Accounting

Principles
Weygandt · Kieso · Kimmel ·
Trenholm
 CHAPTER
1

ACCOUNTING IN ACTION
 THE ACCOUNTING PROCESS

Communication
Identification Recording Accounti
ng
Reports
Ge r
7 M ald Tr
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Prepare
accounting reports

ABC Bank
Select economic Record, classify, Annual Report

events and summarize

(transactions)

Analyse and interpret

for users
QUESTIONS ASKED BY INTERNAL USERS

What is the cost of

manufacturing each unit of
Is cash sufficient to pay
product?
bills?

Can we afford to give employees Which product line is the most

pay raises this year? profitable?
 QUESTIONS ASKED BY EXTERNAL
USERS

How does the company

Is the company compare in size and
earning satisfactory profitability with its
income? competitors?
What do we do
if they catch
us?

Will the company be able to pay its debts as they

come due?
 BOOKKEEPING DISTINGUISHED
FROM ACCOUNTING
Accounting
1. Includes bookkeeping
2. Also includes much more
Bookkeeping
1. Involves only the recording of economic
events
2. Is just one part of accounting
 THE ACCOUNTING PROFESSION

 Public accountants offer their expertise to the

general public through the services they perform.
 Private accountants are employees of individual
companies and are involved in a number of
activities, including cost and tax accounting,
systems, and internal auditing.
 Not-for-profit accounting includes reporting and
control for government units, foundations,
hospitals, labour unions, colleges/universities, and
charities.
 ETHICS

Ethics To Solve Ethical Dilemma

1. Recognize situation and
Standards of ethical issues involved
conduct 2. Identify and analyse
elements
3. Identify alternatives
and weigh effects on
stakeholders
 Accounting Standards
International Accounting Standards Board
• International Accounting Standards (IAS)
• International Financial Reporting Standards
(IFRS)

Financial Accounting Standards Board (FASB)

• Generally Accepted Accounting Principles
(GAAP)
 Measurement Principles
Historical Cost Principle
 The cost principle dictates that assets are
recorded at their cost.
 Cost is the value exchanged at the time
something is acquired.
 Cost is used because it is both relevant and
reliable.

Fair Value Principle

 ASSUMPTIONS
1. Going Concern - assumes organization will
continue into foreseeable future.
2. Monetary Unit - only transaction data that can
be expressed in terms of money is included in
the accounting records.
3. Economic Entity - includes any organization or
unit in society.
 BUSINESS ENTERPRISES
 A business owned by one person is generally a
proprietorship (owner’s equity).
 A business owned by two or more persons
associated as partners is a partnership (partners’
equity).
 A business organized as a separate legal entity
under corporation law and having ownership
divided into transferable shares is called a
corporation (shareholders’ equity).
 BASIC ACCOUNTING EQUATION

The Basic Accounting Equation

Assets = Liabilities + Owner’s Equity

 ASSETS AS A BUILDING BLOCK

 Assets are resources owned by a business.

 They are things of value used in carrying out
such activities as production and exchange.
LIABILITIES AS A BUILDING BLOCK

 Liabilities
are claims against assets.
 They are existing debts and
obligations.
OWNER’S EQUITY AS A BUILDING
BLOCK
 Owner’s Equity is equal to total assets
minus total liabilities.
 Owner’s Equity represents the ownership
claim on total assets.
 Subdivisions of Owner’s Equity:

1. Capital
2. Drawings
3. Revenues
4. Expenses
 INVESTMENTS BY OWNERS
AS A BUILDING BLOCK
 Investments by owner are the assets put
into the business by the owner.
 These investments in the business
increase owner’s equity.
 DRAWINGS AS A BUILDING
BLOCK
 Drawings are withdrawals of cash or other
assets by the owner for personal use.
 Drawings decrease total owner’s equity.
 REVENUES AS A BUILDING
BLOCK
 Revenues are the gross increases in owner’s
equity resulting from business activities
entered into for the purpose of earning
income.
 Revenues may result from sale of
merchandise, performance of services,
rental of property, or lending of money.
 Revenues usually result in an increase in an
asset.
 EXPENSES AS A
BUILDING BLOCK
 Expenses are the decreases in owner’s
equity that result from operating the
business.
 Expenses are the cost of assets consumed
or services used in the process of earning
revenue.
 Examples of expenses include utility
expense, rent expense, and supplies
expense.
 INCREASES AND DECREASES IN
OWNER’S EQUITY

INCREASES DECREASES
Investments
Investments Withdrawals
Withdrawals
by
byOwner
Owner by
byOwner
Owner
Owner’s
Equity
Revenues
Revenues Expenses
Expenses
TRANSACTION ANALYSIS

M. Doucet decides to open a computer

programming service.

BANK

Softbyte
 TRANSACTION ANALYSIS
TRANSACTION 1
On September 1, he invests $15,000 cash in the
business, which he names Softbyte.

