CHAPTER 1: Accounting in Action Identify the use and users of accounting and the objective of financial reporting. Compare different forms of business organizations and explain how Canadian accounting standards apply to these organizations. Describe the components of the financial statements and explain the accounting equation. Determine what events are recognized in the financial statements and how the events are measured. Analyze the effects of business transactions on the accounting equation. Prepare financial statements. Copyright John Wiley & Sons Canada, Ltd. 2

Why is Accounting Important? The information system that identifies, records and communicates economic events to users Important to the world economy Helpful for all business endeavours Solid foundation for other business disciplines Relevant and useful in other disciplines Copyright John Wiley & Sons Canada, Ltd.

Using Accounting Information Internal Users Used for planning, organizing and running companies Includes finance, marketing, human resources, production, company officers External Users Investors, creditors, labour unions, customers, regulators and other authorities Used for decisions of ownership, credit, lending, assess compliance, performance Copyright John Wiley & Sons Canada, Ltd.

Objective of Financial Reporting Accounting information is communicated to external users via financial statements. The main objective of financial statements is to provide useful information to investors and creditors (external users) to make decisions about a business. Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Accounting & Ethics For information to have value, must be prepared by individuals with high standards of ethical behaviour Ethics Standards of conduct used to judge actions To Solve Ethical Dilemmas Recognize situation and ethical issues involved Identify and analyse elements Identify alternatives and weigh effects on stakeholders Select the most ethical alternative Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 1: Accounting in Action Identify the use and users of accounting and the objective of financial reporting. Compare different forms of business organizations and explain how Canadian accounting standards apply to these organizations. Describe the components of the financial statements and explain the accounting equation. Determine what events are recognized in the financial statements and how the events are measured. Analyze the effects of business transactions on the accounting equation. Prepare financial statements. Copyright John Wiley & Sons Canada, Ltd. 7

Business Organizations Copyright John Wiley & Sons Canada, Ltd.

Generally Accepted Accounting Principles (GAAP) Common set of accounting standards Responsibility of the Accounting Standards Board (AcSB) Publicly accountable enterprises must adopt International Financial Reporting Standards (IFRS) Private companies may adopt Accounting Standards for Private Enterprises (ASPE) or IFRS Copyright John Wiley & Sons Canada, Ltd.

Concepts & Assumptions Economic entity concept – activities of a unit or organization in society are kept separate and distinct from other entities and owner Going concern assumption – organization will continue to operate in the foreseeable future Monetary unit – only include transactions that can be expressed as an amount of money Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 1: Accounting in Action Identify the use and users of accounting and the objective of financial reporting. Compare different forms of business organizations and explain how Canadian accounting standards apply to these organizations. Describe the components of the financial statements and explain the accounting equation. Determine what events are recognized in the financial statements and how the events are measured. Analyze the effects of business transactions on the accounting equation. Prepare financial statements. Copyright John Wiley & Sons Canada, Ltd. 11

Copyright John Wiley & Sons Canada, Ltd. Balance Sheet Assets Resources owned or controlled by a business Used to carry out activities such as production and distribution Provide future services or benefits Liabilities Obligations arising from past events to make a future payment of assets or services Present debts and obligations Copyright John Wiley & Sons Canada, Ltd.

Balance Sheet (Continued) Owner’s Equity Represents owner’s claim on assets Owner’s Equity = Assets − Liabilities Components of owner’s equity (Shown in the Statement of Owner’s Equity): Investments: Assets put into business by owner Drawings: Cash or other assets withdrawn by owner for personal use Profit = Revenues − Expenses Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Accounting Equation Assets must equal the sum of liabilities and owner’s equity Liabilities are shown before owner’s equity because creditors’ claims are paid before ownership claims Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Income Statement Revenues: Increase Owner’s Equity Result from business activities that are performed to earn profit Result in an increase in an asset or a decrease in a liability Expenses: Decrease Owner’s Equity The cost of assets consumed or services used Result in an decrease in an asset or an increase in a liability Exclude withdrawals made by owners Copyright John Wiley & Sons Canada, Ltd.

