introduction to accounting

Introduction to Accounting

Presented by Kevin MarkleAugust, 2004

Introduction to Accounting 2

PurposeTo teach the basics of accounting to those students entering the MBA program at SSB who do not have any background in accounting.To prepare all MBA students for the mandatory course, ACTG 5100 – Financial Accounting for Managers, by providing the fundamental concepts on which the course builds.


Intended audienceAll incoming MBA students at The Schulich School of Business.

In particular, this lecture is designed for those that have no previous education or training in accounting.The intention is for this lecture to teach at the most basic level.

To teach the “alphabet” of accounting so that students can learn to speak in “full sentences” in the accounting (and other) courses at SSB.Students with even minimal background may wish to skim or skip sections of the lecture.


Agenda1. Fundamental concepts2. The Accounting Cycle3. Financial statements4. Comprehensive example


Fundamental conceptsWhat is accounting?

The language of business.A means to communicate financial information.A way to convey information about a business to users.


Fundamental conceptsWho uses accounting information?

OwnersManagersInvestors (including potential)

Analysts on their behalf

Creditors (including potential)Government (tax assessment)RegulatorsCustomers


Fundamental conceptsAccounting has two main divisions:

Financial accountingPrimarily prepared for users external to the company.

Revenues, earnings, assets, etc.

Management accountingPrimarily for internal purposes

Costing, budgeting, net present value, etc.

This lecture will focus only on financial accounting.


Fundamental conceptsThere are several ways that cash gets into a

company:Investment by ownersInvestment by creditors (loans)Payments from customers.Repayment of amounts loaned to other entities.Return on investments (interest and dividend)Proceeds from selling assets.


Fundamental conceptsThese can be organized into three categories:Operations

Payments from customersRefunds from suppliers

FinancingInvestment by ownersInvestment by creditors (loans)

InvestingReturn on investments (interest and dividend)Proceeds from selling assetsRepayment of amounts loaned to other entities


Fundamental conceptsSimilarly, money going out of an entity can be

categorized:Operations

Payments to suppliersRefunds to customers

FinancingPayment of dividends or capital to ownersRepayment of creditors

InvestingPurchase of assetsAmounts invested in other entities (debt or equity)


Fundamental conceptsFinancial accounting categorizes all

transactions and events based on their substance.

It is very important that the substance of a transaction be accurately reflected by financial accounting because the users of the information are using it with the assumption that these categorizations are being made accurately.

If money invested by owners was reported as revenue, this would be counter to the fundamental definition of revenue (i.e. that it results from the operations of the company).

The separation of income and capital is a fundamental concept of financial accounting.


Fundamental conceptsEntity conceptGoing concernUnit of measurePeriodic reporting


Fundamental conceptsEntity concept

There are three basic structures that a company can have in Canada:

1. Sole proprietorship2. Partnership3. Corporation

A sole proprietorship is not a legal entity separate from its ownerA partnership is not a legal entity separate from its owners

These are both sub-components of their owners/partners for legal purposes

A corporation is a separate legal entity

The entity concept for accounting does not simply follow the legal guidelines

A business can be a separate entity for accounting even if it is not one from a legal perspective


Fundamental conceptsEntity concept

It is essential that we know for which entity we are accounting because it will determine if and how events are recorded.

e.g. If Ms. Prop is the sole proprietor of a business called SP, there is one legal entity, Ms. Prop (SP is not a separate legal entity).

If we wish to account for SP, there will be events to account for that are non-events from a legal perspective

e.g. When Ms. Prop puts money into a separate account for the company. This is a non-event legally, but is an event to be accounted for from an accounting perspective.


Fundamental conceptsGoing concern

It is assumed that an entity will complete its current plans, use its existing assets, and meet its obligations in the normal course of business.

This is an underlying concept necessary for many of the fundamental recording and reporting decisions that are made in accounting.


Fundamental conceptsUnit of measure

In order for accounting to present information that is useful, it must be able to express things in a common unit of measure.The unit of measure in Canada is usually the Canadian dollar (or U.S. dollar).

It is not useful to tell users that an entity has 30 cars, a building, some land, some equipment, and that it sold 35,000 widgets in the year.The unit of measure concept allows us to express all of these things in dollars.


Fundamental conceptsPeriodic reporting

Meaningful financial information about an entity can be provided for periods of time that are shorter than the life of an entity.

Because financial statements tell the users what the entity has and what they did to get it, the users want that information at different points in the entity’s life.Most commonly, the reporting period is annual. All companies are required to file annual financial statements with their tax returns.

Other common reporting periods are monthly or quarterly.


Fundamental conceptsTo review:

Entity conceptGoing concernUnit of measurePeriodic reporting


The Accounting Cycle1. Transaction or event occurs

Could simply be the passage of time.

2. Recorded in the Journal using a Journal Entry.

event is translated into accounting language.

3. Journal is posted to Ledgerthe information from all the journal entries in the period is aggregated.

4. Ledger accounts are totalled.5. Financial statements are prepared.


The Accounting Cycle1. Transaction or event occurs2. Recorded in the Journal using a Journal Entry.3. Journal is posted to Ledger4. Ledger accounts are totalled.5. Financial statements are prepared.

It is important to note that the decision-making of accounting occurs at step 2 – Journal entry.

Steps 3 – 5 are mechanical exercises.

