Accounts basic
- 1. AAccccoouunnttiinngg PPrriinncciipplleess SSeeccoonndd CCaannaaddiiaann EEddiittiioonn Weygandt · Kieso · Kimmel · Trenholm Prepared by: Carole Bowman, Sheridan College
- 2. CCHHAAPPTTEERR 11 AACCCCOOUUNNTTIINNGG IINN AACCTTIIOONN
- 3. Identification Gerald Trenholm 7 MacCauly Drive Fredericton NB Select economic events (transactions) Recording Record, classify, and summarize Communication Account ing Reports Prepare accounting reports SOFTBYTE Annual Report Analyse and interpret for users IILLLLUUSSTTRRAATTIIOONN 11--11 TTHHEE AACCCCOOUUNNTTIINNGG PPRROOCCEESSSS 2000
- 4. IILLLLUUSSTTRRAATTIIOONN 11--22 QQUUEESSTTIIOONNSS AASSKKEEDD BBYY IINNTTEERRNNAALL UUSSEERRSS Is cash sufficient to pay bills? Can we afford to give employees pay raises this year? What is the cost of manufacturing each unit of product? Which product line is the most profitable?
- 5. IILLLLUUSSTTRRAATTIIOONN 11--33 QQUUEESSTTIIOONNSS AASSKKEEDD BBYY EEXXTTEERRNNAALL UUSSEERRSS Is the company earning satisfactory income? How does the company compare in size and profitability with its competitors? What do we do if they catch us? Will the company be able to pay its debts as they come due?
- 6. BBOOOOKKKKEEEEPPIINNGG DDIISSTTIINNGGUUIISSHHEEDD FFRROOMM AACCCCOOUUNNTTIINNGG Accounting 1. Includes bookkeeping 2. Also includes much more Bookkeeping 1. Involves only the recording of economic events 2. Is just one part of accounting
- 7. TTHHEE AACCCCOOUUNNTTIINNGG PPRROOFFEESSSSIIOONN Public accountants offer their expertise to the general public through the services they perform. Private accountants are employees of individual companies and are involved in a number of activities, including cost and tax accounting, systems, and internal auditing. Not-for-profit accounting includes reporting and control for government units, foundations, hospitals, labour unions, colleges/universities, and charities.
- 8. IILLLLUUSSTTRRAATTIIOONN 11--44 EETTHHIICCSS To Solve Ethical Dilemma 1. Recognize situation and ethical issues involved 2. Identify and analyse elements 3. Identify alternatives and weigh effects on stakeholders Ethics Standards of conduct
- 9. GGAAAAPP Generally Accepted Accounting Principles Primarily established by the Canadian Institute of Chartered Accountants Cost Principle The cost principle dictates that assets are recorded at their cost. Cost is the value exchanged at the time something is acquired. Cost is used because it is both relevant and reliable.
- 10. AASSSSUUMMPPTTIIOONNSS 1. Going Concern - assumes organization will continue into foreseeable future. 2. Monetary Unit - only transaction data that can be expressed in terms of money is included in the accounting records. 3. Economic Entity - includes any organization or unit in society.
- 11. BBUUSSIINNEESSSS EENNTTEERRPPRRIISSEESS A business owned by one person is generally a proprietorship (owner’s equity). A business owned by two or more persons associated as partners is a partnership (partners’ equity). A business organized as a separate legal entity under corporation law and having ownership divided into transferable shares is called a corporation (shareholders’ equity).
- 12. IILLLLUUSSTTRRAATTIIOONN 11--55 BBAASSIICC AACCCCOOUUNNTTIINNGG EEQQUUAATTIIOONN The Basic Accounting Equation Assets = Liabilities + Owner’s Equity
- 13. AASSSSEETTSS AASS AA BBUUIILLDDIINNGG BBLLOOCCKK Assets are resources owned by a business. They are things of value used in carrying out such activities as production and exchange.
- 14. LLIIAABBIILLIITTIIEESS AASS AA BBUUIILLDDIINNGG BBLLOOCCKK Liabilities are claims against assets. They are existing debts and obligations.
