ACCOUNTING
PRINCIPLES
SIXTH CANADIAN EDITION
Chapter 1
Accounting in Action
Prepared by:
Debbie Musil
Kwantlen Polytechnic University
CHAPTER 1:
Accounting in Action
STUDY OBJECTIVE:
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business organizations
and explain how Canadian accounting standards
apply to these organizations.
3. Describe the components of the financial statements
and explain the accounting equation.
4. Determine what events are recognized in the financial
statements and how the events are measured.
5. Analyze the effects of business transactions on the
accounting equation.
6. Prepare financial statements.
Copyright John Wiley & Sons Canada, Ltd.
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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
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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
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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.
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Accounting & Ethics
• For information to have value, must be
prepared by individuals with high standards of
ethical behaviour
Ethics

To Solve Ethical Dilemmas
Standards of
conduct used to
judge actions
1. Recognize situation and
ethical issues involved
2. Identify and analyse elements
3. Identify alternatives and weigh
effects on stakeholders
 Select the most ethical
alternative
Copyright John Wiley & Sons Canada, Ltd.
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CHAPTER 1:
Accounting in Action
STUDY OBJECTIVE:
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business organizations
and explain how Canadian accounting standards
apply to these organizations.
3. Describe the components of the financial statements
and explain the accounting equation.
4. Determine what events are recognized in the financial
statements and how the events are measured.
5. Analyze the effects of business transactions on the
accounting equation.
6. Prepare financial statements.
Copyright John Wiley & Sons Canada, Ltd.
7
Business Organizations
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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
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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.
10
CHAPTER 1:
Accounting in Action
STUDY OBJECTIVE:
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business organizations
and explain how Canadian accounting standards
apply to these organizations.
3. Describe the components of the financial statements
and explain the accounting equation.
4. Determine what events are recognized in the financial
statements and how the events are measured.
5. Analyze the effects of business transactions on the
accounting equation.
6. Prepare financial statements.
Copyright John Wiley & Sons Canada, Ltd.
11
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
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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
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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
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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
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Accounting Differences by Type
of Organization
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Accounting Equation Expanded
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CHAPTER 1:
Accounting in Action
STUDY OBJECTIVE:
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business organizations
and explain how Canadian accounting standards
apply to these organizations.
3. Describe the components of the financial statements
and explain the accounting equation.
4. Determine what events are recognized in the financial
statements and how the events are measured.
5. Analyze the effects of business transactions on the
accounting equation.
6. 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.
19
CHAPTER 1:
Accounting in Action
STUDY OBJECTIVE:
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business organizations
and explain how Canadian accounting standards
apply to these organizations.
3. Describe the components of the financial statements
and explain the accounting equation.
4. Determine what events are recognized in the financial
statements and how the events are measured.
5. Analyze the effects of business transactions on the
accounting equation.
6. Prepare financial statements.
Copyright John Wiley & Sons Canada, Ltd.
20
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
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1: Investment by Owner
• Owner invests $15,000 in computer
business and names it “Softbyte”
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2: Purchase Equipment
• Softbyte purchases computer equipment
for $7,000 cash
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3: Purchases Supplies on Credit
• Softbyte purchases supplies that will last
several months for $1,600 on account
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4: Services Provided for Cash
• Softbyte receives from customers $1,200
cash for programming services it provided
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5: Purchase Advertising on Credit
• Softbyte receives a bill for advertising for
$250, which it pays at a later date
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6: Services Provided for Cash &
Credit
• Softbyte provides $3,500 of programming
services and receives payment of $1,500
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7: Payment of Expenses
• Expenses paid in cash: rent of $600,
salaries of $900, utilities of $200
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8: Payment of Accounts Payable
• Softbyte pays its outstanding advertising
bill of $250 in cash
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9: Receipt of Cash on Account
• Softbyte receives $600 in cash from
customers billed in transaction 6
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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
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11: Owner Withdrawal of Cash
• Softbyte’s owner withdraws $1,300 for his
personal use
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32
CHAPTER 1:
Accounting in Action
STUDY OBJECTIVE:
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business organizations
and explain how Canadian accounting standards
apply to these organizations.
3. Describe the components of the financial statements
and explain the accounting equation.
4. Determine what events are recognized in the financial
statements and how the events are measured.
5. Analyze the effects of business transactions on the
accounting equation.
6. Prepare financial statements.
Copyright John Wiley & Sons Canada, Ltd.
33
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
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Interrelationship of the Financial
Statements
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Interrelationship of the Financial
Statements - continued
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