Therefore, the decisions made when making the journal entry (i.e. translating to accounting language) are very important as they determine what will ultimately be presented on the financial statements.cont’d on next slide…


The Accounting CycleThe making of decisions about what journal entry should be made when a transaction or event occurs is the prominent theme of ACTG 5100.

It is commonly believed that these decisions are bound by strict rules that dictate what the journal entry should be.

In reality, this is not true. There are principles that can guide the decisions, but there are many circumstances for which there are not specific treatments prescribed and, therefore, the judgment of the preparers determines the treatment.

For the purposes of this lecture, we will look mostly at non-ambiguous situations.

Students will become very aware of the ambiguity in the real world in ACTG 5100 (and from reading the newspaper).


Accounting EquationFundamental Accounting Equation:

Assets = Liabilities + Owners’ Assets = Liabilities + Owners’ EquityEquity

This equation is always in balance

In order for this equation to remain in balance, double-entry bookkeeping is employed.

That is, the recording of every transaction or event must have at least two parts

Either an equal impact (increase or decrease) to both sides of the equation or equal and opposite impact to one side.

The recording of every transaction must keep this equation in balance


Journal EntriesAll journal entries have two “sides”:

Debit and CreditFor every journal entry, the total debits must equal the total credits

This ensures that the fundamental accounting equation (A = L + OE) is always in balance.

The basic journal entry:Debit Account name1 $amount Credit Account name2 $amountTo record…


Journal Entries“Debit” and “Credit” are just accounting-speak for “increase” and “decrease”

“Debit” means “increase” for some elements and “decrease” for other elements. Likewise for “credit”.

For example, a company pays its $500 utility bill:In English: the company has incurred an expense (the amount of expense has increased) and the amount of cash in the company has decreased.

An expense (Utilities) has increasedAn asset (Cash) has decreased

In Journal entry:Debit Utility expense $500 Credit Cash $500To record the payment of utility bill


Journal EntriesHow do we know whether to debit or credit?

Convention exists based on what element is being increased or decreased.

Each element “lives in” either debit or credit. If we want to increase something that “lives in” debit, we will debit it.

The convention works such that the fundamental equation (A = L + OE) is always kept in balance.


Journal Entries

Asset Expense

Liability Revenue Owners’ Equity

The Basic Accounting Elements:


Journal EntriesThe Basic Accounting Elements:Asset

Has future benefit to the entityLiability

Obligation to transfer assets in the futureOwners’ Equity

Owners’ interest in the companyRevenue

Increase in economic resources resulting from normal operations of the company

ExpenseDecrease in economic resources resulting from normal operations of the company


Journal Entries

Balance Sheet Income Statement

Balance Sheet/Stmt of Retained Earnings

Debit Asset Expense

Credit Liability Revenue Owners’ Equity

The Basic Accounting Elements:


Journal EntriesBalance Sheet

Income Statement

Balance Sheet/Stmt of Retained Earnings

Debit Asset Expense

Credit Liability Revenue Owners’ Equity

To increase an Asset or Expense: DebitTo increase a Liability, Revenue, or Owners’ Equity: CreditTo decrease an Asset or Expense: CreditTo decrease a Liability, Revenue, or Owners’ Equity: Debit


Journal EntriesGoing back to the Fundamental Accounting Equation:

Assets = Liabilities + Owners’ Assets = Liabilities + Owners’ EquityEquity

Debit Credit Credit


Journal EntriesWhat about the Income Statement elements (Revenue and Expense)?

They don’t appear in the fundamental accounting equation, so how does it stay in balance when they are debited or credited?e.g. consultant sells services for $300 cash

In English: Cash (asset) increases $300 Revenue increases $300

In Accounting:Debit Cash (Asset) $300 Credit Consulting Revenue $300To record payment for consulting services rendered

Assets have increased. Liabilities and Owners’ Equity appear to be unchanged.Is A = L + OE not true (i.e. out of balance)?


Element structuresAssetsLiabilitiesOwners’ equity


Element structuresAssets

Current assetsCash

• Cash on handBank accounts

• CIBC• BMO

Accounts receivable• Accounts receivable – customer 1• Accounts receivable – customer 2

InventoryRaw materialsWork in processFinished goods

• Product 1• Product 2


Element structuresAssets

Current assetsLong-term assets

BuildingsOntario buildingsQuebec buildings

• Montreal building• Sherbrooke building

VehiclesCarsTrucks

• Truck 1• Truck 2


Element structuresLiabilities

Current liabilitiesAccounts payableAccrued liabilities

Long-term liabilitiesBank loans

• Loan from RBC• Loan from Scotiabank

Notes payableBonds payable


Element structuresOwners’ equity

Capital stock (direct investment)Retained earnings (indirect investment)

RevenueExpenses(Dividends)

Although revenue and expenses are not sub-pieces of Retained earnings the way Current assets are a sub-piece of Total assets, for the purposes of understanding how they fit in to the equation, this representation is helpful.


Element structuresThe balance sheet is a permanent statement

Its’ accounts accumulate information from the entity’s beginning.

The amounts presented on the balance sheet are aggregated from the entity’s beginning to the balance sheet date.

The income statement is a temporary statementIts’ accounts are temporary accounts

They accumulate information for a period and then are reset to zero to begin tracking information for the next period.

The amounts presented on the income statement are aggregated from the beginning of the period to the end of the period only.


Element structuresThe Closing Entry

Whenever financial statements are to be prepared, the temporary (income statement) accounts must be “closed” to zero so that they can begin tracking data for the next period.

