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Brief Contents
Preface
Chapter 1
Accounting Concepts and Procedures: An Introduction
Chapter 2
Debits and Credits: Analyzing and Recording Business Transactions
Chapter 3
Beginning the Accounting Cycle: Journalizing, Posting, and the
Trial Balance 91
Chapter 4
The Accounting Cycle Continued: Preparing Worksheets and
Financial Statements 142
Chapter 5
The Accounting Cycle Completed: Closing and Post-Closing Trial Balance
197
Chapter 6
Special Journals and Subsidiary Ledgers: Sales and Cash Receipts Journals
256
Chapter 7
Special Journals and Subsidiary Ledgers: Purchases and Cash Payments
Journals 307
Chapter 8
Completion of the Accounting Cycle for a Merchandising Company
Chapter 9
Banking Procedures and Control of Cash
Chapter 10
Payroll Procedures: The Employee’s Perspective
Chapter 11
The Employer’s Payroll Responsibilities
Chapter 12
Accounting for Bad Debts
551
Chapter 13
Special Journals with Taxes
585
Index
xiii
1
48
355
411
463
515
651
iii
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Contents
Preface
xiii
CHAPTER 1 Accounting Concepts and Procedures:
An Introduction
1
Accounting, the Language of Business 1
Types of Business Organization 2
Classifying Organizations by Activity 3
Users of Accounting Information 4
Accounting Opportunities 4
Professional Certification 5
Accounting Standards 5
Role of Ethics in Accounting and Business
6
Learning Unit 1-1 The Accounting Equation
7
7
Assets, Liabilities, and Equities
Learning Unit 1-2 The Balance Sheet
12
Points to Remember in Preparing a Balance Sheet
12
Learning Unit 1-3 The Accounting Equation Expanded: Revenue, Expenses,
and Withdrawals 14
Key Terms in the Accounting Equation 14
Expanded Accounting Equation 15
Learning Unit 1-4 Preparing Financial Reports
21
The Income Statement 21
The Statement of Owner’s Equity 22
The Balance Sheet 22
Main Elements of the Income Statement, the Statement
of Owner’s Equity, and the Balance Sheet 23
CHAPTER ASSIGNMENTS
26
Demonstration Problem 26
Summary of Key Points 29
Key Terms 29
Quick Review 31
Blueprint of Financial Reports 33
Questions, Classroom Demonstration Exercises, Exercises, and Problems
Continuing Problem 47
35
CHAPTER 2 Debits and Credits: Analyzing and Recording Business
Transactions
48
The T Account and How to Foot and Balance
Learning Unit 2-1 The T Account
49
48
49
Balancing an Account
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Learning Unit 2-2 Recording Business Transactions: Debits and Credits 51
T Account Entries for Accounting in the Accounting Equation 51
The Accounting Analysis: Five Steps 52
Applying the Transaction Analysis to Catherine Hall’s Law Practice 53
Summary of Transactions for Catherine Hall 59
Learning Unit 2-3 The Trial Balance and Preparation of
Financial Statements 62
The Trial Balance 63
Preparing Financial Statements 63
CHAPTER ASSIGNMENTS
67
Demonstration Problem 67
Summary of Key Points 71
Key Terms 71
Quick Review 72
Blueprint for Preparing Financial Statements from a Trial Balance 73
Questions, Classroom Demonstration Exercises, Exercises, and Problems
Continuing Problem 90
75
CHAPTER 3 Beginning the Accounting Cycle: Journalizing, Posting,
and the Trial Balance
91
The Nine Steps of the Accounting Cycle
92
Learning Unit 3-1 Analyzing and Recording Business Transactions in a Journal:
Steps 1 and 2 of the Accounting Cycle 92
The General Journal 92
Learning Unit 3-2 Posting to the Ledger: Step 3 of the
Accounting Cycle 101
Posting 101
Learning Unit 3-3 Preparing the Trial Balance: Step 4 of the
Accounting Cycle 109
What to Do If a Trial Balance Doesn’t Balance 110
Some Common Mistakes 110
Making a Correction Before Posting 110
Making a Correction After Posting 111
Correcting an Entry Posted to the Wrong Account 111
CHAPTER ASSIGNMENTS
115
Demonstration Problem: Steps 1–4 of the Accounting Cycle 115
Summary of Key Points 119
Key Terms 119
Quick Review 120
Blueprint of First Four Steps of the Accounting Cycle 122
Questions, Classroom Demonstration Exercises, Exercises, and Problems
Continuing Problem 139
CHAPTER 4
he Accounting Cycle Continued: Preparing Worksheets
T
and Financial Statements 142
Learning Unit 4-1 Step 5 of the Accounting Cycle: Preparing a
Worksheet 144
The Trial Balance Section 144
The Adjustments Section 144
The Worksheet 151
The Balance Sheet Section 154
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Learning Unit 4-2 Step 6 of the Accounting Cycle: Preparing the Financial
Statements from the Worksheet
159
Preparing the Income Statement 159
Preparing the Statement of Owner’s Equity
Preparing the Balance Sheet 159
159
Learning Unit 4-3 Journalizing and Posting Adjusting Entries: Step 7 of the
Accounting Cycle 164
Recording Journal Entries from the Worksheet 164
CHAPTER ASSIGNMENTS
168
Demonstration Problem: Steps 5, 6, and 7 of the Accounting Cycle 168
Summary of Key Points 172
Key Terms 172
Quick Review 173
Blueprint of Steps 5, 6, and 7 of the Accounting Cycle 175
Questions, Classroom Demonstration Exercises, Exercises, and Problems
Continuing Problem 196
178
CHAPTER 5 The Accounting Cycle Completed: Closing and
Post-Closing Trial Balance
197
Learning Unit 5-1 Journalizing and Posting Closing Entries: Step 8 of the
Accounting Cycle 198
How to Journalize Closing Entries 198
Learning Unit 5-2 The Post-Closing Trial Balance: Step 9 of the
Accounting Cycle 209
Preparing a Post-Closing Trial Balance 209
The Accounting Cycle Reviewed 209
CHAPTER ASSIGNMENTS
212
Demonstration Problem: Reviewing the Accounting Cycle 212
Summary of Key Points 219
Key Terms 219
Quick Review 220
Blueprint of the Closing Process from the Worksheet 221
Questions, Classroom Demonstration Exercises, Exercises, and Problems
Continuing Problem 238
MINI PRACTICE SET
239
223
239
Sullivan Realty
CHAPTER 6 Special Journals and Subsidiary Ledgers: Sales and
Cash Receipts Journals
256
Learning Unit 6-1 Designing and Understanding Special Journals
Main Types of Journals 257
Other Journals 257
Merchandising Operations 258
Periodic Inventory System 258
Perpetual Inventory System 259
Accounting for Merchandising Sales 261
Fundamentals of Customer Relations 261
256
Learning Unit 6-2 The Sales Journal and Accounts Receivable Subsidiary
Ledger 263
Subsidiary Ledgers 263
The Sales Journal 264
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Learning Unit 6-3 The Credit Memorandum 268
Journalizing, Recording, and Posting the Credit Memorandum
269
Learning Unit 6-4 Cash Receipts Journal and Schedule of Accounts
Receivable 273
Journalizing, Recording, and Posting from the Cash Receipts Journal 273
Schedule of Accounts Receivable 275
CHAPTER ASSIGNMENTS
279
Comprehensive Demonstration Problem with Solution Tips 279
Summary of Key Points 281
Key Terms 281
Quick Review 283
Blueprint of Sales and Cash Receipt Journals 285
Questions, Classroom Demonstration Exercises, Exercises, and Problems
Continuing Problem 305
289
CHAPTER 7 Special Journals and Subsidiary Ledgers: Purchases and
Cash Payments Journals
307
Designing and Understanding the Journals Needed for Purchasing
Accounting for Purchases in a Perpetual Inventory System 308
Accounting for Purchases in a Periodic Inventory System 308
