1. 1 Accounting in Business CHAPTER PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
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2. © 2013 McGraw-Hill Ryerson Limited.
Learning Objectives
Describe the purpose and importance of accounting. (LO1)
Describe forms of business organization. (LO2)
Identify users and uses of, and opportunities in, accounting. (LO3)
Identify and explain why ethics and social responsibility are crucial to accounting. (LO4)
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Learning Objectives
Identify, explain, and apply accounting principles. (LO5)
Identify and explain the content and reporting aims of financial statements. (LO6)
Analyze business transactions by applying the accounting equation. (LO7)
Prepare financial statements reflecting business transactions. (LO8)
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4. © 2013 McGraw-Hill Ryerson Limited.
What is Accounting?
Accounting is an information system that identifies, measures, records, and communicates information that has relevance and is a faithful representation of an organization’s economic activities.
Its objective is to help people make better decisions.
(LO1)
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What is Recordkeeping?
Recordkeeping, or bookkeeping, is the part of accounting that involves recording economic transactions, either electronically or manually.
Accounting involves the recordkeeping process but is much more.
(LO1)
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Forms of Organization
Sole Proprietorship
Partnership
Corporation
(LO2)
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Sole Proprietorships
One owner
Separate entity for accounting purposes
Not a separate legal entity from the owner
Unlimited liability
Limited life
Owner taxed on profits
(LO2)
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Partnerships
Two or more owners
Separate entity for accounting purposes
Not a separate legal entity from the owners
Unlimited liability
Limited life
Owners taxed on profits
(LO2)
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Corporations
One or more owners
Separate entity for accounting purposes
Separate legal entity from the owner(s)
Limited liability
Unlimited life
Corporation taxed on profits
(LO2)
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10. Users of Accounting Information
Accounting is a service activity that provides information to help internal and external users make decisions.
(LO3)
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External Users
External users of accounting information are not involved in running the organization.
They include:
Lenders
Shareholders
Governments
Consumer groups
External auditors
Customers
(LO3)
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External Reporting
Reports for external users are usually in the form of financial statements.
The information in the statements needs to be relevant and faithfully represented.
Generally accepted accounting principles (GAAP)are the underlying concepts that make up acceptable accounting practices.
GAAP are important in increasing the usefulness of financial statements to users.
(LO3)
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Internal users
Internal users are involved in managing and operating an organization.
Accounting provides information to these users to help them improve the efficiency and effectiveness of the organization.
(LO3)
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14. Typical Questions Asked by Internal Users
What are the manufacturing expenses per unit of product?
What is the most profitable mix of services?
What level of revenues is necessary to show net income?
Which service activities are most profitable?
Which expenses change with a change in revenue?
(LO3)
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15. Accounting Opportunities
Broad fields of accounting include:
Financial accounting
Managerial accounting
Taxation
Accounting-related fields
(LO3)
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16. Accounting Opportunities
Accountants may work as:
Private accountants
Public accountants
Government accountants
(LO3)
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17. Professional Certification
Professional certifications in Canada:
Certified General Accountant (CGA)
Certified Management Accountant (CMA)
Chartered Accountant (CA)
(LO3)
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18. Ethics and Social Responsibility
Ethics are beliefs that differentiate right from wrong.
Ethics and ethical behaviour are important to the accounting profession and to those who use accounting information.
Ethical practices build trust, which promotes loyalty and long-term relationships with customers, suppliers, employees, and investors.
(LO4)
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19. © 2013 McGraw-Hill Ryerson Limited.
Ethics in Accounting
One of the primary goals of accounting is to provide useful information for decision making.
In order for the information to be useful, it must be trusted.
Accountants must act in an ethical manner in order for the information they produce to be trusted.
(LO4)
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20. Ethical Obligations of Accountants
Maintain a high level of professional competence.
Treat sensitive information as confidential.
Exercise due care and professional judgment.
Must not be associated with deceptive information.
(LO4)
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21. Generally Accepted Accounting Principles (GAAP)
GAAP are the underlying concepts that make up acceptable accounting practices.
Canada has recently adopted International Financial Reporting Standards (IFRS) for publicly accountable enterprises (PAE).