The amounts in the accounts at closing are transferred to Retained Earnings (so named because it is the earnings (net income) of the company that is retained in the company and not distributed to the owners).

We will see an example in the comprehensive example.


Element structuresThe Closing Entry

The result of the closing entry is that all impacts on Revenue and Expenses (the temporary accounts) are indirectly impacts on Retained earnings (a permanent account).

That is how A = L + OE stays in balance.The temporary accounts are sub-pieces of OE.


Journal Entries

Going back to the Fundamental Accounting Equation:

Assets Assets ==

Liabilities Liabilities ++

Owners’ Owners’ EquityEquity

Debit Credit CreditAssets

Current assetsLong-term assets

LiabilitiesCurrent liabilitiesLong-term liabilities

Direct investmentCapital stock

Indirect investmentDividends (debit)Retained earnings

Revenue (credit)Expense (debit)


Financial StatementsThere are 4 statements in a standard set of financial

statements1. Balance Sheet

The “what do we have?” statementShows what the entity owns and owes (the difference being the owners’ residual interest)

2. Income StatementThe “what did we do?” statementShows the activity the entity undertook in its normal course of operations.

3. Statement of Retained EarningsShows the changes in Retained earnings in the year

Often shown at the bottom of the Income Statement

4. Statement of Cash FlowsShows the sources and uses of cash in the year

Information is derived from the B/S and I/S and other


Financial StatementsStatement of Cash Flows

Contains information about how cash came into and left the entity in the period.

Does not contain new informationi.e. the SCF is derived from the Balance Sheet and Income Statement (with some supplementary information)

The SCF will not be covered in this lecture. It is covered in ACTG 5100.


Financial Statements

Company Name Company NameIncome statement Balance SteetFor year ended December 31, 2003 As at December 31, 2003

Revenue 100,000 AssetsCurrent assets 3,000

Expenses Long-term assets 40,000 Salaries 45,000 Utilities 13,000 Rent 30,000 Other 8,000 Total Assets 43,000

96,000- Liabilities

Net Income 4,000 Current liabilities 15,000 Long-term liabilities 20,000

35,000 Company Name Owners' EquityStatement of Retained Earnings Capital stock 1,000 For year ended December 31, 2003 Retained Earnings 7,000

Opening Retained Earnings 3,500 8,000 Net Income (Loss) 4,000 Dividends 500- Total Liabilities and OE 43,000

Closing Retained Earnings 7,000


Loblaw


Loblaw

To Balance Sheet


Loblaw

From Statement of Retained Earnings


Canadian Tire


Canadian Tire

To Balance Sheet


Canadian Tire

From Statement of Retained Earnings


Research In Motion


Research In Motion

To Statement of Shareholders’ Equity


Research In Motion

To Balance Sheet

From Income Statement


Research In Motion

From Statement of Shareholders’ Equity


Accounting MethodsCash Accounting

Revenue is recorded when cash is received.Expense is recorded when cash is disbursed.

Very straightforward. Facts determine the timing of entries. Less room for judgment.

Accrual AccountingRevenue is recorded (recognized) when the revenue has been earned.

When the product or service has been provided to the customer, regardless of when payment is received.

Expenses are matchedmatched to the revenue that they helped to earn, regardless of when payment is made.


Accounting MethodsIt is possible for cash receipt to coincide with revenue recognition and cash payment to coincide with expense recognition.However, in business in North America (and, indeed globally), it is the norm for the exchange of cash to either precede or follow the actual “economic event”.Except in the simplest of entities (e.g. an individual person) or in unique circumstances, cash accounting will not yield useful information.

Accrual accounting is the standard method.


Accrual Accounting2 kinds of entries1. Transactional

• The recording of an exchange with another entity

2. Adjusting• Required only when financial statements are prepared

to “adjust” accounts to where they should be• Always include at least one Balance Sheet account

and one Income Statement account.• e.g. Depreciation of capital assets, earning of interest

revenue.


Journal EntriesJournal Entries

Usually one side (the Debit or the Credit) will be obvious from the transaction (e.g. when cash is received, cash (an asset) increases. The Debit has to be to cash).It is the determination of the other side of the entry that requires thought and judgment.


Journal EntriesIt is best to reason logically:1. Which financial statement should be impacted?

• Balance sheet, Income statement, or Stmt of Retained Earnings?

2. Which element on that statement should be impacted?3. Which specific account should be impacted?

AssetsCurrent assets

• Cash• Accts receivable

Long-term assets• Building• Land

LiabilitiesCurrent liabilities

• Accts payableLong-term liabilities

• Bank loan

Owners’ EquityDirect investment

Capital stockIndirect investment

Dividends (debit)Retained earnings

Revenue (credit)Expense (debit)

ElementAccount


ExampleWe will account for a company, Tasman Inc., for its

first year of operations.Tasman Inc. is a Pizza business that makes and delivers pizza in the Toronto area.It is 100% owned by Dave, who is also active in the business as its manager.Tasman Inc. is a corporation (a legal entity separate from Dave).The company begins on January 1, 2003. Its fiscal year end is December 31.We will prepare a Balance Sheet as at December 31, 2003 and an Income Statement and Statement of Retained Earnings for the year ended December 31, 2003.


Tasman


Example – Tasman Inc.Our approach

We will be given several transactions and events and will process them one at a time, carrying them all the way to the financial statements.

This approach will reinforce the impact of each event on the financial statements as a whole.