- 15. OOWWNNEERR’’SS EEQQUUIITTYY AASS AA BBUUIILLDDIINNGG BBLLOOCCKK Owner’s Equity is equal to total assets minus total liabilities. Owner’s Equity represents the ownership claim on total assets. Subdivisions of Owner’s Equity: 1. Capital 2. Drawings 3. Revenues 4. Expenses
- 16. IINNVVEESSTTMMEENNTTSS BBYY OOWWNNEERRSS AASS AA BBUUIILLDDIINNGG BBLLOOCCKK Investments by owner are the assets put into the business by the owner. These investments in the business increase owner’s equity.
- 17. DDRRAAWWIINNGGSS AASS AA BBUUIILLDDIINNGG BBLLOOCCKK Drawings are withdrawals of cash or other assets by the owner for personal use. Drawings decrease total owner’s equity.
- 18. RREEVVEENNUUEESS AASS AA BBUUIILLDDIINNGG BBLLOOCCKK Revenues are the gross increases in owner’s equity resulting from business activities entered into for the purpose of earning income. Revenues may result from sale of merchandise, performance of services, rental of property, or lending of money. Revenues usually result in an increase in an asset.
- 19. EEXXPPEENNSSEESS AASS AA BBUUIILLDDIINNGG BBLLOOCCKK Expenses are the decreases in owner’s equity that result from operating the business. Expenses are the cost of assets consumed or services used in the process of earning revenue. Examples of expenses include utility expense, rent expense, and supplies expense.
- 20. IILLLLUUSSTTRRAATTIIOONN 11--66 IINNCCRREEAASSEESS AANNDD DDEECCRREEAASSEESS IINN OOWWNNEERR’’SS EEQQUUIITTYY INCREASES DECREASES Investments by Owner Investments by Owner RReevveennuueess Withdrawals by Owner Withdrawals by Owner EExxppeennsseess Owner’s Equity
- 21. TTRRAANNSSAACCTTIIOONN AANNAALLYYSSIISS Marc Doucet decides to open a computer programming service. BANK Softbyt e
- 22. TTRRAANNSSAACCTTIIOONN AANNAALLYYSSIISS TTRRAANNSSAACCTTIIOONN 11 On September 1, he invests $15,000 cash in the business, which he names Softbyte. Trans. # = Liabilities + Assets Owner's Equity Cash Supplies Equipment Accounts Payable M. Doucet, Capital (1) 15,000 = 15,000 Investment There is an increase in the asset Cash, $15,000, and an equal increase in the owner’s equity, M. Doucet, There is an increase in the asset Cash, $15,000, and an equal increase in the owner’s equity, M. Doucet, Capital, $15,000. Capital, $15,000.
- 23. TTRRAANNSSAACCTTIIOONN AANNAALLYYSSIISS TTRRAANNSSAACCTTIIOONN 22 SSooffttbbyyttee ppuurrcchhaasseess ccoommppuutteerr eeqquuiippmmeenntt ffoorr $$77,,000000 ccaasshh.. Trans. # = Liabilities + Assets Owner's Equity Cash Supplies Equipment Accounts Payable M. Doucet, Capital 15,000 15,000 Investment (2) (7,000) 7,000 Balance 8,000 + 7,000 = 15,000 Cash is decreased $7,000, and the asset Cash is decreased $7,000, and the asset Equipment is increased $7,000. Equipment is increased $7,000.
- 24. TTRRAANNSSAACCTTIIOONN AANNAALLYYSSIISS TTRRAANNSSAACCTTIIOONN 33 Softbyte purchases computer paper and supplies expected to last several months from Chuah Supply Company for $1,600 on account. Trans. # = Liabilities + Assets Owner's Equity Cash Supplies Equipment Accounts Payable M. Doucet, Capital Balance 8,000 7,000 15,000 (3) 1,600 1,600 Balance 8,000 + 1,600 + 7,000 = 1,600 + 15,000 The asset Supplies is increased $1,600, and the liability Accounts Payable is increased by the same amount. The asset Supplies is increased $1,600, and the liability Accounts Payable is increased by the same amount.
- 25. TTRRAANNSSAACCTTIIOONN AANNAALLYYSSIISS TTRRAANNSSAACCTTIIOONN 44 Softbyte receives $1,200 cash from customers for programming services it has provided. Trans. # = Liabilities + Assets Owner's Equity Cash Supplies Equipment Accounts Payable M. Doucet, Capital Balance 8,000 1,600 7,000 1,600 15,000 (4) 1,200 1,200 Service Revenue Balance 9,200 + 1,600 + 7,000 = 1,600 + 16,200 Cash is increased $1,200, and Cash is increased $1,200, and M. Doucet, Capital is increased $1,200. M. Doucet, Capital is increased $1,200.