Learning Unit 7-1 Steps Taken in Purchasing Merchandise
Steps Taken by Art’s Clothing Company When Ordering Goods
307
308
308
Learning Unit 7-2 The Purchases Journal and Accounts Payable Subsidiary
Ledger 312
The Debit Memorandum 312
Recording Purchases in a Periodic Inventory System 315
Learning Unit 7-3 The Cash Payments Journal and Schedule of Accounts
Payable 318
Journalizing, Posting, and Recording from the Cash Payments Journal to the
Accounts Payable Subsidiary Ledger and the General Ledger 318
Recording Cash Payments in a Periodic Inventory System 322
CHAPTER ASSIGNMENTS
326
Comprehensive Demonstration Problem with Solution Tips 326
Summary of Key Points 331
Key Terms 331
Quick Review 332
Blueprint of Purchases and Cash Payments Journals 334
Questions, Classroom Demonstration Exercises, Exercises, and Problems
Continuing Problem 353
336
CHAPTER 8 Completion of the Accounting Cycle for a Merchandising
Company
355
Learning Unit 8-1 Adjustments for Inventory and Unearned Rent
Adjustment for Merchandise Inventory 356
Adjustment for Unearned Rent 357
Learning Unit 8-2 Completing the Worksheet
358
Learning Unit 8-3 Preparing Financial Statements
The Income Statement 369
Statement of Owner’s Equity 371
The Balance Sheet 372
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Learning Unit 8-4 Journalizing and Posting Adjusting and Closing Entries;
Preparing the Post-Closing Trial Balance
376
Journalizing and Posting Adjusting Entries 376
Journalizing and Posting Closing Entries 378
The Post-Closing Trial Balance 380
Learning Unit 8-5 Reversing Entries (Optional Section) 382
Summary of Key Points 385
Key Terms 385
Quick Review 386
Blueprint of a Worksheet for a Merchandising Company 389
Blueprint of Financial Statements 390
Questions, Classroom Demonstration Exercises, Exercises, and Problems
CHAPTER 9 Banking Procedures and Control of Cash
Internal Control
394
411
412
Learning Unit 9-1 Bank Procedures, Chequing Accounts, and
Bank Reconciliation 413
Opening a Chequing Account 413
Cheque Endorsement 415
The Chequebook 415
Monthly Recordkeeping: The Bank’s Statement of Account and In-Company
Records 415
The Bank Reconciliation Process 418
Steps in Completing Bank Reconciliation 418
Trends in Banking 420
Learning Unit 9-2 The Establishment of Petty Cash and Change Funds 427
Steps in Setting Up a Petty Cash Fund 427
Setting Up the Petty Cash Fund 428
Making Payments from the Petty Cash Fund 429
How to Replenish the Petty Cash Fund 430
Setting Up a Change Fund and Insight into Cash Short and Over 431
Summary of Key Points 435
Key Terms 435
Quick Review 437
Blueprint of a Bank Reconciliation 438
Questions, Classroom Demonstration Exercises, Exercises, and Problems 440
Continuing Problem 460
CHAPTER 10 Payroll Procedures: The Employee’s Perspective
Accounting for Payroll
463
463
Learning Unit 10-1 Important Laws and How They Affect Payroll
464
Gross Pay 464
Employee Payroll Deductions 465
Using TD1 Forms 466
Canada or Quebec Pension Plan 466
Employment Insurance Plan 470
Workers’ Compensation Plans 471
Various Union Agreements 471
Other Deductions 471
Learning Unit 10-2 A Typical Payroll
475
474
The Payroll Summary in Detail
Learning Unit 10-3 Recording and Payment
477
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Employee Earnings Record 478
Payroll Flowchart 479
Summary of Key Points 481
Key Terms 481
Quick Review 482
Blueprint for Recording, Posting, and Paying the Payroll 484
Questions, Classroom Demonstration Exercises, Exercises, and Problems 486
Continuing Problem 495
Appendices Employee payroll deductions (extracted): Income Taxes, CPP, EI 497
Appendix 10-1—Federal Tax Form TD1 497
Appendix 10-2—Provincial Tax Form TD1ON 498
Appendix 10-3—Federal Tax Deductions 499
Appendix 10-4—Provincial (Ontario) Tax Deductions 505
Appendix 10-5—Simulated Canada Pension Plan Contributions 511
Appendix 10-6—Simulated Employment Insurance Premium Calculations 513
CHAPTER 11 The Employer’s Payroll Responsibilities
515
Learning Unit 11-1 Employer’s Expenses Associated with Payroll
How to Calculate Employer’s Remittance 516
Summary 519
Learning Unit 11-2 Completing the Monthly Remittance Form
Learning Unit 11-3 Employer’s Annual T4 Summary
Workers’ Compensation Insurance 528
Summary of Key Points 531
Key Terms 531
Quick Review 532
Blueprint of the Tax Calendar 534
516
521
526
Questions, Classroom Demonstration Exercises, Exercises, and Problems
Continuing Problem 549
CHAPTER 12 Accounting for Bad Debts
535
551
Learning Unit 12-1 Accrual Accounting and Journalizing Bad Debts
Transactions 552
Writing Off an Account Deemed Uncollectible 553
Learning Unit 12-2 The Allowance Method: Two Approaches to Estimating
the Amount of Bad Debts Expense 555
The Income Statement Approach 556
The Balance Sheet Approach 556
Aging the Accounts Receivable 557
Learning Unit 12-3 Writing Off Uncollectible Accounts
559
Writing Off an Account Using the Allowance for Doubtful Accounts 559
The Direct Write-Off Method 561
Insight into Income Tax Regulations 561
Summary of Key Points 563
Key Terms 563
Quick Review 564
Blueprint Summary of Recording Bad Debts Expense, Write-Offs, and
Recovery 566
Questions, Classroom Demonstration Exercises, Exercises, and Problems 568
Continuing Problem 578
MINI PRACTICE SET
The Corner Dress Shop
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CHAPTER 13 Special Journals with Taxes
Introduction to GST and HST
585
586
Learning Unit 13-1 Chou’s Toy Shop: Seller’s View of a Merchandising
Company 587
Provincial Sales Tax Charged 587
The Credit Memorandum with Provincial Sales Tax 589
How Companies Record GST and HST 590
GST/HST Charged on Sales 590
GST/HST and the Credit Memorandum 592
Provincial Sales Tax with GST/HST 593
Sales Invoice with PST and GST 594
Credit Memorandum with PST and GST/HST 594
Learning Unit 13-2 Cash Receipts Journal and Schedule of Accounts
Receivable 598
Journalizing, Recording, and Posting from the Cash Receipts Journal 599
Schedule of Accounts Receivable 602
Learning Unit 13-3 GST/HST Paid on Purchases
Overview 605
Recording Purchases with GST/HST 606
The Debit Memorandum 608
Quick Method of Accounting for GST/HST
The Cash Payments Journal 610
605
609
CHAPTER ASSIGNMENTS 617
Comprehensive Demonstration Problem with Solution Tips—Including
HST at 13% 617
Summary of Key Points 622
Key Terms 622
Quick Review 625
Blueprint of Sales and Cash Receipts Journals 627
Blueprint of Purchases and Cash Payments Journals 628
Questions, Classroom Demonstration Exercises, Exercises, and Problems
Index
630
651
CONTENTS
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Preface
Welcome to the fourteenth Canadian edition of College Accounting: A Practical Approach by
Jeffrey Slater and Debra Good. In this edition, we have made several significant changes
that instructors told us would help students learn and understand the accounting they
will need in their daily business lives. These positive changes help the fourteenth
Canadian edition continue the long and respected history of College Accounting while
keeping the features that have helped make College Accounting a classroom favourite for
more than 25 years.