Accounting Differences by Type of Organization Copyright John Wiley & Sons Canada, Ltd.

Accounting Equation Expanded Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 1: Accounting in Action Identify the use and users of accounting and the objective of financial reporting. Compare different forms of business organizations and explain how Canadian accounting standards apply to these organizations. Describe the components of the financial statements and explain the accounting equation. Determine what events are recognized in the financial statements and how the events are measured. Analyze the effects of business transactions on the accounting equation. Prepare financial statements. Copyright John Wiley & Sons Canada, Ltd. 18

Recognition and Measurement Recognition – the process of recording a transaction in the accounting records Measurement – determining the amount that should be recognized Historical cost is the primary basis used – reliable and verifiable, however may not be relevant Fair value may be more relevant – the amount of consideration if sold in the open market Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 1: Accounting in Action Identify the use and users of accounting and the objective of financial reporting. Compare different forms of business organizations and explain how Canadian accounting standards apply to these organizations. Describe the components of the financial statements and explain the accounting equation. Determine what events are recognized in the financial statements and how the events are measured. Analyze the effects of business transactions on the accounting equation. Prepare financial statements. Copyright John Wiley & Sons Canada, Ltd. 20

Copyright John Wiley & Sons Canada, Ltd. Transaction Analysis Accounting identifies, records and communicates the economic events of an organization Only events that cause changes in assets, liabilities or owner’s equity are recorded Accounting equation must always equal Each transaction will have a “dual effect” on the equation Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. 1: Investment by Owner Owner invests $15,000 in computer business and names it “Softbyte” Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. 2: Purchase Equipment Softbyte purchases computer equipment for $7,000 cash Copyright John Wiley & Sons Canada, Ltd.

3: Purchases Supplies on Credit Softbyte purchases supplies that will last several months for $1,600 on account Copyright John Wiley & Sons Canada, Ltd.

4: Services Provided for Cash Softbyte receives from customers $1,200 cash for programming services it provided Copyright John Wiley & Sons Canada, Ltd.

5: Purchase Advertising on Credit Softbyte receives a bill for advertising for $250, which it pays at a later date Copyright John Wiley & Sons Canada, Ltd.

6: Services Provided for Cash & Credit Softbyte provides $3,500 of programming services and receives payment of $1,500 Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. 7: Payment of Expenses Expenses paid in cash: rent of $600, salaries of $900, utilities of $200 Copyright John Wiley & Sons Canada, Ltd.

8: Payment of Accounts Payable Softbyte pays its outstanding advertising bill of $250 in cash Copyright John Wiley & Sons Canada, Ltd.

9: Receipt of Cash on Account Softbyte receives $600 in cash from customers billed in transaction 6 Copyright John Wiley & Sons Canada, Ltd.

10: Signed Contract to Rent Equipment No effect on the accounting equation because assets, liabilities and owner’s equity have not changed Accounting transaction has not occurred Copyright John Wiley & Sons Canada, Ltd.

11: Owner Withdrawal of Cash Softbyte’s owner withdraws $1,300 for his personal use Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 1: Accounting in Action Identify the use and users of accounting and the objective of financial reporting. Compare different forms of business organizations and explain how Canadian accounting standards apply to these organizations. Describe the components of the financial statements and explain the accounting equation. Determine what events are recognized in the financial statements and how the events are measured. Analyze the effects of business transactions on the accounting equation. Prepare financial statements. Copyright John Wiley & Sons Canada, Ltd. 33

Copyright John Wiley & Sons Canada, Ltd. Financial Statements Prepared after all transactions identified, recorded and summarized and are prepared in the following order: 1. Income Statement – presents revenues, expenses and profit or loss for a specific period of time 2. Statement of Owner’s Equity – summarizes the changes in owner’s equity for a specific time period 3. Balance Sheet – reports assets, liabilities and owner’s equity at a specific date 4. Cash Flow Statement – summarizes cash inflows and outflows for a specific period of time Copyright John Wiley & Sons Canada, Ltd.

Interrelationship of the Financial Statements Copyright John Wiley & Sons Canada, Ltd.

Interrelationship of the Financial Statements - continued Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd.