FINANCIAL ACCOUNTING A USER PERSPECTIVE Hoskin Fizzell Davidson Second Canadian Edition

Double Entry Accounting Systems Chapter Three

Basic Accounting Equation Assets = Liabilities + Shareholders’ Equity

Dual entry accounting Uses the T-Account: Assets Liabilities + Shareholders’ Equity

Individual T-Accounts Exhibit 3-1 DebitCredit (Left side)(Right side) Assets Liabilities + Shareholders’ Equity L-Accounts SE-Common A-Cash Payable Shares

Demo Retail Company, Ltd. Exhibit 3-2 A-Cash L-Accounts Payable 3,000 2,500 A-Accounts Receivable SE-Common Shares 0 7,500 A-Inventory SE-Retained Earnings 2,500 0 A-Equipment 4,500

Entries to T-Accounts Exhibit 3-3 Liabilities & Assets Shareholders’ Equity Beginning Beginning balance balance Increases Decreases Decreases Increases Ending Ending balance balance

Permanent Accounts Balance sheet accounts: assets, liabilities, and shareholders’ equity accounts Have balances that carry over from one period to the next Example: Retained Earnings

Temporary Accounts Used temporarily to keep track of revenues, expenses and dividends during the period Beginning balance is zero End of period balance is transferred to Retained Earnings

Entries to T-Accounts Exhibit 3-3 SE-Retained Earnings Beg.balance Decrease inIncrease in Shareholders’ WealthShareholders’ Wealth SE-Revenues SE-Expenses SE-Dividends Declared Decr. Incr. Incr. Decr. Incr. Decr.

Accounting Cycle Determines the types of accounting information to be recorded Summarized in the Chart of Accounts

Chart of Accounts Exhibit 3-6 Permanent Accts –Assets Cash Accounts Receivable Inventory Prepaid Insurance Land Equipment –Liabilities Accounts Payable Interest Payable Bank Loan –Shareholders’ Equity Common Shares Retained Earnings

Chart of Accounts Exhibit 3-6 Temporary Accounts –Income Statement Accounts Sales Revenues Cost of Goods Sold Insurance Expense Amortization Expense –Dividends Declared

Accounting Cycle Exhibit 3-7 Chart of Accounts Adjusting entries Transactions or events Transaction analysis Journal entries Posting Trial balance Opening balances Closing entries Preparation of financial statements Adjusted trial balance

Accounting Cycle Opening Balances –balances carried forward from the end of the last accounting cycle Transactions or Events –evidenced by source documents

Accounting Cycle Transaction Analysis –which accounts are affected and by how much Journal Entries –journal: chronological listing of events

Journal Entries Exhibit 3-9

Accounting Cycle Posting to the Ledger –posting: transferring the information from the journal entry to the ledger –ledger: each account is listed separately –each page represents a specific T- account

Posting to the Ledger A-Accounts receivable Bal ,500 A-Inventory Bal. 2,500 1,800 2 SE-Sales revenue 0 Bal. 2,500 1 Se-Cost of goods sold Bal ,800

Accounting Cycle Trial Balance –List of debit and credit balances –Ensures that: Total debit balances = Total credit balances

Accounting Cycle Adjusting Entries –to corrects errors –to recognize transactions or events not recorded during the period –GAAP: report revenues earned in a period, and expenses incurred to generate that revenue

Accounting Cycle Adjusted Trial Balance –after adjusting entries Financial Statement Preparation –income statement, balance sheet, and cash flow statement Closing Entries –balances in temporary accounts are transferred to Retained Earnings

Income Statement Format Single-step income statement –all revenues are listed together –all expenses are listed together

Income Statement Format Multistep income statement –results of different kinds of operations are segregated –Gross profit (or margin): sales less cost of goods sold

Multistep Income Statement Income from: –Continuing operations –Nonoperating sources –Unusual or infrequent sources –Corporate income taxes –Discontinued operations –Extraordinary items

Multistep Income Statement Income from Continuing Operations –Revenues and expenses resulting from the sales of goods and services to customers

Multistep Income Statement Income from Nonoperating Sources –transactions that do not involve the normal sales of goods or services Income from Unusual or Infrequent Events Corporate Income Taxes

Multistep Income Statement Discontinued Operations –income or loss from the operation –gain or loss on disposal of the segment Extraordinary Items –unusual, infrequent, and not resulting from management decisions

Earnings Per Share Net income Weighted average number of common shares outstanding

Balance Sheet Format Assets and Liabilities: –listed in order of liquidity the ability to convert into cash –separate current and noncurrent