accounting in business © 2013 mcgraw-hill ryerson limited. powerpoint slides to accompany...

AccountinAccounting in g in BusinessBusiness

© 2013 McGraw-Hill Ryerson Limited.

PowerPoint Slides to accompanyFundamental Accounting Principles, 14ce

Prepared byJoe Pidutti, Durham College

CHAPTER

1

1. Describe the purpose and importance of accounting. (LO1)

2. Describe forms of business organization. (LO2)

3. Identify users and uses of, and opportunities in, accounting. (LO3)

4. Identify and explain why ethics and social responsibility are crucial to accounting. (LO4)

© 2013 McGraw-Hill Ryerson Limited.

Learning ObjectivesLearning Objectives

2

5. Identify, explain, and apply accounting principles. (LO5)

6. Identify and explain the content and reporting aims of financial statements. (LO6)

7. Analyze business transactions by applying the accounting equation. (LO7)

8. Prepare financial statements reflecting business transactions. (LO8)

© 2013 McGraw-Hill Ryerson Limited.

Learning ObjectivesLearning Objectives

3

• 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.

© 2013 McGraw-Hill Ryerson Limited.

What is Accounting?What is Accounting?

(LO1)4

• 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.

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What is Recordkeeping?What is Recordkeeping?

(LO1)5

• Sole Proprietorship• Partnership• Corporation

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Forms of OrganizationForms of Organization

(LO2)6

• One owner• Separate entity for accounting purposes• Not a separate legal entity from the

owner• Unlimited liability• Limited life• Owner taxed on profits

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Sole ProprietorshipsSole Proprietorships

(LO2)7

• 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

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PartnershipsPartnerships

(LO2)8

• One or more owners• Separate entity for accounting purposes• Separate legal entity from the owner(s)• Limited liability• Unlimited life• Corporation taxed on profits

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CorporationsCorporations

(LO2)9

• Accounting is a service activity that provides information to help internal and external users make decisions.

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Users of Accounting InformationUsers of Accounting Information

(LO3)10

External UsersExternal UsersExternal users of accounting information are not involved in running the organization.

They include:•Lenders•Shareholders•Governments•Consumer groups•External auditors•Customers

© 2013 McGraw-Hill Ryerson Limited. (LO3)11

• 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.

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External ReportingExternal Reporting

(LO3)12

• 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.

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Internal usersInternal users

(LO3)13

• 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?

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Typical Questions Asked by Internal Typical Questions Asked by Internal UsersUsers

(LO3)14

Broad fields of accounting include:• Financial accounting• Managerial accounting• Taxation• Accounting-related fields

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Accounting OpportunitiesAccounting Opportunities

(LO3)15

Accountants may work as:• Private accountants• Public accountants• Government accountants

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Accounting OpportunitiesAccounting Opportunities

(LO3)16

Professional certifications in Canada:• Certified General Accountant (CGA)• Certified Management Accountant (CMA)• Chartered Accountant (CA)

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Professional CertificationProfessional Certification

(LO3)17

• 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.

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Ethics and Social ResponsibilityEthics and Social Responsibility

(LO4)18

Ethics in AccountingEthics 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.

© 2013 McGraw-Hill Ryerson Limited.19 (LO4)

• 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.

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Ethical Obligations of Ethical Obligations of AccountantsAccountants

(LO4)20

• 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).

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Generally Accepted Accounting Generally Accepted Accounting Principles (GAAP)Principles (GAAP)

(LO5)21

• 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.

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IFRSIFRS

(LO5)22

• 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.

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ASPEASPE

(LO5)23

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GAAP for Public vs. Private GAAP for Public vs. Private EnterprisesEnterprises

(LO5)

Publicly Accountable Enterprises (PAEs)

Private Enterprises (PEs)

GAAP to be used

IFRS ASPE or IFRS

24

• 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.

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Purpose of GAAPPurpose of GAAP

(LO5)25

GAAP includes the following principles:•Business entity principle•Cost principle•Going concern principle•Monetary unit principle•Revenue recognition principle

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GAAPGAAP

(LO5)26

• Every business is to be accounted for separately from its owner(s) or any other economic entity of the owner.

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Business Entity PrincipleBusiness Entity Principle

(LO5)27

• 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.

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Cost PrincipleCost Principle

(LO5)28

• 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.

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Going Concern PrincipleGoing Concern Principle

(LO5)29

• 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.

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Monetary Unit PrincipleMonetary Unit Principle

(LO5)30

• 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.

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Revenue Recognition PrincipleRevenue Recognition Principle

(LO5)31

• 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.

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Financial StatementsFinancial Statements

(LO6)32

There are four major financial statements:•Income statement•Balance sheet•Statement of changes in equity•The statement of cash flowsThese statements provide different information but are linked together.

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Financial StatementsFinancial Statements

(LO6)33

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Financial StatementsFinancial 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

Point in time Point in time

34

Period of time

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.

Income StatementIncome Statement

© 2013 McGraw-Hill Ryerson Limited. (LO6)35

Value of assets exchanged forproducts and

servicesprovided tocustomers.

Income StatementIncome Statement

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Costs incurred or the using upof assets from

generating revenue

Income StatementIncome Statement

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• 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.

