recognition – the process of recording a transaction in the accounting records Measurement – determining the amount that should be recognized Measurement – determining the amount that should be recognized Historical cost is the primary basis used – reliable and verifiable, however may not be relevantHistorical cost is the primary basis used – reliable and verifiable, however may not be relevant Fair value may be more relevant – the amount of consideration that would be agreed to between arm’s-length partiesFair value may be more relevant – the amount of consideration that would be agreed to between arm’s-length parties

11. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Assets = Liabilities + Owner’s Equity Assets = Liabilities + Owner’s Equity Accounting Equation Assets must equal the sum of liabilities and owner’s equity 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 Liabilities are shown before owner’s equity because creditors’ claims are paid before ownership claims

12. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Assets & Liabilities Assets Assets Resources owned by a businessResources owned by a business 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 Obligations arising from past events to make a future paymentObligations arising from past events to make a future payment Existing debts and obligationsExisting debts and obligations

13. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Owner’s Equity Represents ownership claim on assets Represents ownership claim on assets Owner’s Equity = Assets − Liabilities Owner’s Equity = Assets − Liabilities 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 Profit = Revenues − ExpensesProfit = Revenues − Expenses

14. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Revenues & Expenses Revenues: Increase Owner’s Equity Revenues: Increase Owner’s Equity Result from business activities that are performed to earn profitResult from business activities that are performed to earn profit Result in an increase in an asset or a decrase in a liabilityResult in an increase in an asset or a decrase in a liability Expenses: Decrease Owner’s Equity Expenses: Decrease Owner’s Equity The cost of assets consumed or services usedThe cost of assets consumed or services used Result in an decrease in an asset or an increase in a liabilityResult in an decrease in an asset or an increase in a liability

15. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Assets = Liabilities + Owner’s Equity Assets = Liabilities + Owner’s Equity Accounting Equation Expanded Investments - Drawings + Profit ( or - Loss) Investments - Drawings + Profit ( or - Loss) Revenues - Expenses Revenues - Expenses  

16. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting Differences by Type of Organization

17. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Transaction Analysis Accounting identifies, records and communicates the economic events of an organization 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 Only events that cause changes in assets, liabilities or owner’s equity are recorded 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, Fifth Canadian Edition © 2010 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, Fifth Canadian Edition © 2010 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, Fifth Canadian Edition © 2010 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, Fifth Canadian Edition © 2010 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, Fifth Canadian Edition © 2010 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, Fifth Canadian Edition © 2010 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, Fifth Canadian Edition © 2010 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, Fifth Canadian Edition © 2010 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, Fifth Canadian Edition © 2010 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, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. 10: Signed Contract to Rent Equipment No effect on the accounting equation because assets, liabilities and owner’s equity have not changed No effect on the accounting equation because assets, liabilities and owner’s equity have not changed Accounting transaction has not occurred Accounting transaction has not occurred

28. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 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 11: Owner Withdrawal of Cash

29. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 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 profit or loss for a specific period of timeIncome Statement – presents revenues, expenses and profit or 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

30. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Income Statement

31. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Statement of Owner’s Equity Profit of $2,750 is brought forward from the Income Statement

32. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Balance Sheet Owner’s capital of $16,450 is brought forward from the Statement of Owner’s Equity

33. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Cash Flow Statement Cash shown on the Balance Sheet equals ending cash on the Cash Flow Statement

34. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. COPYRIGHT Copyright © 2010 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.