We will then go back and do the mechanical steps that get us from journal entries to financial statements.

This will show the accounting cycle in its entirety.


Tasman


Tasman Inc.

Tasman Inc. Tasman Inc.Income statement Balance SteetFor year ended December 31, 2003 As at January 1, 2003

Revenue - AssetsCurrent assets -

Expenses Long-term assets - - - - - Total Assets -

- Liabilities

Net Income - Current liabilities - Long-term liabilities -

- Tasman Inc. Owners' EquityStatement of Retained Earnings Capital stock - For year ended December 31, 2003 Retained Earnings -

Opening Retained Earnings - - Net Income (Loss) - Dividends - Total Liabilities and OE -

Closing Retained Earnings -

On January 1, 2003, the financial statements of the company are all nil

A = L + OE is true because 0 = 0 + 0


Tasman Inc.1

Tasman Inc. (Tasman) is incorporated on January 1, 2003. Dave pays $1,000 of his own money to pay for the incorporation.


Tasman Inc.1

Tasman Inc. (Tasman) is incorporated on January 1, 2003. Dave pays $1,000 of his own money to pay for the incorporation.

If we assume that Dave is going to want to be reimbursed by Tasman:

Debit Incorporation costs Expense 1,000

Credit Due to shareholder Liability 1,000To record payment of incorporation costs by shareholder.


Tasman Inc.Tasman Inc. Tasman Inc.Income statement Balance SteetFor year ended December 31, 2003 As at

Revenue - AssetsCurrent assets -

Expenses Long-term assets - Incorp costs 1,000

- - - Total Assets -

1,000- Liabilities

Net Income 1,000- Current liabilitiesDue to shareholder 1,000

Tasman Inc. Total current liabilities 1,000 Statement of Retained Earnings Long-term liabilities - For year ended December 31, 2003 1,000

Owners' EquityOpening Retained Earnings - Capital stock - Net Income (Loss) 1,000- Retained Earnings 1,000- Dividends -

1,000- Closing Retained Earnings 1,000-

Total Liabilities and OE -


Tasman Inc.2

Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return.


Tasman Inc.2

Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return.

Debit Cash Asset 10,000

Credit Capital stock Owners’ Equity 10,000

To record sale of common shares.



Revenue - AssetsCurrent assets

Expenses Cash 10,000 - Incorp costs 1,000 Total current assets 10,000

- Long-term assets- - Total Assets 10,000

1,000- Liabilities


Tasman Inc. Total current liabilities 1,000 Statement of Retained Earnings Long-term liabilities - For year ended December 31, 2003 1,000

Owners' EquityOpening Retained Earnings - Capital stock 10,000 Net Income (Loss) 1,000- Retained Earnings 1,000- Dividends -

9,000 Closing Retained Earnings 1,000-

Total Liabilities and OE 10,000


Tasman Inc.3

Tasman Inc. gets a $50,000 loan from the bank. Interest rate is 6% per year. Interest on the outstanding amount must be paid each year on the anniversary. Principal can be repaid at any time.


Tasman Inc.3

Tasman Inc. gets a $50,000 loan from the bank. Interest rate is 6% per year. Interest on the outstanding amount must be paid each year on the anniversary. Principal can be repaid at any time.


Credit Bank loan Liability 50,000To record the receipt of bank loan.




Expenses Cash 60,000 - Incorp costs 1,000 Total current assets 60,000

- Long-term assets- - Total Assets 60,000

1,000- Liabilities


Tasman Inc. Total current liabilities 1,000 Statement of Retained Earnings Long-term liabilities 50,000 For year ended December 31, 2003 51,000

Owners' EquityOpening Retained Earnings - Capital stock 10,000 Net Income (Loss) 1,000- Retained Earnings 1,000- Dividends -

9,000 Closing Retained Earnings 1,000-



Tasman Inc.4

Signed a lease for store space. Rental cost is $3,000 per month. Lease term is 36 months. Annual rent must be paid up front on the anniversary of the lease.


Tasman Inc.4

Signed a lease for store space. Rental cost is $3,000 per month. Lease term is 36 months. Annual rent must be paid up front on the anniversary of the lease.

There is no entry.Signing of a lease (or any contract) is not considered a transaction for accounting purposes.


Tasman Inc.5

Make the rent payment for 2003 ($36,000).


Tasman Inc.5

Make the rent payment for 2003 ($36,000).

Debit Prepaid rent expense Asset 36,000

Credit Cash Asset 36,000To record the payment of 2003 rent in advance.




Expenses Cash 24,000 - Incorp costs 1,000 Prepaid rent expense 36,000

- - Total current assets 60,000 - Long-term assets

1,000- Total Assets 60,000

Net Income 1,000- Liabilities

Current liabilitiesTasman Inc. Due to shareholder 1,000 Statement of Retained EarningsFor year ended December 31, 2003 Total current liabilities 1,000

Long-term liabilities 50,000 Opening Retained Earnings - 51,000 Net Income (Loss) 1,000- Owners' EquityDividends - Capital stock 10,000

Retained Earnings 1,000- Closing Retained Earnings 1,000-

9,000



Tasman Inc.6

Buy an oven which costs $15,000. Pay $5,000 cash, balance is due in one year. Interest rate on the outstanding balance is 3.5% per year.


Tasman Inc.6

Buy an oven which costs $15,000. Pay $5,000 cash, balance is due in one year. Interest rate on the outstanding balance is 3.5% per year.