New to the Fourteenth Canadian Edition
New Chapter Order and Contents
The chapters in this edition have been reorganized and a new chapter has been added in
response to instructors’ teaching needs.
Chapters 1 to 5 maintain the order and content of the previous edition, covering the
introduction to accounting concepts and procedures, and the accounting cycle for service companies. Chapters 6 and 7 introduce merchandising operations and then focus
on special journals and subsidiary ledgers. The sales and cash receipts journals continue
to be covered in Chapter 6, and the purchases and cash payments journals continue to
be covered in Chapter 7. Chapter 8 is new and completes the accounting cycle for merchandising companies (combining the contents of Chapters 12 and 13 from the previous edition). Thus, the accounting cycle is complete for both service and merchandising
companies before topics common to both types of companies are covered.
Chapter 9 covers banking procedures and the control of cash. Chapters 10 and
11 cover payroll calculations and procedures, first from the employees’ perspective
(Chapter 10), and then from the employers’ perspective (Chapter 11). In response to
instructor requests, Chapter 12 now covers accounting for bad debts. Previously, this
chapter had been offered online, but by including it in the textbook, accounting for
bad debts now has full coverage in the text supplements and in MyLab Accounting.
The textbook ends with Chapter 13, which covers special journals with taxes. Having
special journals with taxes as the final chapter gives instructors the flexibility to cover
this topic at the end of their course or after Chapters 6 and 7 (the special journals
chapters).
The following Auxiliary Chapters continue to be available in MyLab Accounting:
• Accounting for Property, Plant, Equipment, and Intangible Assets
• Statement of Cash Flows
• Analyzing Financial Statements
• Notes Receivable and Notes Payable
• Accounting for Merchandise Inventory
These auxiliary chapters will assist instructors who need to extend their students’ education while keeping the text’s price under control. In general, the chapters continued from
an earlier Canadian edition retain many of the features that adopters have come to
appreciate. Because they are from a high-quality source, they are of considerable assistance in selected circumstances.
xiii
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NEW! The new chapter order and contents in this edition of College Accounting allow for a
better flow of material while allowing flexibility in the order in which the chapters
are presented.
NEW!
NEW!
Ethical Considerations
Ethical Considerations questions have been added to the end of eight chapters to help
students apply ethical concepts to business situations and justify their choices in written
responses. Students sharing responses in class will lead to lively ethical discussions.
Analysis of Financial Statements
Two new Analysis of Financial Statements questions appear at the end of almost
every chapter. The first directs students to the 2018 Annual Report for Roots
Corporation to apply the chapter’s accounting concepts to this familiar company’s
financial statements. The second encourages students to select a company that interests them and answer similar questions. There is no better way to see the chapter’s
accounting concepts at work than by looking at the financial statements of real,
familiar companies.
Accounting Opportunities
Chapters 3, 10, and 12 contain new Accounting Opportunities questions. In Chapter 3,
students are given the chance to see how even basic accounting knowledge is important
in accounting and non-accounting jobs, which can help them explore employment interests after graduation. Chapter 10 allows students to apply real CRA tools to a fictional
employee just as they would if they worked in a real payroll department. In Chapter 10,
students explain the concepts of doubtful accounts to a small business owner. All these
Accounting Opportunities activities give students a chance to apply their new accounting skills to situations they could face in the workplace, reinforcing how valuable it is to
study accounting.
Available in MyLab Accounting
Accounting Cycle Tutorial
This interactive tutorial in MyLab Accounting helps students master the Accounting
Cycle for early and continued success in financial accounting courses. The tutorial—
accessed by computer, smartphone, or tablet—provides students with brief explanations
of each concept of the Accounting Cycle through engaging, interactive activities. Students
are immediately assessed on their understanding, and their performance is recorded in
the MyLab Accounting gradebook. Whether the Accounting Cycle Tutorial is used as a
remediation self-study tool or course assignment, students have yet another resource
within MyLab Accounting to help them be successful with the accounting cycle.
NEW!
NEW!
xiv
PREFACE
ACT Comprehensive Problem
The Accounting Cycle Tutorial now includes a comprehensive problem that allows students to work with the same set of transactions throughout the accounting cycle. The
comprehensive problem, which can be assigned at the beginning or the end of the full
cycle, reinforces the lessons learned in the Accounting Cycle Tutorial activities by
emphasizing the connections between the accounting cycle concepts.
Dynamic Study Modules
Chapter-specific Dynamic Study Modules help students study effectively on their own
by continuously assessing their activity and performance in real time. Here’s how it
works: Students complete a set of questions with a unique answer format that also asks
them to indicate their confidence level. Questions repeat until the student can answer
them all correctly and confidently. Dynamic Study Modules explain the concept using
materials from the text. These are available as graded assignments and are accessible on
smartphones, tablets, and computers.
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Learning Catalytics
Text-specific Learning Catalytics helps you generate class discussion, customize your
lecture, and promote peer-to-peer learning with real-time analytics. As a student response
tool, Learning Catalytics uses students’ smartphones, tablets, or laptops to engage them
in more interactive tasks and thinking.