- 26. TTRRAANNSSAACCTTIIOONN AANNAALLYYSSIISS TTRRAANNSSAACCTTIIOONN 55 Softbyte receives a bill for $250 for advertising its business but pays the bill on a later date. Trans. # = Liabilities + Assets Owner's Equity Accounts M. Doucet, Cash Supplies Equipment Payable Capital Balance 9,200 + 1,600 + 7,000 = 1,600 + 16,200 (5) 250 (250) Advertising Expense Balance 9,200 1,600 7,000 1,850 15,950 Accounts Payable is increased $250, and M. Accounts Payable is increased $250, and M. Doucet, Capital is decreased $250. Doucet, Capital is decreased $250.
- 27. TTRRAANNSSAACCTTIIOONN AANNAALLYYSSIISS TTRRAANNSSAACCTTIIOONN 66 Softbyte provides programming services of $3,500 for customers and receives cash of $1,500, with the balance payable on account. Trans. # = Liabilities + Assets = Liabilities + Owner's Equity Account Receivable Supplies Equipment Accounts Payable M. Doucet, Capital Cash is increased $1,500; Accounts Receivable is increased $2,000; and M. Doucet, Capital is Cash is increased $1,500; Accounts Receivable is increased $2,000; and M. Doucet, Capital is increased $3,500. increased $3,500. Cash Account Receivable Supplies Equipment Accounts Payable M. Doucet, Capital Balance 9,200 9,200 + 0 0 + 1,600 1,600 + 7,000 7,000 = = 1,850 1,850 15,950 15,950 (6) 1,500 2,000 3,500 Service Revenue Balance 10,700 2,000 1,600 7,000 1,850 19,450
- 28. TTRRAANNSSAACCTTIIOONN AANNAALLYYSSIISS TTRRAANNSSAACCTTIIOONN 77 Expenses paid in cash for September are store rent, $600, salaries of employees, $900, and utilities, $200. Trans. # = Liabilities + Cash Assets Owner's Equity Account Receivable Supplies Equipment Accounts Payable M. Doucet, Capital Balance 10,700 2,000 1,600 7,000 1,850 19,450 (7) (600) (600) Rent Exp. (900) (900) Salaries Exp. (200) (200) Utilities Exp. Balance 9,000 + 2,000 + 1,600 + 7,000 = 1,850 + 17,750 Cash is decreased $1,700 and M. Doucet, Capital is decreased the same amount. Cash is decreased $1,700 and M. Doucet, Capital is decreased the same amount.
- 29. TTRRAANNSSAACCTTIIOONN AANNAALLYYSSIISS TTRRAANNSSAACCTTIIOONN 88 SSooffttbbyyttee ppaayyss iittss aaddvveerrttiissiinngg bbiillll ooff $$225500 iinn ccaasshh.. Trans. # = Liabilities + Assets Owner's Equity Account Receivable Supplies Equipment Accounts Payable M. Doucet, Capital Cash is decreased $250 and Accounts Payable is decreased the same amount. Cash is decreased $250 and Accounts Payable is decreased the same amount. Cash Account Receivable Supplies Equipment Accounts Payable M. Doucet, Capital Cash Balance 9,000 2,000 1,600 7,000 1,850 17,750 Balance 9,000 2,000 1,600 7,000 1,850 17,750 (8) (250) (250) Balance 8,750 + 2,000 + 1,600 + 7,000 = 1,600 + 17,750
- 30. TTRRAANNSSAACCTTIIOONN AANNAALLYYSSIISS TTRRAANNSSAACCTTIIOONN 99 The sum of $600 in cash is received from customers who have previously been billed for services in Transaction 6. Trans. # = Liabilities + Assets Owner's Equity Account Receivable Supplies Equipment Accounts Payable Balance 8,750 + 2,000 + 1,600 + 7,000 = 1,600 + 17,750 (9) 600 (600) Balance 9,350 + 1,400 + 1,600 + 7,000 = 1,600 + 17,750 M. Doucet, Capital Cash is increased $600 and Accounts Cash is increased $600 and Accounts Cash Receivable is decreased by the same amount. Receivable is decreased by the same amount.