Trans. # Assets = Liabilities + Owner's Equity

Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
(1) 15,000 = 15,000 Investment

There
There isis an
an increase
increase inin the
the asset
asset Cash,
Cash, $15,000,
$15,000, and
and an
an
equal
equal increase
increase in in the
the owner’s
owner’s equity,
equity, M.
M. Doucet,
Doucet, Capital,
Capital,
$15,000.
$15,000.
 TRANSACTION ANALYSIS
TRANSACTION 2
Softbyte purchases computer equipment for $7,000 cash.

Trans. # Assets = Liabilities + Owner's Equity

Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
15,000 15,000 Investment
(2) (7,000) 7,000
Balance 8,000 + 7,000 = 15,000

Cash
Cash isis decreased
decreased $7,000,
$7,000, and
and the
the asset
asset
Equipment
Equipment isis increased
increased $7,000.
$7,000.
 TRANSACTION ANALYSIS
TRANSACTION 3
Softbyte purchases computer paper and supplies expected to last
several months from Chuah Supply Company for $1,600 on account.

Trans. # Assets =
= Liabilities
Liabilities +
+ Owner's
Owner's Equity
Accounts
Accounts M.
M. Doucet,
Cash Supplies
Supplies Equipment
Equipment Payable
Payable Capital
Capital
Balance 8,000
8,000 7,000
7,000 15,000
15,000
(3) 1,600 1,600
Balance 8,000 + 1,600 + 7,000 = 1,600 + 15,000

The
The asset
asset Supplies
Supplies isis increased
increased $1,600,
$1,600, and
and the
the liability
liability
Accounts
Accounts Payable
Payable isis increased
increased by
by the
the same
same amount.
amount.
 TRANSACTION ANALYSIS
TRANSACTION 4
Softbyte receives $1,200 cash from customers for
programming services it has provided.
Trans. # Assets = Liabilities + Owner's Equity
Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
Balance 8,000 1,600 7,000 1,600 15,000
(4) 1,200 1,200 Service Revenue
Balance 9,200 + 1,600 + 7,000 = 1,600 + 16,200

Cash
Cash isis increased
increased $1,200,
$1,200, and
and
M.
M. Doucet,
Doucet, Capital
Capital isis increased
increased $1,200.
$1,200.
 TRANSACTION ANALYSIS
TRANSACTION 5
Softbyte receives a bill for $250 for advertising its business but
pays the bill on a later date.

Trans. # Assets = Liabilities +

+ Owner's
Owner's Equity
Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
Balance 9,200 + 1,600
1,600 + 7,000
7,000 = 1,600
1,600 + + 16,200
16,200
(5) 250 (250) Advertising Expense
Balance 9,200 1,600 7,000 1,850 15,950

Accounts
Accounts Payable
Payable isis increased
increased $250,
$250, and
and M.
M.
Doucet,
Doucet, Capital
Capital isis decreased
decreased $250.
$250.
 TRANSACTION ANALYSIS
TRANSACTION 6
Softbyte provides programming services of $3,500 for
customers and receives cash of $1,500, with the balance
payable on account.
Trans. #
# Assets == Liabilities
Liabilities ++ Owner's
Owner's Equity
Account
Account Accounts
Accounts M.
M. Doucet,
Doucet,
Cash Receivable
Receivable Supplies
Supplies Equipment
Equipment Payable
Payable Capital
Capital
Balance
Balance 9,200
9,200 ++ 00 ++ 1,600
1,600 ++ 7,000
7,000 == 1,850
1,850 15,950
15,950
(6) 1,500 2,000 3,500 Service Revenue
Balance 10,700 2,000 1,600 7,000 1,850 19,450

Cash
Cash isis increased
increased $1,500;
$1,500; Accounts
Accounts Receivable
Receivable isis increased
increased
$2,000;
$2,000; and and M.
M. Doucet,
Doucet, Capital
Capital isis increased
increased $3,500.
$3,500.
 TRANSACTION ANALYSIS
TRANSACTION 7
Expenses paid in cash for September are store rent,
$600, salaries of employees, $900, and utilities, $200.
Trans. # Assets = Liabilities + Owner's Equity
Account Accounts M. Doucet,
Cash Receivable Supplies Equipment Payable Capital
Balance 10,700 2,000 1,600 7,000 1,850 19,450
(7) (600) (600) Rent Exp.
(900) (900) Salaries Exp.
(200) (200) Utilities Exp.
Balance 9,000 + 2,000 + 1,600 + 7,000 = 1,850 + 17,750

Cash
Cash isis decreased
decreased $1,700
$1,700 and
and M.
M. Doucet,
Doucet,
Capital
Capital isis decreased
decreased the
the same
same amount.
amount.
 TRANSACTION ANALYSIS
TRANSACTION 8
Softbyte pays its advertising bill of $250 in cash.