• Upload a full PowerPoint® deck for easy creation of slide questions.
• Help your students develop critical thinking skills.
• Monitor responses to find out where your students are struggling.
• Rely on real-time data to adjust your teaching strategy.
• Automatically group students for discussion, teamwork, and peer-to-peer learning.
NEW!
Animations in the MyLab Accounting show how a worksheet is created, replacing the
­acetates that appeared in Chapter 4 in previous editions of the textbook.
NEW!
Worksheets continue to be available in Excel format for all
• Self-Review Quizzes
• Demonstration Problems
• Classroom Demonstration Exercises
• Exercises (Set A and Set B)
• Problems (Groups A, B, and C)
• Continuing Problems
• Mini Practice Sets
Available in MyLab Accounting’s Multimedia Library and Chapter Resources sections,
students can download these redesigned worksheet files and fill them in with Excel or
print them and fill them in by hand.
Chapter Summary Tests—Short self-tests containing fill-in-the-blank, true/false,
and matching questions with answers can be downloaded and printed by students to
test their understanding of each chapter and prepare for in-class exams. Found in
the MyLab Accounting Multimedia Library, these are extra practice outside the
Study Plan.
Workbook for Students
An important aspect of learning the accounting concepts in College Accounting is students
working through questions with pencil on paper. As instructors cover questions in class,
students need working papers to fill in. The Workbook has been designed with this in
mind—it includes the blank working papers for the questions we anticipate instructors
will cover in class. The Workbook includes working papers for
• Demonstration Problems
• Classroom Demonstration Exercises
• Exercises (Set A)
• Problems (Group A)
The Workbook is available on its own, or it can be bundled with the print textbook or a
MyLab Accounting access code.
Redesigned worksheets for all questions in College Accounting are provided in Excel
format in MyLab Accounting, including the questions in the Workbook.
PREFACE
xv
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Acknowledgments
The task of publishing a Canadian edition of any textbook is a challenging venture. In this
case it helped to be working from an outstanding original and with an outstanding team.
Thanks are certainly due to the many helpful folks at Pearson Canada, including
Portfolio Manager Keara Emmett, Content Manager Kamilah Reid-Burrell, Content
Developer Anita Smale, Project Manager Sarah Gallagher, Marketing Manager Darcey
Pepper, and Production Editor Muralidharan Krishnamurthy of SPi Global.
Thanks are also due to the following reviewers who provided valuable criticism and
suggestions during the development of the manuscript:
Tina Dean, College of the North Atlantic; Monica Draayer, Niagara College; Rainer
Huebl, University of the Fraser Valley.
A special thanks to Imelda Engels, who very kindly allowed the use (with modifications) of the comprehensive payroll project she used very successfully with her students
at the College of the Rockies in Cranbrook, B.C.
Also, a special thank you to my husband and children for their encourgement and
support.
Debra Good
Elmira, Ontario
xvi
PREFACE
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CHAPTER 1
Accounting
Concepts and
Procedures
An Introduction
B
usinesses small and large sell billions of dollars of goods and services
every day. The business must keep track of each of these sales for
income tax reasons as well as good business practice. When you purchase
an item at your local grocery store or online from Amazon.ca, accounting
surrounds each transaction.
When you buy an item from Amazon.ca, such as a set of headphones, you keep track of the purchase, often using your PayPal
account or credit card. Amazon.ca also keeps track of the sale in a special account it calls its Revenue account. All companies record these
transactions and prepare reports, which can be read and understood by
interested parties.
Accounting is often called the language of business, and learning
about this important topic can have huge positive consequences for you.
Whether you want to own and run your own company or work for some
larger concern, knowledge of accounting is an important skill to have. This
chapter introduces you to this central business topic.
Learning Objectives
LO 1 Defining and listing the
functions of accounting
(p. 5)
LO 2 Recording transactions in the
basic accounting equation
(p. 8)
LO 3 Seeing how revenue,
expenses, and withdrawals
expand the basic accounting
equation (p. 14)
LO 4 Preparing an income statement, a statement of owner’s
equity, and a balance sheet
(p. 21)
Accounting, the Language of Business
Accounting is the language of business; it provides information to
managers, owners, investors, governmental agencies, and others inside
and outside the organization. These people are often called internal
stakeholders (inside the company) and external stakeholders (outside
the company). Accounting provides answers and insights to questions
like these:
Should I invest in Amazon.com?
AA Is Subway’s cash balance sufficient?
AA Will Internet companies be able to pay their debt obligations?
AA Should General Motors Canada hire new employees?
AA What percentage of IBM’s marketing budget is for e-business? How
does this compare with the competition? What is the overall financial
condition of IBM?
AA
1
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Smaller businesses also need answers to their financial questions:
The Internet is creating
many new opportunities
and challenges for all
forms of business
organizations.
Did business increase enough over the last year to warrant hiring a new assistant?
AA Should we spend more money to design, produce, and send out new brochures
in an effort to create more business?
AA What role should the Internet play in our business?
AA
Accounting is as important to individuals as it is to businesses; it answers questions like:
AA
AA
Should I take out a loan for a new car or wait until I can afford to pay cash?
Would my money work better in a chartered bank or in a credit union savings
plan?
Accounting is an information system that provides reports to users about the
economic activities and condition of a business. It is the process that analyzes,
records, classifies, summarizes, reports, and interprets financial information for
decision-makers—whether individuals, small businesses, large corporations, or governmental and not-for-profit agencies—in a timely fashion. It is important that students understand the “whys” of the accounting process.
Types of Business Organization
There are three main categories of business organization: (1) sole proprietorship,
(2) partnership, and (3) corporation. Let’s define each of them and look at their
advantages and disadvantages. This information also appears in Table 1-1.
Sole Proprietorship
A sole proprietorship is a business that has one owner. That person is the
owner and often the manager of the business. One advantage of a sole proprietorship is that the owner makes all the decisions for the business. One disadvantage is that if the business cannot pay its obligations, the business owner
must pay them. This means that the owner could lose some personal assets (e.g.,
house or savings).
Sole proprietorships are easy to form. They end if the business is sold or closes,
or when the owner dies.
Partnership
A partnership, such as a real estate partnership, is a form of business ownership
that has at least two owners (partners) who share both the risks and the decision
making. Each partner acts as an owner of the company. This is an advantage because
the partners can share the decision-making and the risks of the business. A disadvantage is that, as in a sole proprietorship, the partners’ personal assets could be lost
if the partnership cannot meet its obligations.
Partnerships are easy to form, but may rely on legal advice to create a workable
agreement. They end when a partner dies or leaves the partnership.
Corporation
A corporation, such as Canadian Tire, is a business owned by shareholders. The
corporation may have only a few shareholders or it may have many shareholders.