Debit Cooking equipment Asset 15,000

Credit Cash Asset 5,000Credit Accounts payable Liability 10,000

To record the purchase of oven partially on credit.





- - Total current assets 55,000 - Long-term assets

1,000- Cooking equipment 15,000

Net Income 1,000- 15,000 Total Assets 70,000

Tasman Inc. LiabilitiesStatement of Retained Earnings Current liabilitiesFor year ended December 31, 2003 Due to shareholder 1,000

Accounts payable 10,000 Opening Retained Earnings - Total current liabilities 11,000 Net Income (Loss) 1,000- Long-term liabilities 50,000 Dividends - 61,000

Owners' EquityClosing Retained Earnings 1,000- Capital stock 10,000

Retained Earnings 1,000-

9,000



Tasman Inc.7

Buy $1,500 of food supplies (ingredients to make pizzas).


Tasman Inc.7

Buy $1,500 of food supplies (ingredients to make pizzas).

Debit Food inventory Asset 1,500

Credit Cash Asset 1,500To record the purchase of supplies to be used in making pizzas for sale.





- Food inventory 1,500 - Total current assets 55,000 - Long-term assets

1,000- Cooking equipment 15,000






9,000



Tasman Inc.8

Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days.


Tasman Inc.8

Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days.

Debit Office equipment Asset 4,000

Credit Accounts payable Liability 4,000To record the purchase of office equipment on credit.





- Food inventory 1,500 - Total current assets 55,000 - Long-term assets

1,000- Cooking equipment 15,000 Office equipment 4,000






9,000



Tasman Inc.9

Hired a chef. Salary of $33,800 per year paid bi-weekly (26 times a year).


Tasman Inc.9

Hired a chef. Salary of $33,800 per year paid bi-weekly (26 times a year).

No entry.Hiring of an employee is not considered a transaction for accounting purposes.


Tasman Inc.10

In addition to being the manager, Dave will be the delivery man until there is revenue enough to hire one. Dave decides to pay himself a salary of $62,400 per year paid bi-weekly. To avoid draining cash from the company, Dave will not take cash salary until further notice.


Tasman Inc.10

In addition to being the manager, Dave will be the delivery man until there is revenue enough to hire one. Dave decides to pay himself a salary of $62,400 per year paid bi-weekly. To avoid draining cash from the company, Dave will not take cash salary until further notice.

No entry.Same reason as previous example.Information will be useful in determining future journal entries.


Tasman Inc.11

First salary payments are made.


Tasman Inc.11

First salary payments are made.

Debit Salary expense Expense 2,400

Credit Due to shareholder Liability 2,400To record salary expense for Manager, not paid in cash (62,400/26 = 2,400)


Credit Cash Asset 1,300To record payment of chef (33,800/26 = 1,300).




Expenses Cash 16,200 - Incorp costs 1,000 Prepaid rent expense 36,000 Salaries 3,700 Food inventory 1,500

- Total current assets 53,700 - Long-term assets







5,300



Tasman Inc.12

Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms.


Tasman Inc.12

Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms.

Debit Vehicle Asset 10,000Credit Cash Asset 10,000

To record purchase of used vehicle to be used as delivery vehicle.




Expenses Cash 6,200 Incorp costs 1,000 Prepaid rent expense 36,000 Salaries 3,700 Food inventory 1,500



Net Income 4,700- Vehicle 10,000 29,000 Total Assets 72,700





5,300



Tasman Inc.13

Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days.


Tasman Inc.13

Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days.

Debit Cash Asset 900

Debit Accounts receivable Asset 600

Credit Catering revenue Revenue 1,500To record the earning of catering revenue.



Revenue AssetsCatering 1,500 Current assets

1,500 Cash 7,100 Expenses Prepaid rent expense 36,000

Incorp costs 1,000 Food inventory 1,500 Salaries 3,700 Accounts receivable 600








6,800



Tasman Inc.14

Store is open for business. Cash register reports revenue of $1,200 for the day.


Tasman Inc.14

Store is open for business. Cash register reports revenue of $1,200 for the day.


Credit Store revenue Revenue 1,200To record the aggregate sales for the first day of business.



Revenue AssetsCatering 1,500 Current assetsStore sales 1,200 2,700 Cash 8,300

Expenses Prepaid rent expense 36,000 Incorp costs 1,000 Food inventory 1,500 Salaries 3,700 Accounts receivable 600








8,000



Tasman Inc.15

The company upstairs in Tasman’s building approaches Dave about an exclusive catering arrangement whereby the company will pay Tasman $4,000 up front to cater 5 functions throughout the year. Dave accepts the deal and $4,000 cash.


Tasman Inc.15

The company upstairs in Tasman’s building approaches Dave about an exclusive catering arrangement whereby the company will pay Tasman $4,000 up front to cater 5 functions throughout the year. Dave accepts the deal and $4,000 cash.


Credit Unearned revenue Liability 4,000To record the receipt of cash for work to be performed in the future.




Expenses Prepaid rent expense 36,000 Incorp costs 1,000 Food inventory 1,500 Salaries 3,700 Accounts receivable 600 50,400

- Long-term assets- Cooking equipment 15,000

4,700- Office equipment 4,000 Vehicle 10,000 29,000

Net Income 2,000- Total Assets 79,400

LiabilitiesTasman Inc. Current liabilitiesStatement of Retained Earnings Due to shareholder 3,400 For year ended December 31, 2003 Accounts payable 14,000

Unearned revenue 4,000 21,400 Opening Retained Earnings - Long-term liabilities 50,000 Net Income (Loss) 2,000- 71,400 Dividends - Owners' Equity

Capital stock 10,000 Closing Retained Earnings 2,000- Retained Earnings 2,000-

8,000



Tasman Inc.16

Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days.