There is also another set of standards called Accounting Standards for Private Enterprises (ASPE).
(LO5)
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IFRS
IFRS was established to try to achieve global agreement on the use of a common set of accounting standards.
This is intended to make accounting information more comparable from country to country.
(LO5)
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23. © 2013 McGraw-Hill Ryerson Limited.
ASPE
Private enterprises are privately owned so they have some different reporting needs than public enterprises.
ASPE have significant parallels to IFRS but there are some differences.
(LO5)
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24. GAAP for Public vs. Private Enterprises
Publicly Accountable Enterprises (PAEs)
Private Enterprises (PEs)
GAAP to be used
IFRS
ASPE or IFRS
(LO5)
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Purpose of GAAP
The primary purpose of GAAP is to ensure the usefulness of financial information.
In order for it to be useful, it must have the characteristics of relevance and faithful representation.
Usefulness is enhanced if the information is comparable, verifiable, timely, and understandable.
(LO5)
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GAAP
GAAP includes the following principles:
Business entity principle
Cost principle
Going concern principle
Monetary unit principle
Revenue recognition principle
(LO5)
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27. Business Entity Principle
Every business is to be accounted for separately from its owner(s) or any other economic entity of the owner.
(LO5)
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Cost Principle
All transactions are recorded based on the actual cash amount received or paid.
In absence of cash, the cash equivalent amount of the exchange is recorded.
(LO5)
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29. Going Concern Principle
Financial statement users can safely assume that the statements reflect a business that is going to continue its operations instead of being closed or sold.
(LO5)
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30. Monetary Unit Principle
Requires that transactions be expressed using units of money as the common denominator.
It assumes that the monetary unit is stable.
Adjustments are not made for changes in currency value or inflation.
(LO5)
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31. Revenue Recognition Principle
Requires that revenue be recorded at the time that it is earned regardless of whether cash or another asset has been exchanged.
The amount of revenue to be recorded is measured by the cash plus the cash equivalent of any other assets received.
(LO5)
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Financial Statements
Are an organization’s primary means of financial communication.
An organization’s transactions are recorded, classified, sorted, and summarized in order to produce financial statements.
(LO6)
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Financial Statements
There are four major financial statements:
Income statement
Balance sheet
Statement of changes in equity
The statement of cash flows
These statements provide different information but are linked together.
(LO6)
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34. Financial Statements (LO6) Balance Sheet
(at the beginning of the period)
Income Statement
Statement of Changes in Equity
Balance Sheet
(at the end of the period)
Statement of Cash Flows
Period of time
Point in time
Point in time
(LO6)
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Income Statement
The income statement reports:
Revenues of the organization.
Expenses (costs incurred in earning the revenues).
Net income or loss.
The income statement covers a period of time.
(LO6)
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Income Statement
Value of assets
exchanged for
products and services
provided to customers.
(LO6)
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Income Statement
Costs incurred
or the using up
of assets from
generating
revenue
(LO6)
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38. Statement of Owner’s Equity
Equity is equal to total assets minus total liabilities.
It represents how much of the assets belong to the owner.
Owner’s equity increases with owner investments and net income.
Owner’s equity decreases with owner withdrawals and net loss.
(LO6)
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39. Statement Of Owner’s Equity
Covers a
period
of time.
From the
Income
statement.
(LO6)
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Balance Sheet
The balance sheet reports the:
Assets
Liabilities
Owner’s equity
of an organization at a point in time.
It is linked to the Statement of Owner’s Equity.
(LO6)
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Balance Sheet
Properties or
economic
resources
owned by a
business
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(LO6)

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Balance Sheet
Debts or
obligations
of the
business
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(LO6)

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Balance Sheet
Owner’s
claim on the
assets
From the
Statement of
Owner’s
Equity
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(LO6)

44. © 2013 McGraw-Hill Ryerson Limited.
Cash Flow Statement
Reports the sources and uses of cash for a period of time.
Organized by the company’s major activities:
Operating
Investing
Financing
(LO6)
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Cash Flow Statement
From
the
balance
sheet
(LO6)
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46. = + The Accounting Equation Liabilities Equity Assets
Describe what an organization has invested in.