Trans. # AccountAssets = Liabilities

Accounts + M. Doucet,
Owner's Equity
Cash Account
Receivable Supplies Equipment Accounts
Payable M.Capital
Doucet,
Balance Cash
9,000 Receivable
2,000 Supplies
1,600 Equipment
7,000 Payable
1,850 Capital
17,750
Balance 9,000 2,000 1,600 7,000 1,850 17,750
(8) (250) (250)
Balance 8,750 + 2,000 + 1,600 + 7,000 = 1,600 + 17,750

Cash
Cash isis decreased
decreased $250
$250 and
and Accounts
Accounts
Payable
Payable isis decreased
decreased the
the same
same amount.
amount.
 TRANSACTION ANALYSIS
TRANSACTION 9
The sum of $600 in cash is received from customers who
have previously been billed for services in Transaction 6.
Trans. # Assets = Liabilities + Owner's Equity
Account Accounts M. Doucet,
Cash Receivable Supplies Equipment Payable Capital
Balance 8,750 + 2,000 + 1,600 + 7,000 = 1,600 + 17,750
(9) 600 (600)
Balance 9,350 + 1,400 + 1,600 + 7,000 = 1,600 + 17,750

Cash
Cash isis increased
increased $600
$600 and
and Accounts
Accounts
Receivable
Receivable isis decreased
decreased by
by the
the same
same amount.
amount.
 TRANSACTION ANALYSIS
TRANSACTION 10
Mr X withdraws $1,300 in cash from the
business for his personal use.
Trans. # Assets = Liabilities
Liabilities ++ Owner's
Owner's Equity
Account Accounts
Accounts M.
M. Doucet,
Doucet,
Cash Receivable Supplies Equipment
Equipment Payable
Payable Capital
Capital
Balance 9,350 1,400 1,600
1,600 7,000
7,000 1,600
1,600 17,750
17,750
(10) (1,300) (1,300) Doucet, Drawings
Balance 8,050 + 1,400 + 1,600 + 7,000 = 1,600 + 16,450

Cash
Cash isis decreased
decreased $1,300
$1,300 and
and M.
M. Doucet,
Doucet,
Capital
Capital isis decreased
decreased by
by the
the same
same amount.
amount.
 FINANCIAL STATEMENTS
After transactions are identified, recorded,
and summarized, four financial statements
are prepared from the summarized
accounting data:
1. An income statement presents the
revenues and expenses and resulting net
income or net loss of a company for a
specific period of time.
2. A statement of owner’s equity
summarizes the changes in owner’s equity
for a specific period of time.
 FINANCIAL STATEMENTS
In addition to the income statement and
statement of owner’s equity, two additional
statements are prepared:
3. A balance sheet reports the assets,
liabilities, and owner’s equity of a
business enterprise at a specific date.
4. A cash flow statement summarizes
information concerning the cash inflows
(receipts) and outflows (payments) for a
specific period of time.
5. The notes are an integral part of the
financial statements.
 FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE
Income Statement
For the Month Ended September 30, 2002
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income $ 2,750

Net income of $2,750 shown on the income statement is added to the

beginning balance of owner’s capital in the statement of owner’s equity .
 FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE
Statement of Owner's Equity
For the Month Ended September 30, 2002

M. Doucet, Capital, September 1 $ -

Add: Investments $ 15,000
Net income 2,750 17,750
$ 17,750
Less: Drawings 1,300
M. Doucet, Capital September 30 $ 16,450

Net income of $2,750 is carried forward from the income statement to the
statement of owner’s equity. The owner’s capital of $16,450 at the end of
the reporting period is shown as the final total of the owner’s equity
column of the Summary of Transactions (Illustration 1-9 in text).
 FINANCIAL STATEMENTS AND
THEIR INTERRELATIONSHIPS
Owner’s capital SOFTBYTE
of $16,450 at Balance Sheet
September 30, 2002
the end of the
Assets
reporting
Cash $ 8,050
period – shown Accounts receivable 1,400
in the statement Supplies 1,600
of owner’s Equipment 7,000
equity – is also Total assets $ 18,050
shown on the
balance sheet. Liabilities and Owner's Equity
Cash of $8,050 Liabilities
on the balance Accounts payable $ 1,600
sheet is Owner's Equity
reported on the M. Doucet, Capital 16,450
cash flow Total liabilities and owner's equity $ 18,050
statement.
 FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE
Cash Flow Statement
Cash of For the Month Ended September 30, 2002
$8,050 on the Cash flows from operating activities
Cash receipts from customers $ 3,300
balance sheet Cash payments to suppliers and employees (1,950) $ 1,350
and cash flow Net cash provided by operating activities
statement is Cash flows from investing activities
Purchase of equipment $ (7,000)
shown as the
Net cash used by investing activities (7,000)
final total of Cash flows from financing activities
the cash Investments by owner $ 15,000
column of the Drawings by owner (1,300)
Net cash provided by financing activities 13,700
Summary of Net increase in cash $ 8,050
Transactions Cash, September 1 -
(Illustration Cash, September 30 $ 8,050
1-9 in text).
USING THE INFORMATION IN
THE FINANCIAL STATEMENTS

• Annual Reports

– Non-financial
information

– Financial
information
Thank You