Tasman Inc.16

Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days.


Credit Accounts payable Liability 5,000To record the purchase of food inventory on credit.











8,000



Tasman Inc.17

Pay off the balances owing on the office equipment and the food supplies.


Tasman Inc.17

Pay off the balances owing on the office equipment and the food supplies.

Debit Accounts payable Liability 5,000Credit Cash Asset 5,000

To record the payment of amount owing to supplier of food inventory.

Debit Accounts payable Liability 4,000

Credit Cash Asset 4,000To record the payment of amounts owing to supplier of office equipment.











8,000



Tasman Inc.18

Dave finds out that the company that owes Tasman $600 for the catering job has gone bankrupt and Tasman will not be receiving payment.


Tasman Inc.18

Dave finds out that the company that owes Tasman $600 for the catering job has gone bankrupt and Tasman will not be receiving payment.

Debit Bad debt expense Expense 600

Credit Accounts receivable Asset 600To record the write-off of amount owing from customer.




Expenses Prepaid rent expense 36,000 Incorp costs 1,000 Food inventory 6,500 Salaries 3,700 Accounts receivable - 45,800 Bad debts 600 Long-term assets

- Cooking equipment 15,000 5,300- Office equipment 4,000

Vehicle 10,000 29,000 Net Income 2,600- Total Assets 74,800




7,400



Tasman Inc.19

Tasman provides the catering for an event for the company upstairs. Everything goes fine.


Tasman Inc.19

Tasman provides the catering for an event for the company upstairs. Everything goes fine.

Debit Unearned revenue Liability 800

Credit Catering revenue Revenue 800To record the earning of catering revenue (assume $4,000 is earned evenly over 5 events)






Vehicle 10,000 29,000 Net Income 1,800- Total Assets 74,800




8,200



Tasman Inc.Summary amount 1

Store revenues have been $220,000.



Store revenues have been $220,000.


Credit Store revenue Revenue 220,000To record aggregate store revenue for the year.






Vehicle 10,000 29,000 Net Income 218,200 Total Assets 294,800


Unearned revenue 3,200 16,600 Opening Retained Earnings - Long-term liabilities 50,000 Net Income (Loss) 218,200 66,600 Dividends - Owners' Equity

Capital stock 10,000 Closing Retained Earnings 218,200 Retained Earnings 218,200

228,200




All salaries have been paid. Dave has taken half of his salary in cash.



All salaries have been paid. Dave has taken half of his salary in cash.


Credit Cash Asset 31,200Credit Due to shareholder Liability 28,800

To record salary expense for Manager (62,400 – 2,400 (previously recorded) = 60,000)


Credit Cash Asset 32,500To record payment of chef’s salary (33,800 - 1,300 (previously recorded) = 32,500).










135,700




Additional food supply purchases were $80,000.



Additional food supply purchases were $80,000.


Credit Cash Asset 80,000To record aggregate food supply purchases for the year.










135,700




Food supplies that had cost $3,500 are on hand on December 31, 2003.




Total purchased in the year = 1,500 + 5,000 + 80,000 = 86,50086,500 – 3,500 = 83,000 = Cost of the inventory used

= Cost of goods sold




Total purchased in the year = 1,500 + 5,000 + 80,000 = 86,50086,500 – 3,500 = 83,000 = Cost of the inventory used

= Cost of goods sold

Debit Cost of goods sold Expense 83,000

Credit Food inventory Liability 83,000To record the cost of food inventory used in the year.




Prepaid rent expense 36,000 Cost of goods sold 83,000- Food inventory 3,500 Gross margin 140,500 Accounts receivable - 119,100

Long-term assetsExpenses Cooking equipment 15,000

Incorp costs 1,000 Office equipment 4,000 Salaries 96,200 Vehicle 10,000 29,000 Bad debts 600 Total Assets 148,100

- 97,800- Liabilities

Current liabilitiesNet Income 42,700 Due to shareholder 32,200

Accounts payable 10,000 Unearned revenue 3,200 45,400

Tasman Inc. Long-term liabilities 50,000 Statement of Retained Earnings 95,400 For year ended December 31, 2003 Owners' Equity

Capital stock 10,000 Opening Retained Earnings - Retained Earnings 42,700 Net Income (Loss) 42,700 Dividends - 52,700

Closing Retained Earnings 42,700 Total Liabilities and OE 148,100



Utilities expenses were all paid in cash on the last day of each month. Total for the year was $9,600.



Utilities expenses were all paid in cash on the last day of each month. Total for the year was $9,600.

Debit Utilities expense Expense 9,600

Credit Cash Asset 9,600To record aggregate payment of utilities expense for the year.






Incorp costs 1,000 Office equipment 4,000 Salaries 96,200 Vehicle 10,000 29,000 Bad debts 600 Total Assets 138,500 Utilities 9,600

107,400- LiabilitiesCurrent liabilities

Net Income 33,100 Due to shareholder 32,200 Accounts payable 10,000 Unearned revenue 3,200 45,400






Tasman catered 3 of the remaining events for the company upstairs. The last one will be held on January 7, 2004.