(LO7)
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47. = + The Accounting Equation Liabilities Equity Assets
Describe what an organization has invested in.
Describe non-owner financing (borrowing)
(LO7)
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48. = + The Accounting Equation Liabilities Equity Assets
Describe what an organization has invested in.
Describe non-owner financing (borrowing).
Describe owner financing .
(LO7)
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49. = + The Accounting Equation
Liabilities
Equity
Assets = +
The accounting equation is used to keep track of changes in a company’s assets, liabilities, and equity.
(LO7)
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50. = + The Accounting Equation
Liabilities
Equity
Assets = +
Business transactions cause changes in assets, liabilities, and equity.
(LO7)
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Transaction Analysis
We need to determine:
Which accounts are being affected.
If the accounts are increasing or decreasing.
(LO7)
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52. © 2013 McGraw-Hill Ryerson Limited.
Transaction Analysis
(1) Virgil Klimb invests $10,000 cash in the business.
Analysis: Cash increases by $10,000.
Owner’s capital increases by $10,000.
(LO7)
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53. © 2013 McGraw-Hill Ryerson Limited.
Transaction Analysis
(2) Purchased supplies for $2,500 cash.
Analysis: Supplies increase by $2,500.
Cash decreases by $2,500.
(LO7)
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54. © 2013 McGraw-Hill Ryerson Limited.
Transaction Analysis
(3a) Purchased $1,100 of supplies on credit.
Analysis: Supplies increase by $1,100.
Accounts Payable increases by $1,100
(LO7)
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55. © 2013 McGraw-Hill Ryerson Limited.
Transaction Analysis
(3b) Purchased $6,000 of equipment on credit A promissory note was signed.
Analysis: Equipment increases by $6,000.
Notes payable increases by $6,000.
(LO7)
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56. © 2013 McGraw-Hill Ryerson Limited.
Transaction Analysis
(4) Services rendered for $2,200 cash.
Analysis: Cash increases $2,200
Owner’s equity increases $2,200
(LO7)
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57. © 2013 McGraw-Hill Ryerson Limited.
Transaction Analysis
(5) Payment of $1,000 rent expense in cash.
Analysis: Cash decreases $1,000
Owner’s equity decreases $1,000
(LO7)
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58. © 2013 McGraw-Hill Ryerson Limited.
Transaction Analysis
(6) Payment of $700 salaries expense in cash.
Analysis: Cash decreases $700
Owner’s equity decreases $700
(LO7)
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Transaction Analysis
(7) Service contract signed for April.
Analysis: No economic exchange has taken place
All accounts remain unaffected
(LO7)
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Transaction Analysis
(8)Services and rental revenues of $1,900 rendered for credit. ($1,600 Teaching Revenue and $300 Equipment Rental Revenue)
Analysis: Accounts receivable increases $1,900
Owner’s equity increases $1,900
(LO7)
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61. © 2013 McGraw-Hill Ryerson Limited.
Transaction Analysis
(9) Receipt of $1,900 cash on account.
Analysis: Cash increases $1,900
Accounts receivable decreases $1,900
(LO7)
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Transaction Analysis
(10) Payment of $900 accounts payable.
Analysis: Cash decreases $900
Accounts payable decreases $900
(LO7)
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Transaction Analysis
(11) Withdrawal of $600 cash by owner.
Analysis: Cash decreases $600
Owner’s capital decreases $600
(LO7)
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64. Financial Statement Preparation
The final balances of the accounts after all of the transactions have been recorded are as follows:
This information will be used to prepare the financial statements.
(LO7)
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65. Financial Statement Preparation
The Income Statement is prepared first by using revenue and expense information from the Equity column.
Transactions 4 and 8
Transaction 8
Transaction 5
Transaction 6
(LO8)
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66. The Statement of Owner’s Equity is prepared next
Transaction 1
Income Statement
Transaction 11
(LO8)
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67. The Balance Sheet is prepared using the final balances of the accounts
From the Statement
of Owner’s Equity
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(LO8)

68. © 2013 McGraw-Hill Ryerson Limited.
End of Chapter
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