- 31. TTRRAANNSSAACCTTIIOONN AANNAALLYYSSIISS TTRRAANNSSAACCTTIIOONN 1100 Marc Doucet withdraws $1,300 in cash from the business for his personal use. Assets Owner's Equity M. Doucet, Capital M. Capital Trans. # = Liabilities + Accounts Payable Balance 9,350 1,400 1,600 7,000 1,600 1,600 17,750 17,750 (10) (1,300) (1,300) Doucet, Drawings Balance 8,050 + 1,400 + 1,600 + 7,000 = 1,600 + 16,450 Cash Account Receivable Supplies Equipment Cash is decreased $1,300 and M. Doucet, Capital is decreased by the same amount. Cash is decreased $1,300 and M. Doucet, Capital is decreased by the same amount.
- 32. FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS After transactions are identified, recorded, and summarized, four financial statements are prepared from the summarized accounting data: 1. An income statement presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time. 2. A statement of owner’s equity summarizes the changes in owner’s equity for a specific period of time.
- 33. FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS In addition to the income statement and statement of owner’s equity, two additional statements are prepared: 3. A balance sheet reports the assets, liabilities, and owner’s equity of a business enterprise at a specific date. 4. A cash flow statement summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time. The notes are an integral part of the financial statements.
- 34. IILLLLUUSSTTRRAATTIIOONN 11--1100 FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS AANNDD TTHHEEIIRR IINNTTEERRRREELLAATTIIOONNSSHHIIPPSS SOFTBYTE Income Statement For the Month Ended September 30, 2002 Revenues Service revenue $ 4,700 Expenses Salaries expense $ 900 Rent expense 600 Advertising expense 250 Utilities expense 200 Total expenses 1,950 Net income $ 2,750 Net income of $2,750 shown on the income statement is added to the beginning balance of owner’s capital in the statement of owner’s equity.
- 35. IILLLLUUSSTTRRAATTIIOONN 11--1100 FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS AANNDD TTHHEEIIRR IINNTTEERRRREELLAATTIIOONNSSHHIIPPSS SOFTBYTE Statement of Owner's Equity For the Month Ended September 30, 2002 M. Doucet, Capital, September 1 $ - Add: Investments $ 15,000 Net income 2,750 17,750 Net income of $2,750 is carried forward from the income statement to the statement of owner’s equity. The owner’s capital of $16,450 at the end of the reporting period is shown as the final total of the owner’s equity column of the Summary of Transactions (Illustration 1-9 in text). $ 17,750 Less: Drawings 1,300 M. Doucet, Capital September 30 $ 16,450
- 36. IILLLLUUSSTTRRAATTIIOONN 11--1100 FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS AANNDD TTHHEEIIRR IINNTTEERRRREELLAATTIIOONNSSHHIIPPSS Owner’s capital of $16,450 at the end of the reporting period – shown in the statement of owner’s equity – is also shown on the balance sheet. Cash of $8,050 on the balance sheet is reported on the cash flow statement. SOFTBYTE Balance Sheet September 30, 2002 Assets Cash $ 8,050 Accounts receivable 1,400 Supplies 1,600 Equipment 7,000 Total assets $ 18,050 Liabilities and Owner's Equity Liabilities Accounts payable $ 1,600 Owner's Equity M. Doucet, Capital 16,450 Total liabilities and owner's equity $ 18,050
- 37. IILLLLUUSSTTRRAATTIIOONN 11--1100 FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS AANNDD TTHHEEIIRR IINNTTEERRRREELLAATTIIOONNSSHHIIPPSS Cash of $8,050 on the balance sheet and cash flow statement is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-9 in text). SOFTBYTE Cash Flow Statement For the Month Ended September 30, 2002 Cash flows from operating activities Cash receipts from customers $ 3,300 Cash payments to suppliers and employees (1,950) $ 1,350 Net cash provided by operating activities Cash flows from investing activities Purchase of equipment $ (7,000) Net cash used by investing activities (7,000) Cash flows from financing activities Investments by owner $ 15,000 Drawings by owner (1,300) Net cash provided by financing activities 13,700 Net increase in cash $ 8,050 Cash, September 1 - Cash, September 30 $ 8,050
- 38. UUSSIINNGG TTHHEE IINNFFOORRMMAATTIIOONN IINN TTHHEE FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS • Annual Reports – Non-financial information – Financial information
- 39. CCOOPPYYRRIIGGHHTT Copyright © 2002 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / 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.