1. Accounting in Business © 2013 McGraw-Hill Ryerson Limited. PowerPoint Slides to accompany Fundamental Accounting Principles, 14ce Prepared by Joe Pidutti, Durham College CHAPTER 1

2. 1. Describe the purpose and importance of accounting. (LO 1 ) 2. Describe forms of business organization. (LO 2 ) 3. Identify users and uses of, and opportunities in, accounting. (LO 3 ) 4. Identify and explain why ethics and social responsibility are crucial to accounting. (LO 4 ) © 2013 McGraw-Hill Ryerson Limited. Learning Objectives 2

3. 5. Identify, explain, and apply accounting principles. (LO 5 ) 6. Identify and explain the content and reporting aims of financial statements. (LO 6 ) 7. Analyze business transactions by applying the accounting equation. (LO 7 ) 8. Prepare financial statements reflecting business transactions. (LO 8 ) © 2013 McGraw-Hill Ryerson Limited. Learning Objectives 3

4. 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? (LO 1 ) 4

5. 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. © 2013 McGraw-Hill Ryerson Limited. What is Recordkeeping? (LO 1 ) 5

6. Sole Proprietorship Partnership Corporation © 2013 McGraw-Hill Ryerson Limited. Forms of Organization (LO 2 ) 6

7. One owner Separate entity for accounting purposes Not a separate legal entity from the owner Unlimited liability Limited life Owner taxed on profits © 2013 McGraw-Hill Ryerson Limited. Sole Proprietorships (LO 2 ) 7

8. 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 © 2013 McGraw-Hill Ryerson Limited. Partnerships (LO 2 ) 8

9. One or more owners Separate entity for accounting purposes Separate legal entity from the owner(s) Limited liability Unlimited life Corporation taxed on profits © 2013 McGraw-Hill Ryerson Limited. Corporations (LO 2 ) 9

10. Accounting is a service activity that provides information to help internal and external users make decisions. © 2013 McGraw-Hill Ryerson Limited. Users of Accounting Information (LO 3 ) 10

11. External Users External 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. (LO 3 ) 11

12. 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. © 2013 McGraw-Hill Ryerson Limited. External Reporting (LO 3 ) 12

13. 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. © 2013 McGraw-Hill Ryerson Limited. Internal users (LO 3 ) 13

14. 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. © 2013 McGraw-Hill Ryerson Limited. Ethics and Social Responsibility (LO 4 ) 14

15. Ethics 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. 15 (LO 4 )

16. 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). © 2013 McGraw-Hill Ryerson Limited. Generally Accepted Accounting Principles (GAAP) (LO 5 ) 16

17. 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. © 2013 McGraw-Hill Ryerson Limited. IFRS (LO 5 ) 17

18. 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. © 2013 McGraw-Hill Ryerson Limited. ASPE (LO 5 ) 18

19. © 2013 McGraw-Hill Ryerson Limited. GAAP for Public vs. Private Enterprises (LO 5 ) Publicly Accountable Enterprises (PAEs) Private Enterprises (PEs) GAAP to be used IFRSASPE or IFRS 19

20. 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. © 2013 McGraw-Hill Ryerson Limited. Purpose of GAAP (LO 5 ) 20

21. GAAP includes the following principles: Business entity principle Cost principle Going concern principle Monetary unit principle Revenue recognition principle © 2013 McGraw-Hill Ryerson Limited. GAAP (LO 5 ) 21

22. Every business is to be accounted for separately from its owner(s) or any other economic entity of the owner. © 2013 McGraw-Hill Ryerson Limited. Business Entity Principle (LO 5 ) 22

23. 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. © 2013 McGraw-Hill Ryerson Limited. Cost Principle (LO 5 ) 23

24. 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. © 2013 McGraw-Hill Ryerson Limited. Going Concern Principle (LO 5 ) 24

25. 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. © 2013 McGraw-Hill Ryerson Limited. Monetary Unit Principle (LO 5 ) 25

26. 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. © 2013 McGraw-Hill Ryerson Limited. Revenue Recognition Principle (LO 5 ) 26

27. 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. © 2013 McGraw-Hill Ryerson Limited. Financial Statements (LO 6 ) 27

28. There are four major financial statements: Income statement Balance sheet Statement of changes in equity The statement of cash flows These statements provide different information but are linked together. © 2013 McGraw-Hill Ryerson Limited. Financial Statements (LO 6 ) 28

29. © 2013 McGraw-Hill Ryerson Limited. Financial Statements (LO 6 ) 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 29 Period of time

30. 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 Statement © 2013 McGraw-Hill Ryerson Limited. (LO 6 ) 30

