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Accounting PrinciplesWeygandt, Kieso, Trenholm
Prepared by Barbara Trenholm
University of New Brunswick
1 Explain the meaning of accounting.2 Identify the users and uses of accounting.3 Understand why ethics is a fundamental
business concept.4 Explain the meaning of generally accepted
accounting principles and the costprinciple.
5 Explain the meaning of the goingconcern, monetary unit, andeconomic entity assumptions.
After studying this chapter, you should be able to:
CHAPTER 1ACCOUNTING IN ACTION
6 State the basic accounting equation and explainthe meaning of assets, liabilities, and owner’sequity.
7 Analyse the effect of business transactions onthe basic accounting equation.
8 Distinguish between an income statement,statement of owner’s equity, balance sheet, andstatement of cash flows.
CHAPTER 1ACCOUNTING IN ACTION
After studying this chapter, you should be able to:
ACCOUNTING IN ACTION
CHAPTER·1
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PREVIEW OF CHAPTER 1
Accounting In Action
What is Accounting?
Who uses accounting info?
Brief history of accounting
Bookkeeping and accounting
Accounting and you
The accounting profession
PREVIEW OF CHAPTER 1
Accounting In Action
The Building Blocksof Accounting
Ethics - a fundamentalbusiness concept
Generally acceptedaccounting principles
Assumptions
Basic accounting equation
PREVIEW OF CHAPTER 1
Accounting In Action
Using the Building Blocks
Transaction analysis
Summary of transactions
Financial statements
Using the information inthe financial statements
Accounting In ActionAccounting In ActionAccounting In ActionAccounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In Action
Chapter 1 • Accounting In Action
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PREVIEW OF CHAPTER 1
Accounting In Action
Financial Statements
Income Statement
Statement of Owner’sEquity
Balance Sheet
Statement of Cash Flows
STUDY OBJECTIVE 1
Explain the meaning of accounting.
Accounting is a process of three activities:1 Identifying2 Recording3 Communicating
WHAT IS ACCOUNTING?
Weygandt · Kieso · Trenholm Accounting Principles, Canadian Edition
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Gerald Trenholm
7 MacCauly Drive
Fredericton NB
Identification
Select economic events(transactions)
Recording
Record, classifyand summarize
AccountingReports
SOFTBYTEAnnual Report
Prepareaccounting reports
Analyse and interpretfor users
Communication
ILLUSTRATION 1-1THE ACCOUNTING PROCESS
2000
STUDY OBJECTIVE 2
Identify the users and uses of accounting.
ILLUSTRATION 1-2QUESTIONS ASKED BY INTERNAL USERS
Can we afford to give employeespay raises this year?
Is cash sufficient to pay bills?What is the cost of manufacturingeach unit of product?
Which product line is the mostprofitable?
Accounting In ActionAccounting In ActionAccounting In ActionAccounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In Action
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ILLUSTRATION 1-2QUESTIONS ASKED BY EXTERNAL USERS
Is the company earningsatisfactory income?
Will the company be able to pay its debts as they come due?
How does the company comparein size and profitability with itscompetitors?
What do wedo if theycatch us?
Accounting1 Includes bookkeeping2 Also includes much moreBookkeeping1 Involves only the recording of economic
events2 Is just one part of accounting
BOOKKEEPING DISTINGUISHEDFROM ACCOUNTING
THE ACCOUNTING PROFESSION
Public accountants offer expert service to the generalpublic through the services they perform.Private accountants are employees of individual companiesand are involved in a number of activities including costand tax accounting, systems, and internal auditing.Not-for-profit accounting includes reporting and controlfor government units, foundations, hospitals, labourunions, colleges/universities, and charities.
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ACCOUNTING CAREER LADDER
10+ years
6 to 8 years
2 to 4+ years
Entry level
Partner
PublicAccounting
SeniorManager
Manager
StaffAccountant
PrivateAccounting
VP Financeand CFO
Comptroller
Manager
Accountant
STUDY OBJECTIVE 3
Understand why ethics is a fundamentalbusiness concept.
ETHICS
To Solve EthicalDilemma1 Recognize situation
and ethical issuesinvolved
2 Identify and analyseelements
3 Identify alternativesand weigh impacts onstakeholders
������
Ethics
- standards of conduct
Accounting In ActionAccounting In ActionAccounting In ActionAccounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In Action
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STUDY OBJECTIVE 4
Explain the meaning of generally acceptedaccounting principles and the cost principle.