Tasman catered 3 of the remaining events for the company upstairs. The last one will be held on January 7, 2004.

Debit Unearned revenue Liability 2,400

Credit Catering revenue Revenue 2,400To record the earning of revenue for 3 of remaining 4 events that had been pre-paid.






Incorp costs 1,000 Office equipment 4,000 Salaries 96,200 Vehicle 10,000 29,000 Bad debts 600 Total Assets 138,500 Utilities 9,600

107,400- LiabilitiesCurrent liabilities

Net Income 35,500 Due to shareholder 32,200 Accounts payable 10,000 Unearned revenue 800 43,000





Tasman Inc.Adjusting entry 1

Costs related to the oven, the office equipment, and the Camaro must be recorded.



Costs related to the oven, the office equipment, and the Camaro must be recorded.

Debit Depreciation expense Expense 3,000Credit Accumulated Depreciation

– OvenContra-asset 3,000

To record annual depreciation of Oven (15,000/5 = 3,000 (assume 5-year life)).

Debit Depreciation expense Expense 2,000Credit Accumulated Depreciation

– VehicleContra-asset 2,000

To record annual depreciation of delivery vehicle (10,000/5 = 2,000).

Debit Depreciation expense Expense 1,000

Credit Accumulated Depreciation – Office equipment

Contra-asset 1,000

To record annual depreciation of office equipment (4,000/4 = 1,000 (assume 4-year life)).






Incorp costs 1,000 Office equipment 4,000 Salaries 96,200 Vehicle 10,000 Bad debts 600 Accum Depn (total) 6,000- 23,000 Utilities 9,600 Total Assets 132,500 Depreciation 6,000 113,400-

LiabilitiesNet Income 29,500 Current liabilities

Due to shareholder 32,200 Accounts payable 10,000

Tasman Inc. Unearned revenue 800 43,000 Statement of Retained Earnings Long-term liabilities 50,000 For year ended December 31, 2003 93,000

Owners' EquityOpening Retained Earnings - Capital stock 10,000 Net Income (Loss) 29,500 Retained Earnings 29,500 Dividends -

39,500 Closing Retained Earnings 29,500




Interest has accrued on the bank loan and the amount due to the oven supplier.



Interest has accrued on the bank loan and the amount due to the oven supplier.

Debit Interest expense Expense 3,000Credit Interest payable Liability 3,000

To record the interest which has accrued in the year (50,000*6% = 3,000)

Debit Interest expense Expense 350Credit Interest payable Liability 350

To record the interest which has accrued on amount payable on oven (10,000*3.5% = 350)






Incorp costs 1,000 Office equipment 4,000 Salaries 96,200 Vehicle 10,000 Bad debts 600 Accum Depn (total) 6,000- 23,000 Utilities 9,600 Total Assets 132,500 Depreciation 6,000 Interest 3,350 116,750- Liabilities

Net Income 26,150 Current liabilitiesDue to shareholder 32,200 Accounts payable 10,000

Tasman Inc. Interest payable 3,350 Statement of Retained Earnings Unearned revenue 800 46,350 For year ended December 31, 2003 Long-term liabilities 50,000

96,350 Opening Retained Earnings - Owners' EquityNet Income (Loss) 26,150 Capital stock 10,000 Dividends - Retained Earnings 26,150

36,150 Closing Retained Earnings 26,150




Rent expense must be recorded.

Recall that $36,000 was paid at the beginning of the year for the full year and was recorded as an asset, Prepaid rent expense.



Rent expense must be recorded.

Recall that $36,000 was paid at the beginning of the year for the full year and was recorded as an asset, Prepaid rent expense.

Debit Rent expense Expense 36,000

Credit Prepaid rent expense Asset 36,000To record the rent expense which had been prepaid at the beginning of the year.


Tasman Inc.Tasman Inc. Tasman Inc.Income statement Balance SteetFor year ended December 31, 2003 As at December 31, 2003


Prepaid rent expense - Cost of goods sold 83,000- Food inventory 3,500 Gross margin 142,900 Accounts receivable - 73,500


Incorp costs 1,000 Office equipment 4,000 Salaries 96,200 Vehicle 10,000 Bad debts 600 Accum Depn (total) 6,000- 23,000 Utilities 9,600 Total Assets 96,500 Rent 36,000 Depreciation 6,000 LiabilitiesInterest 3,350 152,750- Current liabilities

Due to shareholder 32,200 Net Income 9,850- Accounts payable 10,000

Interest payable 3,350 Unearned revenue 800 46,350


Capital stock 10,000 Opening Retained Earnings - Retained Earnings 9,850- Net Income (Loss) 9,850- 150 Dividends - Closing Retained Earnings 9,850- Total Liabilities and OE 96,500


The Accounting Cycle1. Transaction or event occurs2. Recorded in the Journal using a Journal Entry.3. Journal is posted to Ledger4. Ledger accounts are totalled.5. Financial statements are prepared.

We have done step 2 (journal entries).Step 3 is most easily done using a spreadsheet (Friedlan text provides a template).

We will use the old-fashioned method known as T-accounts.

Each account is represented by a T. All debits are “posted” on the left, all credits are “posted” on the right.Spreadsheets have made this practice virtually obsolete, but it is informative to do it to help understand the fundamentals.