31. Value of assets exchanged for products and services provided to customers. Income Statement © 2013 McGraw-Hill Ryerson Limited. (LO 6 ) 31

32. Costs incurred or the using up of assets from generating revenue Income Statement © 2013 McGraw-Hill Ryerson Limited. (LO 6 ) 32

33. 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 Owner’s Equity © 2013 McGraw-Hill Ryerson Limited. (LO 6 ) 33

34. Statement Of Owner’s Equity Covers a period of time. From the Income statement. © 2013 McGraw-Hill Ryerson Limited. (LO 6 ) 34

35. 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 Sheet © 2013 McGraw-Hill Ryerson Limited. (LO 6 ) 35

36. Balance Sheet Properties or economic resources owned by a business © 2013 McGraw-Hill Ryerson Limited. (LO 6 ) 36

37. Balance Sheet Debts or obligations of the business © 2013 McGraw-Hill Ryerson Limited. (LO 6 ) 37

38. Balance Sheet Owner’s claim on the assets © 2013 McGraw-Hill Ryerson Limited. (LO 6 ) From the Statement of Owner’s Equity 38

39. Liabilities Equity Assets =+ The Accounting Equation © 2013 McGraw-Hill Ryerson Limited. Describe what an organization has invested in. (LO 7 ) 39

40. Liabilities Equity Assets =+ The Accounting Equation 40 © 2013 McGraw-Hill Ryerson Limited. Describe what an organization has invested in. Describe non-owner financing (borrowing) (LO 7 )

41. Liabilities Equity Assets =+ The Accounting Equation 41 © 2013 McGraw-Hill Ryerson Limited. Describe what an organization has invested in. Describe non-owner financing (borrowing). Describe owner financing. (LO 7 )

42. Liabilities Equity Assets =+ The Accounting Equation 42 © 2013 McGraw-Hill Ryerson Limited. The accounting equation is used to keep track of changes in a company’s assets, liabilities, and equity. (LO 7 )

43. Liabilities Equity Assets =+ The Accounting Equation 43 © 2013 McGraw-Hill Ryerson Limited. Business transactions cause changes in assets, liabilities, and equity. (LO 7 )

44. We need to determine: 1. Which accounts are being affected. 2. If the accounts are increasing or decreasing. Transaction Analysis 44 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

45. (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 45 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

46. (2) Purchased supplies for $2,500 cash. Analysis:Supplies increase by $2,500. Cash decreases by $2,500. Transaction Analysis 46 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

47. (3a) Purchased $1,100 of supplies on credit. Analysis:Supplies increase by $1,100. Accounts Payable increases by $1,100 Transaction Analysis 47 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

48. (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 48 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

49. (4) Services rendered for $2,200 cash. Analysis:Cash increases $2,200 Owner’s equity increases $2,200 Transaction Analysis 49 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

50. (5) Payment of $1,000 rent expense in cash. Analysis:Cash decreases $1,000 Owner’s equity decreases $1,000 Transaction Analysis 50 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

51. (6) Payment of $700 salaries expense in cash. Analysis:Cash decreases $700 Owner’s equity decreases $700 Transaction Analysis 51 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

52. (7) Service contract signed for April. Analysis:No economic exchange has taken place All accounts remain unaffected Transaction Analysis 52 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

53. 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 53 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

54. (9) Receipt of $1,900 cash on account. Analysis:Cash increases $1,900 Accounts receivable decreases $1,900 Transaction Analysis 54 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

55. (10) Payment of $900 accounts payable. Analysis:Cash decreases $900 Accounts payable decreases $900 Transaction Analysis 55 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

56. (11) Withdrawal of $600 cash by owner. Analysis:Cash decreases $600 Owner’s capital decreases $600 Transaction Analysis 56 © 2013 McGraw-Hill Ryerson Limited. (LO 7 )

57. Financial Statement Preparation 57 © 2013 McGraw-Hill Ryerson Limited. (LO 7 ) 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.

58. © 2013 McGraw-Hill Ryerson Limited. (LO 8 ) 58 Transactions 4 and 8 Transaction 8 Transaction 5 Transaction 6 The Income Statement is prepared first by using revenue and expense information from the Equity column. Financial Statement Preparation

59. © 2013 McGraw-Hill Ryerson Limited. (LO 8 ) 59 The Statement of Owner’s Equity is prepared next Transaction 1 Income Statement Transaction 11

60. © 2013 McGraw-Hill Ryerson Limited. (LO 8 ) 60 The Balance Sheet is prepared using the final balances of the accounts From the Statement of Owner’s Equity

61. End of Chapter © 2013 McGraw-Hill Ryerson Limited. 61