Generally Accepted Accounting Principles -primarily established by the Canadian Institute ofChartered AccountantsCost Principle
The cost principle dictates that assets are recorded attheir cost.Cost is the value exchanged at the time something isacquired.Cost is used because it is both relevant and reliable.
GAAP
STUDY OBJECTIVE 5
Explain the meaning of the going concern, monetaryunit, and economic entity assumptions.
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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.
ASSUMPTIONS
BUSINESS ENTERPRISES
A business owned by one person is generally aproprietorship (owner’s equity).A business owned by two or more persons associated aspartners is a partnership (partners’ equity).A business organized as a separate legal entity undercorporation law and having ownership divided intotransferable shares of stock is called a corporation(shareholders’ equity).
ILLUSTRATION 1-7EQUITY FORMATS
Proprietorship
Owner’s equity:Bure, capital $50,000
Partnership
Partners’ equity:Wu, capital $ 75,000Scholten, capital 75,000Total partners’ equity $150,000
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ILLUSTRATION 1-7EQUITY FORMATS
Corporation
Shareholders’ equity: Capital stock $500,000 Retained earnings 350,000Total shareholders’ equity $850,000
STUDY OBJECTIVE 6
State the basic accounting equation andexplain the meaning of assets, liabilities,and owner’s equity.
Assets = Liabilities + Owner’s Equity
ILLUSTRATION 1-5BASIC ACCOUNTING EQUATION
The Basic Accounting Equation
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ASSETS AS A BUILDING BLOCK
Assets are resources owned by a business.They are things of value used in carryingout such activities as production andexchange.
LIABILITIES AS A BUILDING BLOCK
Liabilities are claims against assets.They are existing debts andobligations.
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 Capital2 Drawings3 Revenues4 Expenses
OWNER’S EQUITY ASA BUILDING BLOCK
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Chapter 1 • Accounting In Action
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INVESTMENTS BY OWNERSAS A BUILDING BLOCK
Investments by owner are the assets put inthe business by the owner.These investments in the business increaseowner’s equity.
Drawings are withdrawals of cash or otherassets by the owner for personal use.Drawings decrease total owner’s equity.
DRAWINGS AS ABUILDING BLOCK
REVENUES AS ABUILDING BLOCK
Revenues are the gross increases in owner’sequity resulting from business activitiesentered into for the purpose of earningincome.Revenues may result from sale ofmerchandise, performance of services, rentalof property, or lending of money.Revenues usually result in an increase in anasset.
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EXPENSES AS ABUILDING BLOCK
Expenses are the decreases in owner’s equitythat result from operating the business.Expenses are the cost of assets consumed orservices used in the process of earningrevenue.Examples of expenses may be utility expense,rent expense, supplies expense, and incometax expense.
ILLUSTRATION 1-6
INCREASES AND DECREASES IN OWNER’S EQUITY
INCREASES DECREASESInvestmentsby Owner
Revenues
Owner’sEquity
Withdrawalsby Owner
Expenses
STUDY OBJECTIVE 7
Analyse the effect of business transactionson the basic accounting equation.
Accounting In ActionAccounting In ActionAccounting In ActionAccounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In ActionChapter1 Accounting In Action
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TRANSACTION IDENTIFICATION PROCESS
Answertelephone
Purchasecomputer
Pay rent
Is the financial position (assets, liabilities, andowner’s equity) of the company changed?
Yes No Yes
Record Don’tRecord Record
Gerald Trenholm7 MacCauly DriveFredericton NB 2000
Royal Imperial Dominion Bank of MontrealEverywhere, Canada
TRANSACTION ANALYSISTRANSACTION 1
Marc Doucet decides to open a computer programmingservice.On September 1, he invests $15,000 cash in the business,which he names Softbyte.
BANK
Softbyte
TRANSACTION ANALYSISTRANSACTION 1 SOLUTION
(1) +$15,000 = +$15,000Investment
Assets = Liabilities + Owner’s Equity Doucet,
Cash Capital
There is an increase in the asset Cash,$15,000, and an equal increase in theowner’s equity, Doucet, Capital, $15,000.
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TRANSACTION ANALYSISTRANSACTION 2
Softbyte purchases computer equipment for $7,000 cash.
TRANSACTION ANALYSISTRANSACTION 2 SOLUTION
Cash is decreased $7,000, and theasset Equipment is increased $7,000.
Assets = Liabilities + Owner’s Equity Doucet,
Cash + Equipment = CapitalOld Bal. $15,000 $15,000
New Bal. $ 8,000 + $7,000 = $15,000
$15,000
(2) -7,000 +$7,000
Softbyte purchases computer paper and other suppliesexpected to last several months from Chuah SupplyCompany for $1,600.Chuah Supply Company agrees to allow Softbyte to paythis bill in October, a month later.This transaction is often referred to as a purchase onaccount or a credit purchase.
Softbyte
Chuah Supply Company
TRANSACTION ANALYSISTRANSACTION 3
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TRANSACTION ANALYSISTRANSACTION 3 SOLUTION
The asset Supplies is increased $1,600, and theliability Accounts Payable is increased by the sameamount.
Assets = Liabilities + Owner’s EquityAccounts Doucet,
Cash + Supplies + Equipment = Payable + CapitalOld Bal. $8,000 $7,000 $15,000
New Bal. $8,000 + $1,600 + $7,000 = $1,600 + $15,000
$16,600 $16,600
(3) +$1,600 +$1,600
Softbyte receives $1,200 cash from customers forprogramming services it has provided.This transaction represents the principalrevenue-producing activity of Softbyte.
Softbyte
TRANSACTION ANALYSISTRANSACTION 4
TRANSACTION ANALYSISTRANSACTION 4 SOLUTION
Cash is increased $1,200, and Doucet,Capital is increased $1,200.
Assets = Liabilities + Owner’s EquityAccounts Doucet,
Cash + Supplies + Equipment = Payable + CapitalOld Bal. $8,000 $1,600 $7,000 $1,600 $15,000
New Bal. $9,200 + $1,600 + $7,000 = $1,600 + $16,200
$17,800 $17,800
(4) +1,200 +1,200 Service Revenue
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Softbyte receives a bill for $250 from the FinancialPost for advertising the opening of its business butpostpones payment of the bill until a later date.
Softbyte
Daily News
Bill
TRANSACTION ANALYSISTRANSACTION 5
TRANSACTION ANALYSISTRANSACTION 5 SOLUTION
Accounts Payable is increased $250, andDoucet, Capital is decreased $250.
Assets = Liabilities + Owner’s EquityAccounts Doucet,
Cash + Supplies + Equipment = Payable + CapitalOld Bal. $9,200 $1,600 $7,000 $1,600 $16,200
New Bal. $9,200 + $1,600 + $7,000 = $1,850 + $15,950
$17,800 $17,800
(5) +250 -250 Advertising Expense
Softbyte provides programming services of $3,500for customers.Cash amounting to $1,500 is received fromcustomers, and the balance of $2,000 is billed tocustomers on account.
SoftbyteBill
TRANSACTION ANALYSISTRANSACTION 6
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Chapter 1 • Accounting In Action
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TRANSACTION ANALYSISTRANSACTION 6 SOLUTION
Cash is increased $1,500; Accounts Receivable isincreased $2,000; and Doucet, Capital is increased $3,500.
Assets = Liabilities + Owner’s Equity Accounts Accounts Doucet,
Cash + Receivable + Supplies + Equipment = Payable + CapitalOld Bal. $ 9,200 $1,600 $7,000 $1,850 $15,950
New Bal. $10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $19,450
$21,300 $21,300
(6) +1,500 +2,000 +3,500 Service Revenue
Expenses paid in cash for September are store rent,$600, salaries of employees, $900, and utilities, $200.
Softbyte
$600
$900
$200
TRANSACTION ANALYSISTRANSACTION 7
TRANSACTION ANALYSISTRANSACTION 7 SOLUTION
Cash is decreased $1,700 and Doucet, Capital is decreasedthe same amount.
Assets = Liabilities + Owner’s Equity Accounts Accounts Doucet,
Cash + Receivable + Supplies + Equipment = Payable + CapitalOld Bal. $10,700 $2,000 $1,600 $7,000 $1,850 $19,450
New Bal. $ 9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $17,750
$19,600 $19,600
(7) -1,700 -600 Rent Exp. -900 Salaries Exp. -200 Utilities Exp.
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Softbyte pays its Financial Post advertising bill of$250 in cash.
TRANSACTION ANALYSISTRANSACTION 8
Softbyte
Daily News
TRANSACTION ANALYSISTRANSACTION 8 SOLUTION
Cash is decreased $250 and Accounts Payable isdecreased the same amount.