The shareholders are not personally liable for the corporation’s debts, and they usually do not have input into business decisions.
Corporations are more difficult to form than sole proprietorships or partnerships. Corporations can exist indefinitely.
2
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Not-For-Profit Organization
Unlike regular businesses, profits made by not-for-profit organizations are paid
out or redistributed to the community by providing services. While the primary
objective of other forms of organization is to maximize profits, not-for-profit
organizations aim to improve society in some way. They usually obtain funding
from donations and government grants. Not-for-profit companies include religious organizations, minor sports organizations, community care centres, charitable organizations, and hospitals. Not-for-profit organizations do not have
identifiable owners but require financial statements because they are accountable to donors, sponsors, lenders, and tax authorities. Accounting records provide key information about the activities of the organization and enable it to
operate as permitted.
Table 1-1 Types of Business Organization
Sole Proprietorship
Partnership
Corporation
Ownership
Business owned by one
person
Business owned by more
than one person
Business owned by
shareholders
Formation
Easy to form
Easy to form
More difficult to form
Liability
Owner could lose personal
assets to meet obligations
of business
Partners could lose
personal assets to
meet obligations of
partnership
Limited personal risk;
shareholders’ loss is
usually limited to their
investment in the
company
Closing
Ends with owner closing the
business or death of the owner
Ends with exit of a
partner or death of
a partner
Can continue indefinitely
Classifying Organizations by Activity
Whether we are looking at a sole proprietorship, a partnership, or a corporation,
the business can be classified by what the business does to earn money.
Companies are categorized as service, merchandising, or manufacturing businesses. (See Table 1-2 for examples of each type).
Table 1-2 Examples of Service, Merchandising, and Manufacturing Businesses
Service Businesses
Merchandising Businesses
Manufacturing Businesses
eBay
Canadian Tire
Mattel
Jane’s Painting Co.
Walmart
General Motors
Dr. Wheeler, M.D.
The Bay
Intel
H&R Block
Amazon.com
Bombardier
A local cab company is a good example of a service company because it provides a service. The first part of this book focuses on service businesses.
Stores like Canadian Tire and Loblaws sell products. They are called merchandising companies. Merchandising companies, in the broadest sense, are businesses that contribute to the sale of products to retail and/or wholesale companies.
Companies like Intel and General Motors, which only make products to sell to
other companies (often called retailers or dealers), are called manufacturing
­companies.
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Users of Accounting Information
Accounting is a service activity that serves the decision-making needs of external
and internal users, as shown in Figure 1-1.
Figure 1-1
Users of Accounting
Information
External
Stakeholders/
Users
Internal
Stakeholders/
Users
Provides information for
Provides information for
Lenders
Shareholders
Governments
Customers
Investors
Community
Officers
Controllers
Managers
Internal Auditors
Sales Staff
External users of accounting information are not directly involved in running
the organization. Each external user has special information needs that depend on
the kind of decision to be made.
Internal users of accounting information are those individuals directly involved
in managing and operating an organization. The role of accounting is to provide
information to help internal users improve the efficiency and effectiveness of an
organization in delivering products or services.
Accounting Opportunities
There are countless job opportunities in accounting. Jobs are classified by the kind
of work that accountants perform. In general, accountants work in four broad fields,
as shown in Figure 1-2.
Figure 1-2
Opportunities in the
Accounting Field
Accounting
Opportunities
Financial
Managerial
Taxation
Other
Accounting
Related
Financial Accounting
Financial accounting serves the needs of external users by providing financial
statements. Investors, suppliers, customers, and lenders all use financial accounting
information to make decisions. Day-to-day activities include statement preparation
and analysis, auditing, regulatory issues, and planning. Financial accountants ensure
that the information in the financial statements is accurate and up to date so that
users of this information can make informed decisions. The three financial statements are the income statement, statement of owner’s equity, and balance sheet.
These are discussed fully later in this chapter.
4
CHAPTER 1
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Managerial Accounting
Managerial accounting serves the needs of internal users by providing specialpurpose reports. These special-purpose reports are the result of general accounting,
cost accounting, budgeting, internal auditing, and management consulting.
Managerial accountants are often employees of the business for which they work.
Taxation
Income tax raised by federal and provincial governments is based on the income
earned by taxpayers. These taxpayers include both individuals and corporate businesses. Sole proprietorships and partnerships are not subject to income tax, but
owners of these two non-corporate business forms must pay tax on income earned
from these businesses. The tax accountant’s role includes preparation, planning,
regulatory compliance, and consulting. These functions are normally done after an
external audit has been completed. Tax accountants help taxpayers comply with tax
laws by preparing their tax returns and providing assistance with tax planning for
the future.
Other Accounting-Related Activities
This field could include all of the above. Other positions include accounting consultants, analysts, appraisers or underwriters in the insurance field, planners, traders,
teachers, and managers of accounting.
Professional Certification
Many accountants have professional accounting certification. Several different
accounting certifications recognized in Canada recently merged.
In the past, the three major accounting designations were
Chartered Accountant (CA)
AA Certified Management Accountant (CMA)
AA Certified General Accountant (CGA)
AA
All three organizations were governed by separate provincial standards across
Canada. In October 2014, the three designations merged into a single unified designation, the Chartered Professional Accountant (CPA). This unification better serves
the public with a strong, global brand for all Canadian accountants. Obtaining a CPA
designation requires completing a university degree and final evaluation exam, along
with required practical experience.
Accounting Standards
Accounting (also called the accounting process) is a system that measures the
activities of a business in financial terms. It provides reports and financial statements that show how the various transactions the business undertook (e.g., buying
and selling goods) affected the business. It does this by performing the following
functions:
LO1 Defining and listing the
functions of accounting
Analyzing: Looking at what happened and how the business was affected.
AA Recording: Putting the information into the accounting system.
AA Classifying: Grouping all of the same activities (e.g., all purchases) together.
AA Summarizing: Creating totals by category and/or date, which are used in the
next two functions.
AA Reporting: Issuing the reports that tell the results of the previous functions.
AA
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Interpreting: Examining the reports to determine how the various pieces of
AA
information they contain relate to each other and providing feedback to the
users of the information.
The system communicates the reports and financial statements to people who
are interested in the information, such as the business’s decision-makers, investors,
and creditors; governmental agencies (e.g., Canada Revenue Agency); and so on. As
you can see, a lot of people use these reports. A set of procedures and guidelines
exists to make sure that everyone prepares and interprets the reports the same way.
Canadian accountants rely on a set of generally accepted accounting principles
(abbreviated as GAAP) to guide them in the process of preparing financial reports
for business entities.
Generally Accepted Accounting Principles (GAAP)
As stated earlier, the goal of accounting is to provide useful information for decision
making. For information to be useful, it must be trusted and relevant. This demands
not only ethics in accounting but also generally accepted underlying concepts. The
underlying concepts that make up acceptable accounting practices are referred to as
generally accepted accounting principles (GAAP). The primary purpose of
GAAP is to ensure the usefulness of financial information.
In Canada, the Accounting Standards Board (AcSB) is responsible for setting
accounting standards. The responsibility for setting accounting principles in Canada
changed recently because of Canada’s adoption of International Financial
Reporting Standards (IFRS). Public companies, whose shares of stock are traded
on stock exchanges, must prepare financial information in accordance with IFRS.
IFRS was developed by the International Accounting Standards Board (IASB) and is
used globally. Private companies, whose shares of stock are not traded on stock
exchanges, may choose to follow IFRS or may follow the Accounting Standards for
Private Enterprises (ASPE) developed by the AcSB. These standards are less complex and are used only by private companies in Canada.
Both ASPE and IFRS conform to an underlying framework. This framework
forms the basis for determining how business transactions should be measured
and reported.
Role of Ethics in Accounting and Business
The objective of accounting is to provide relevant, timely information for user decision making. Accountants must behave in an ethical manner so that the information
they provide will be trustworthy and, therefore, useful for all decisions. Ethics are
moral principles that guide the conduct of individuals.
Sometimes business managers and accountants behave in an unethical manner.
It is not uncommon to pick up a newspaper and see stories about financial scandals.
Most recently, events relating to Toshiba*, FIFA, and United Airlines have created
headlines. Were these organizations “cooking the books”? With jail sentences of up
to 25 years for some corporate officers convicted of unlawful activities, the answer
is clearly—yes! In the United States, a federal statute called the Sarbanes-Oxley Act
(SOX) was passed into law to help prevent future attempts to defraud the public. In
Canada, the Ontario Securities Commission created National Policies that cover
much the same thing. Both countries are attempting to increase the focus on internal
*Geoffrey Smith, “Toshiba just lost its CEO to a huge accounting scandal,” Fortune, July 21, 2015. http://fortune.
com/2015/07/21/toshiba-just-lost-its-ceo-to-a-huge-accounting-scandal.
6
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controls, the role and responsibility of auditors, and increased penalties for business
fraud to improve the accuracy and reliability of published accounting reports.
However, this does not come without cost—meeting these new requirements costs
companies a large amount of money.
Learning Unit 1-1
The Accounting Equation
Assets, Liabilities, and Equities
Let’s begin our study of accounting concepts and procedures by looking at a small
business: Catherine Hall’s law practice. Catherine decided to open her practice at the
end of August 2022. She consulted her accountant, Todd Amark, before she made
her decision and Todd told her some important things. First, he told her the new
business would be considered a separate business entity and its finances had to be
kept separate and distinct from Catherine’s personal finances. This business falls
under the definition of sole proprietorship. The accountant went on to say that all
transactions could be analyzed using the basic accounting equation: Assets 5
Liabilities 1 Owner’s Equity.
Catherine had never heard of the basic accounting equation. She listened
carefully as Todd explained the terms used in the equation and how the equation
works.
Assets
Cash, land, supplies, office equipment, buildings, and other things of value owned by
a firm are called assets.
Equities
The rights or financial claims to the assets are called equities. Equities belong to
those who supply the assets. If you are the only person to supply assets to the firm,
you have the sole right or financial claim to them. For example, if you supply the
law firm with $5,000 in cash and $4,000 in office equipment, your equity in the firm
is $9,000.
Relationship Between Assets and Equities
The relationship between assets and equities is
Assets
5
Equities
(Total value of items owned by a business) (Total claims against the assets)
The total dollar value of the assets of the law firm will be equal to the total dollar
value of the financial claims to those assets; that is, equal to the total dollar value of
the equities.
The total dollar value is broken down on the left-hand side of the equation to
show the specific items of value owned by the business and on the right-hand side
to show the types of claims against the assets owned.
Liabilities
A firm may have to borrow money to buy more assets; when this occurs, it means
the firm is buying assets on account (buy now, pay later). Suppose Catherine’s law
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firm purchases a desk for $400 on account from Joe’s Stationery, and the store is
willing to wait 10 days for payment. The law firm has created a liability: an obligation to pay that comes due in the future. Joe’s Stationery is called the creditor.
This liability—the amount owed to Joe’s Stationery—gives the store the right, or
the financial claim, to $400 of the law firm’s assets. When Joe’s Stationery is paid,
the store’s rights to the assets of the law firm will end since the obligation has
been paid off.
Basic Accounting Equation
To better understand the various claims to a business’s assets, accountants divide
equities into two parts. The claims of creditors—outside persons or businesses—
are labelled liabilities. The claims of the business’s owner are labelled owner’s
equity. Let’s see how the accounting equation looks now. It can be rewritten
as follows:
Assets 5
Equities
1. Liabilities: rights of creditors
2. Owner’s equity: rights of owner
Assets 5 Liabilities 1 Owner’s Equity 1 (Revenue 2 Expenses)
LO2 Recording transactions
in the basic accounting
equation
The total value of all the assets of a firm equals the combined total value of
the financial claims of the creditors (liabilities) and the claims of the owner
(owner’s equity). This is known as the basic accounting equation. The basic
accounting equation provides a basis for understanding the accounting system
of a business. The equation is used to record business transactions in a logical
and orderly way that shows their impact on the company’s assets, liabilities, and
owner’s equity.
Importance of Creditors
Another way of presenting the basic accounting equation is
Assets 2 Liabilities 5 Owner’s Equity
This form of the equation stresses the importance of creditors. The owner’s
rights to the business’s assets are determined after the rights of the creditors are
subtracted. In other words, creditors have first claim on assets. If a firm has no
­liabilities—and therefore no creditors—the owner has the total rights to assets.
Another term for the owner’s current investment, or equity, in the business’s assets
is capital.
As Catherine Hall’s law firm engages in business transactions (paying bills, serving clients, and so on), changes will take place in the assets, liabilities, and owner’s
equity (capital). Let’s analyze some of these transactions.
The term cash in accounting
includes currency and
cheques on hand
(cheques that have not
been deposited yet) as
well as bank accounts.
In this textbook, cash
account will usually
mean the balance in the
company’s bank account.
8
CHAPTER 1
Transaction A: Aug. 26: Catherine invests $7,000 in cash and $800 worth of office
equipment into the business.
On August 26, Catherine withdraws $7,000 from her personal bank account and
deposits the money in the law firm’s newly opened bank account. She also invests
$800 worth of office equipment in the business. She plans to be open for business
on September 1. With the help of her accountant, Catherine begins to prepare the
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accounting records for the business. We put this information into the basic
accounting equation as follows:
ASSETS
5 LIABILITIES 1 OWNER’S EQUITY
C. Hall, Capital
Cash 1 Office Equipment 5
5
$7,000 1 $800
In our analyses, assume
that any number without a
sign in front of it is a 1
amount.
