FINANCIAL ACCOUNTING ACCOUNTING A U s e r P e r s p e c t i v e A U s e r P e r s p e c t i v e Third Canadian Edition Third Canadian Edition Hoskin  Fizzell

2 Double Entry Accounting Systems Double Entry Accounting Systems 3 C h a p t e r

3 Assets = Liabilities + Shareholders’ Equity Basic Accounting Equation

4 Replace with a T-account Replace with a T-account AssetsLiabilities + Shareholders’ Equity Double Entry Accounting

5 Debit Credit Debit Credit (Left side) (Right side) (Left side) (Right side) Assets Liabilities + Shareholders’ Equity Assets Liabilities + Shareholders’ Equity A-Cash L-Accounts Payable SE-Common Shares A-Cash L-Accounts Payable SE-Common Shares Individual T-Accounts

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

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

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

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

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

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

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

13 Temporary Accounts Temporary Accounts – Income Statement Accounts Sales Revenues Sales Revenues Cost of Goods Sold Cost of Goods Sold Insurance Expense Insurance Expense Interest Expense Interest Expense Amortization Expense Amortization Expense – Dividends Declared Chart of Accounts

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

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

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

17 Journal Entries

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

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

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

21 Adjusting Entries Adjusting Entries – To correct an error – To recognize a transaction or event not recorded during the period – GAAP: report revenues earned in a period, and expenses incurred to generate that revenue Accounting Cycle

22 Adjusted trial balance Adjusted trial balance – After adjusting entries Financial statement preparation Financial statement preparation – Income Statement, Balance Sheet, and Cash Flow Statement Closing entries Closing entries – Balances in temporary accounts are transferred to Retained Earnings Accounting Cycle

23 Single-step Income Statement Single-step Income Statement – All revenues are listed together – All expenses are listed together Income Statement Format

24 Multi-step income statement Multi-step income statement – Results of different kinds of operations are segregated – Gross profit (or gross margin): sales less cost of sales Income Statement Format

25 Multi-step Income Statement Income from continuing operations Income from continuing operations Income from nonoperating sources Income from nonoperating sources Income from unusual or infrequent sources Income from unusual or infrequent sources Corporate income taxes Corporate income taxes Discontinued operations Discontinued operations Extraordinary items Extraordinary items

26 Multi-step Income Statement Income from continuing operations Income from continuing operations – Revenues and expenses resulting from the sale of goods and services to customers

27 Multi-step Income Statement Income from nonoperating sources Income from nonoperating sources – Transactions that do not involve the normal sales or goods or services Income from unusual or infrequent events Income from unusual or infrequent events Corporate income taxes Corporate income taxes

28 Multi-step Income Statement Discontinued operations Discontinued operations – Income or loss from significant discontinued segment – Gain or loss on disposal of the segment Extraordinary items Extraordinary items – Unusual, infrequent, and not resulting from management decisions

29 Net income Weighted average number of common shares outstanding common shares outstanding Earnings per Share

30 Assets and Liabilities Assets and Liabilities – Listed in order of liquidity The ability to convert into cash The ability to convert into cash – Separate current and noncurrect items Balance Sheet Format

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