Assets = Liabilities + Owner’s Equity Accounts Accounts Doucet,
Cash + Receivable + Supplies + Equipment = Payable + CapitalOld Bal. $9,000 $2,000 $1,600 $7,000 $1,850 $17,750
New Bal. $8,750 + $2,000 + $1,600 + $7,000 = $1,600 + $17,750
$19,350 $19,350
(8) -250 -250
The sum of $600 in cash is received fromcustomers who have previously been billedfor services in Transaction 6.
TRANSACTION ANALYSISTRANSACTION 9
Softbyte
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TRANSACTION ANALYSISTRANSACTION 9 SOLUTION
Cash is increased $600 and AccountsReceivable is decreased by the sameamount.
Assets = Liabilities + Owner’s EquityAccounts Accounts Doucet,
Cash + Receivable + Supplies + Equipment = Payable + Capital Old Bal. $8,750 $2,000 $1,600 $7,000 $1,600 $17,750
New Bal. $9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $17,750
$19,350 $19,350
(9) +600 -600
Marc Doucet withdraws $1,300 in cash fromthe business for his personal use.
$1,300Softbyte
TRANSACTION ANALYSISTRANSACTION 10
TRANSACTION ANALYSISTRANSACTION 10 SOLUTION
Cash is decreased $1,300 and Doucet, Capital is decreasedby the same amount.
Assets = Liabilities + Owner’s Equity Accounts Accounts Doucet,
Cash + Receivable + Supplies + Equipment = Payable + CapitalOld Bal. $9,350 $1,400 $1,600 $7,000 $1,600 $17,750
New Bal. $8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $16,450
$18,050 $18,050
(10) -1,300 -1,300 Drawings
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STUDY OBJECTIVE 8
Distinguish between an income statement,statement of owner’s equity, balance sheet, andstatement of cash flows.
FINANCIAL STATEMENTS
After transactions are identified, recorded, andsummarized, four financial statements areprepared 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.
FINANCIAL STATEMENTS
In addition to the income statement, and statement ofowner’s equity, the remaining statements include:3 A balance sheet reports the assets, liabilities, andequity of a business enterprise at a specific date.4 A statement of cash flows 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.
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ILLUSTRATION 1-9 FINANCIALSTATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE, INC.Income Statement
For the Month Ended September 30, 1999Revenues Service revenue $ 4,700Expenses Salaries expense $ 900 Rent expense 600 Advertising expense 250 Utilities expense 200 Total expenses 1,950Net income $2,750
Net income of $2,750 shown on the income statement is added to thebeginning balance of owner’s capital in the statement of owner’sequity.
ILLUSTRATION 1-9 FINANCIALSTATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE, INC.Statement of Owner’s Equity
For the Month Ended September 30, 1999M. Doucet, Capital, September 1 $ –0–Add: Investments $ 15,000
Net income 2,750 17,75017,750
Less: Drawings 1,300M. Doucet, Capital, September 30 $16,450
Net income of $2,750 is carried forward from the income statement to thestatement of owner’s equity. The owner’s capital of $16,450 at the end of thereporting period is shown as the final total of the owner’s equity column of theSummary of Transactions (Illustration 1-8).
ILLUSTRATION 1-9 FINANCIALSTATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE, INC.Balance Sheet
September 30, 1999Assets
CashAccounts receivable 1,400Supplies 1,600Equipment 7,000 Total assets $ 18,050
Liabilities and Owner’s EquityLiabilities Accounts payable $ 1,600
Owner’s equity M. Doucet, capital 16,450 Total liabilities and owner’s equity $ 18,050
$ 8,050
Owner’s capital of $16,450 at the end of the reporting period shown in the statement ofowner’s equity is shown on the balance sheet. Cash of $8,050 on the balance sheet isreported on the statement of cash flows.
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ILLUSTRATION 1-9 FINANCIALSTATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE, INC.Statement of Cash Flows
For the Month Ended September 30, 1999Cash flows from operating activities Cash receipts from customers $ 3,300 Cash payments to suppliers and employees (1,950) Net cash provided by operating activities 1,350Cash flows from investing activities Purchase of equipment (7,000)Cash flows from financing activities Investments by owner $ 15,000 Drawings by owner (1,300) Net cash provided by financing activities 13,700Net increase in cash 8,050Cash at the beginning of the period –0–Cash at the end of the period $ 8,050
Cash of $8,050 on the balance sheet and statement of cash flows is shown as thefinal total of the cash column of the Summary of Transactions (Illustration 1-8).
USING THE INFORMATION IN THEFINANCIAL STATEMENTS
• Annual Reports
– Non-financialinformation
– Financialinformation
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Chapter 1 • Accounting In Action
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