$7,800
$7,800 5 $7,800
Note that the total value of the assets, cash, and office equipment—$7,800—is
equal to the combined total value of liabilities (none, so far) and owner’s equity
($7,800). Remember, Catherine Hall has supplied all the cash and office equipment,
so she has the sole financial claim to the assets. Note that the heading “C. Hall,
Capital” is written under the owner’s equity heading. The $7,800 is Catherine’s investment, or equity, in the firm’s assets.
Note: Capital is part of
owner’s equity; it is not an
asset.
Transaction B: Aug. 27: Law practice buys office equipment for cash, $900.
From the initial investment of $7,000 cash, the law firm buys $900 worth of office
equipment (such as a desk). Equipment lasts a long time, while supplies (such as
pens) tend to be used up relatively quickly.
ASSETS
Cash 1 Office Equipment
BEGINNING BALANCE
TRANSACTION
ENDING BALANCE
$7,000 1 $ 800
2900 1 900
$6,100 1 $1,700
5 LIABILITIES 1 OWNER’S EQUITY
C. Hall, Capital
5
5
$7,800
5
$7,800 5 $7,800
$7,800
Shift in Assets
As a result of the last transaction, the law office has less cash but has increased its
amount of office equipment. This is called a shift in assets—the makeup of the
assets has changed, but the total of the assets remains the same.
Suppose you go food shopping at the supermarket with $100 and spend $60. As
you leave the store, you have two assets, food and money. The composition of the
assets has been shifted—you have more food and less money than you did—but the
total of the assets has not increased or decreased. The total value of the food, $60,
plus the cash, $40, is still $100. When you borrow money from the bank, on the
other hand, you have an increase in cash (an asset) and an increase in liabilities; overall there is an increase in assets, not just a shift.
The accounting equation can remain in balance even if only one side is affected.
The key point to remember is that the left-hand-side total of assets must always
equal the right-hand-side total of liabilities and owner’s equity. At least two accounts
must be affected by each transaction.
Transaction C: Aug. 30: Business buys additional office equipment on account, $400.
The law firm purchases an additional $400 worth of chairs and desks from Wilmington
Company. Instead of demanding cash right away, Wilmington agrees to deliver the
equipment and to allow up to 60 days for the law practice to pay the invoice (bill).
This liability, or obligation to pay in the future, has some interesting effects on
the basic accounting equation. Wilmington Company has accepted as payment a
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partial claim against the assets of the law practice. This claim exists until the law
firm pays the bill. This unwritten promise to pay the creditor is a liability called
accounts payable.
ASSETS
5 LIABILITIES 1 OWNER’S EQUITY
C. Hall, Capital
5 Accounts Payable
$7,800
5
Cash 1 Office Equipment
BEGINNING BALANCE
TRANSACTION
ENDING BALANCE
$6,100 1 $1,700
1400
$6,100 1 $2,100
5 1$400
5 $ 400
$8,200 5 $8,200
1 $7,800
When this information is analyzed, we can see that the law practice has increased
what it owes (accounts payable) as well as what it owns (office equipment) by $400.
The law practice gains $400 in an asset but has an obligation to pay Wilmington
Company at a future date.
The owner’s equity remains unchanged. This transaction results in an increase of
total assets from $7,800 to $8,200.
Finally, note that after each transaction the basic accounting equation remains in
balance.
Learning Unit 1-1 Review
AT THIS POINT you should be able to
AA List the functions of accounting. (pp. 5–6)
AA Define and explain the differences between sole proprietorships, partnerships, and corporations. (pp. 2–3)
AA Describe the various types of accountants in Canada.
(pp. 4–5)
AA Define what ethics means for accountants. (pp. 6–7)
AA State the purpose of the accounting equation. (p. 8)
AA Explain the difference between liabilities and owner’s
equity. (pp. 7–8)
AA Define capital. (p. 8)
AA Explain the difference between a shift in assets and an
increase in assets. (pp. 9–10)
TRY IT
To test your understanding of this material, complete the Try It! question and the Self-Review Quiz.
You can complete the Try It! question on paper or on
MyLab Accounting. The solutions are at the end of the
chapter following the Blueprint, as well as on MyLab
Accounting. To complete Self-Review Quiz 1-1, use the
Excel templates available in MyLab Accounting. The
solution to the quiz follows the quiz here in the text. If
you have difficulty doing the problems, review Learning Unit 1-1, the Try It! question, and the solution to
the quiz.
Keep in mind that learning accounting is like learning
to type—the more you practise, the better you become.
You will not be an expert in one day. Be patient. It will all
come together.
!
Record the following transactions into the basic accounting equation:
Cash 1 Salon Equipment 5 Accounts Payable 1 B. Rey, Capital
1. Bernie Rey invests $20,000 to open a hair salon company.
2. The hair salon company buys new salon equipment for $10,000, paying $4,000 cash and putting the balance on account.
Calculate the ending balances.
10
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Self-Review Quiz 1-1
(Excel templates for the Self-Review Quizzes are in MyLab Accounting.)
Record the following transactions in the basic accounting equation:
1. Gracie Ryan invests $17,000 to begin a real estate office.
2. The real estate office buys $600 worth of computer equipment for cash.
3. The real estate office buys $500 worth of additional computer equipment on
account.
Solution to Self-Review Quiz 1-1
ASSETS
Cash
1.
BALANCE
2.
BALANCE
3.
ENDING BALANCE
1 Computer Equipment
1$17,000
17,000
2600
1$600
16,400 1 600
500
$16,400 1 $1,100
5 LIABILITIES
1 OWNER’S EQUITY
5 Accounts Payable 1 Gracie Ryan, Capital
1 $17,000
17,000
5
5
1 $500
5 $500
$17,500 5 $17,500
17,000
1 $17,000
Need Help?
Let’s review first: The left side of the accounting equation
shows what is owned by the business, and the right side of the
equation shows who supplied those assets to the business. Now
let’s look at the transactions in the solution:
Transaction 1: In your head you must say to yourself, “What
did the business get and how did it get it? Is that account
increasing or decreasing? Does the business have more cash
or less cash than before?” The business is getting or increasing its cash by $17,000, and that cash is being supplied by
Gracie Ryan. Think of Gracie as increasing her rights in the
business since she is supplying cash. Keep in mind that capital
does not mean cash. Instead, it is what the owner supplies to
the business. (Gracie may in the future supply other items to
the business.)
The end result is to put $17,000 on the left side of the equation
under cash and put $17,000 under Gracie Ryan, Capital, on the
right side. The sum of the left side must equal the sum on the
right side.
Transaction 2: Here we are NOT looking at the personal
finances of Gracie. You must focus on the business. What did
the business get and who supplied it to the business?
In this transaction the business is getting $600 of computer
equipment by using some of its cash. IT IS SHIFTING ITS
ASSETS: MORE EQUIPMENT FOR LESS CASH. Note that capital is not affected since Gracie has not supplied anything new to
the business. Note that the right side of the equation is not
touched, but the equation still remains in balance. We are just
rearranging the composition of the assets.