T-Accounts (posting to ledgers)

10,000 36,000 600 600 1,000 1,500 1,200 50,000 5,000 - 2,400 800 220,000

900 1,500 28,800 2,400 221,200 1,200 1,300 32,200 4,700 4,000 10,000 36,000 36,000

220,000 9,000 - 32,500 9,000 10,000 31,200 4,000 80,000 1,500 83,000 5,000

9,600 5,000 10,000 83,000 36,000 70,000 80,000 83,000 36,000

3,500 3,000

350 1,000 3,000 15,000 3,350 1,000 1,000 15,000 2,000

4,000 6,000 4,000 800 4,000 3,700

3,000 2,400 92,500 1,000 800 96,200 3,000 2,000 10,000 350 6,000 10,000 3,350

50,000 600 50,000 600

9,600 9,600

10,000 10,000

Cooking equipment

Accumulated depn

Due to shareholder

Accounts payable

Interest payable

Unearned revenue

Cash Accounts Receivable

Prepaid rent expense

Food inventory

Capital stock

Catering revenue

Cost of goods sold

Incorporation costs

Salaries

Bad debts

Retained earnings

Utilities

Vehicle

Store sales

Rent

Depreciation

Interest

Bank loan

Office equipment

Before the closing entry:


The closing entryThe closing entry resets all of the temporary accounts to zero

and send the residual to Retained earnings.Dr Catering revenue 4,700Dr Store sales 221,200 Cr Cost of goods sold 83,000 Cr Incorporation costs 1,000 Cr Salaries 96,200 Cr Bad debts 600 Cr Utilities 9,600 Cr Rent 36,000 Cr Depreciation 6,000 Cr Interest 3,350Dr Retained earnings 9,850To close the temporary accounts for the year


T-Accounts (posting to ledgers)

10,000 36,000 600 600 1,000 1,500 1,200 50,000 5,000 - 2,400 800 220,000

900 1,500 28,800 2,400 221,200 221,200 1,200 1,300 32,200 4,700 4,700 - 4,000 10,000 36,000 36,000 -

220,000 9,000 - 32,500 9,000 10,000 31,200 4,000 83,000 36,000 80,000 1,500 83,000 5,000 83,000 83,000 36,000 36,000

9,600 5,000 10,000 - - 70,000 80,000

3,500 3,000 1,000 3,000

350 1,000 1,000 1,000 15,000 3,350 - 2,000 15,000 6,000 6,000

4,000 - 4,000 800 4,000 3,700

3,000 2,400 92,500 1,000 800 96,200 96,200 3,000 2,000 10,000 - 350 6,000 10,000 3,350 3,350

50,000 - 50,000 600

600 600 - 9,600

10,000 9,600 9,600 10,000 -

9,850 9,850

Utilities

Vehicle

Store sales

Rent

Depreciation

Interest

Bank loan

Office equipment

Food inventory

Capital stock

Catering revenue

Cost of goods sold

Incorporation costs

Salaries

Bad debts

Retained earnings

Cooking equipment

Accumulated depn

Due to shareholder

Accounts payable

Interest payable

Unearned revenue



After the closing entry:


Financial statements

10,000 36,000 600 600 1,000 1,500 1,200 50,000 5,000 - 2,400 800 220,000

900 1,500 28,800 2,400 221,200 221,200 1,200 1,300 32,200 4,700 4,700 - 4,000 10,000 36,000 36,000 -

220,000 9,000 - 32,500 9,000 10,000 31,200 4,000 83,000 36,000 80,000 1,500 83,000 5,000 83,000 83,000 36,000 36,000

9,600 5,000 10,000 - - 70,000 80,000

3,500 3,000 1,000 3,000

350 1,000 1,000 1,000 15,000 3,350 - 2,000 15,000 6,000 6,000

4,000 - 4,000 800 4,000 3,700

3,000 2,400 92,500 1,000 800 96,200 96,200 3,000 2,000 10,000 - 350 6,000 10,000 3,350 3,350

50,000 - 50,000 600

600 600 - 9,600

10,000 9,600 9,600 10,000 -

9,850 9,850

Retained earnings

Cooking equipment

Accumulated depn

Due to shareholder

Accounts payable

Interest payable

Unearned revenue



Capital stock

Catering revenue

Cost of goods sold

Incorporation costs

Salaries

Bad debts

Utilities

Vehicle

Store sales

Rent

Depreciation

Interest

Bank loan

Office equipment

Food inventory

Numbers to go to the financial statements


Tasman Inc.Tasman Inc. Tasman Inc.Income statement Balance SteetFor year ended December 31, 2003 As at December 31, 2003


Food inventory 3,500 73,500 Cost of goods sold 83,000- Long-term assetsGross margin 142,900 Cooking equipment 15,000

Office equipment 4,000 Expenses Vehicle 10,000

Incorp costs 1,000 Accum Depn (total) 6,000- 23,000 Salaries 96,200 Total Assets 96,500 Bad debts 600 Utilities 9,600 LiabilitiesRent 36,000 Current liabilitiesDepreciation 6,000 Due to shareholder 32,200 Interest 3,350 152,750- Accounts payable 10,000

Interest payable 3,350 Net Income 9,850- Unearned revenue 800 46,350

Long-term liabilities 50,000 96,350

Tasman Inc. Owners' EquityStatement of Retained Earnings Capital stock 10,000 For year ended December 31, 2003 Retained Earnings 9,850-

150 Opening Retained Earnings - Net Income (Loss) 9,850- Total Liabilities and OE 96,500 Dividends - Closing Retained Earnings 9,850-

introduction to accounting

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