Statement of OwnerStatement of Owner’’s Equitys Equity

© 2013 McGraw-Hill Ryerson Limited. (LO6)38

Statement Of OwnerStatement Of Owner’’s Equitys Equity

Covers a period

of time.

From the Income

statement.

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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.

Balance SheetBalance Sheet

© 2013 McGraw-Hill Ryerson Limited. (LO6)40

Balance SheetBalance Sheet

Properties or economic resources owned by abusiness

© 2013 McGraw-Hill Ryerson Limited. (LO6)41

Balance SheetBalance Sheet

Debts or obligations

of the business

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Balance SheetBalance Sheet

Owner’s claim on the

assets

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From the Statement of

Owner’s Equity

43

• Reports the sources and uses of cash for a period of time.

• Organized by the company’s major activities:• Operating• Investing• Financing

Cash Flow StatementCash Flow Statement

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From the

balance sheet

Cash Flow StatementCash Flow Statement

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LiabilitiesLiabilities EquityEquityAssetsAssets = +

The Accounting EquationThe Accounting Equation

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Describe what an organization has invested in.

(LO7)46

LiabilitiesLiabilities EquityEquityAssetsAssets = +

The Accounting EquationThe Accounting Equation

47 © 2013 McGraw-Hill Ryerson Limited.

Describe what an organization has invested in.

Describe non-owner financing (borrowing)

(LO7)

LiabilitiesLiabilities EquityEquityAssetsAssets = +

The Accounting EquationThe Accounting Equation

48 © 2013 McGraw-Hill Ryerson Limited.

Describe what an organization has invested in.

Describe non-owner financing (borrowing).

Describe owner financing .

(LO7)

LiabilitiesLiabilities EquityEquityAssetsAssets = +

The Accounting EquationThe Accounting Equation

49 © 2013 McGraw-Hill Ryerson Limited.

The accounting equation is used to keep track of changes in a company’s assets, liabilities, and equity.

(LO7)

LiabilitiesLiabilities EquityEquityAssetsAssets = +

The Accounting EquationThe Accounting Equation

50 © 2013 McGraw-Hill Ryerson Limited.

Business transactions cause changes in assets, liabilities, and equity.

(LO7)

We need to determine:1. Which accounts are being affected.2. If the accounts are increasing or

decreasing.

Transaction AnalysisTransaction Analysis

51 © 2013 McGraw-Hill Ryerson Limited. (LO7)

(1) Virgil Klimb invests $10,000 cash in the business.Analysis: Cash increases by $10,000.

Owner’s capital increases by $10,000.

Transaction Analysis

52 © 2013 McGraw-Hill Ryerson Limited. (LO7)

(2) Purchased supplies for $2,500 cash.Analysis: Supplies increase by $2,500.

Cash decreases by $2,500.

Transaction Analysis

53 © 2013 McGraw-Hill Ryerson Limited. (LO7)

(3a) Purchased $1,100 of supplies on credit.Analysis: Supplies increase by $1,100.

Accounts Payable increases by $1,100

Transaction Analysis

54 © 2013 McGraw-Hill Ryerson Limited. (LO7)

(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.

Transaction Analysis

55 © 2013 McGraw-Hill Ryerson Limited. (LO7)

(4) Services rendered for $2,200 cash.Analysis:Cash increases $2,200

Owner’s equity increases $2,200

Transaction Analysis

56 © 2013 McGraw-Hill Ryerson Limited. (LO7)

(5) Payment of $1,000 rent expense in cash.Analysis:Cash decreases $1,000

Owner’s equity decreases $1,000

Transaction Analysis

57 © 2013 McGraw-Hill Ryerson Limited. (LO7)

(6) Payment of $700 salaries expense in cash.Analysis:Cash decreases $700

Owner’s equity decreases $700

Transaction Analysis

58 © 2013 McGraw-Hill Ryerson Limited. (LO7)

(7) Service contract signed for April.Analysis:No economic exchange has taken place

All accounts remain unaffected

Transaction Analysis

59 © 2013 McGraw-Hill Ryerson Limited. (LO7)

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

60 © 2013 McGraw-Hill Ryerson Limited. (LO7)

(9) Receipt of $1,900 cash on account.Analysis:Cash increases $1,900 Accounts receivable decreases $1,900

Transaction Analysis

61 © 2013 McGraw-Hill Ryerson Limited. (LO7)

(10) Payment of $900 accounts payable.

Analysis:Cash decreases $900

Accounts payable decreases $900

Transaction Analysis

62 © 2013 McGraw-Hill Ryerson Limited. (LO7)

(11) Withdrawal of $600 cash by owner.

Analysis:Cash decreases $600

Owner’s capital decreases $600

Transaction Analysis

63 © 2013 McGraw-Hill Ryerson Limited. (LO7)

Financial Statement Preparation

64 © 2013 McGraw-Hill Ryerson Limited. (LO7)

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.

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Transactions 4 and 8Transaction 8

Transaction 5Transaction 6

The Income Statement is prepared first by using revenue and expense information from the Equity column.

Financial Statement Preparation

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The Statement of Owner’s Equity is

prepared next

Transaction 1Income Statement

Transaction 11

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The Balance Sheet is prepared using the final balances of the

accounts

From the Statement of Owner’s Equity

End of ChapterEnd of Chapter

© 2013 McGraw-Hill Ryerson Limited.68