Transaction 3: Now the business is getting more equipment but
is not paying cash. The equipment is being supplied by a creditor called Accounts Payable. Hopefully in the future the business will be able to pay the creditor back the $500 that it owes.
The end result is that the business now has $1,100 in equipment.
Note that capital is not affected since no new investments were
made by Gracie into the business.
Summary
At the end of these three transactions this company is made up
of two assets, Cash $16,400 and Computer Equipment $1,100.
The total of the assets was supplied by creditors, $500, and the
owner, Gracie Ryan, Capital, $17,000. The sum of the left side
must equal the sum of the right side.
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Learning Unit 1-2
The Balance Sheet
The balance sheet shows
the company’s financial
position as of a particular
date. (In our example, that
date is at the end of
August.)
In the first learning unit, the transactions for Catherine Hall’s law office were
recorded in the accounting equation. The transactions we recorded occurred
before the law firm opened for business. A report, called a balance sheet or
statement of financial position, can show the position of the company before
it started operating. The balance sheet is a formal report that presents the information from the ending balances of both sides of the accounting equation. Think
of the balance sheet as a snapshot of the business’s financial position as of a
particular date.
Let’s look at the balance sheet of Catherine Hall’s law practice for August 31,
2022, shown in Figure 1-3. The figures in the balance sheet come from the ending
balances of the accounting equation for the law practice as shown in Learning
Unit 1-1.
Note in Figure 1-3 that the assets owned by the law practice appear on the
left-hand side and that liabilities and owner’s equity appear on the right-hand side.
Both sides equal $8,200. This balance between left and right gives the balance sheet
its name.
Points to Remember in Preparing a Balance Sheet
Do you remember the
three elements that make
up a balance sheet? They
are assets, liabilities, and
owner’s equity.
The Heading
The heading of the balance sheet provides the following information:
AA The company name: Catherine Hall, Barrister and Solicitor
AA The name of the report: Balance Sheet
AA The date at which the report is presented: August 31, 2022
Use of the Dollar Sign
Note that the dollar sign is not repeated every time a figure appears. As shown in the
balance sheet for Catherine Hall’s law practice, it is usually placed to the left of each
column’s top figure and to the left of the column’s total.
Figure 1-3
The Balance Sheet
ASSETS
=
LIABILITIES
+ OWNER’S EQUITY
= Accounts Payable + C. Hall, Capital
Cash + Office
Equipment
= $400
+ $7,800
ENDING BALANCES $6,100 + $2,100
CATHERINE HALL, Barrister and Solicitor
BALANCE SHEET
AUGUST 31, 2022
Assets
Cash
Office Equipment
Total Assets
12
CHAPTER 1
2 1 0 0 00
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
$ 8 2 0 0 00
Owner’s Equity
C. Hall, Capital
Total Liabilities and
Owner’s Equity
$ 6 1 0 0 00
$
4 0 0 00
7 8 0 0 00
$ 8 2 0 0 00
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Distinguishing the Total
CATHERINE HALL, Barrister and Solicitor
BALANCE SHEET
AUGUST 31, 2022
Assets
Cash
Office Equipment
Total Assets
A single line means
the numbers above it
have been added or
subtracted.
$ 6 1 0 0 00
2 1 0 0 00
$ 8 2 0 0 00
A double line indicates a
total and is called “footing”
a column. Balance sheets
are as of a moment in time.
When adding numbers down a column, use a single line before the total and a double line beneath it. A single line means that the numbers above it have been added or
subtracted. A double line indicates a total. It is important to align the numbers in the
column; many errors occur because these figures are not lined up. These rules are
the same for all accounting reports.
This balance sheet gives Catherine the information she needs to see the law
firm’s financial position before it opens for business. This information does not tell
her, however, whether the firm will make a profit.
Learning Unit 1-2 Review
AT THIS POINT you should be able to:
AA Define and state the purpose of a balance sheet.
(p. 12)
AA Identify and define the elements making up a balance
sheet. (p. 12)
TRY IT
AA Show the relationship between the accounting equa-
tion and the balance sheet. (p. 12)
AA Prepare a balance sheet in proper form from information provided. (pp. 12–13)
AA Place dollar signs correctly in a formal report. (p. 12)
!
From the following, prepare a balance sheet in proper form:
1. Flynn Company; November 30, 2022; iPads $4,000; Accounts Payable $3,000; Pete Flynn,
Capital $9,000; Cash $8,000
Solutions appear after
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MyLab Accounting
Self-Review Quiz 1-2
(Excel templates for the Self-Review Quizzes are available on MyLab Accounting.)
The date is November 30, 2022. Use the following information to prepare in
proper form a balance sheet for Janning Company:
Accounts Payable
Cash
A. Janning, Capital
Office Equipment
$30,000
8,000
9,000
31,000
Quiz Tip
The heading of a balance
sheet answers the questions
Who, What, and When.
November 30, 2022 is the
particular date.
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Solution to Self-Review Quiz 1-2
JANNING COMPANY
BALANCE SHEET
NOVEMBER 30, 2022
Assets
Cash
Office Equipment
Total Assets
$ 8 0 0 0 00
31 0 0 0 00
Liabilities and Owner’s Equity
Liabilities
$ 30 0 0 0 00
Accounts Payable
$ 39 0 0 0 00
Owner’s Equity
A. Janning, Capital
Total Liabilities and
Owner’s Equity
9 0 0 0 00
Capital does not
mean cash. The
capital amount is
the owner’s current
investment of assets
in the business.
$ 39 0 0 0 00
Need Help?
Let’s review first: A photo of your family as of a particular date
is like a balance sheet. It gives you a history of your family as of a
particular date. The balance sheet is a formal report that lists
assets, liabilities, and owner’s equity for a business as of a particular date.
The heading of a balance sheet answers three questions:
Before making the report, identify whether each item is an asset,
a liability, or owner’s equity. Accounts payable is a liability. Cash
and items of value owned by the business are assets. A. Janning,
Capital, is owner’s equity, or what the owner is supplying to the
business.
The left side of the balance sheet lists the assets: cash, and
office equipment.
Who? Janning Company
What report? Balance Sheet
When? November 30, 2022
The right side lists who supplies the assets to the business: creditors (Accounts Payable) or the owner, A. Janning, Capital. Use
single rules to add and double rules for totals. The sum of the
left side must equal the sum of the right side.
Learning Unit 1-3
The Accounting Equation Expanded: Revenue, Expenses, and Withdrawals
LO3 Seeing how revenue,
expenses, and
withdrawals expand the
basic accounting
equation
When revenue is earned, it
is recorded as an increase
in owner’s equity and an
increase in assets.
14
CHAPTER 1
As soon as Catherine Hall’s office opened, she began performing legal services for
her clients and earning revenue for the business. At the same time, as a part of doing
business, she incurred various expenses, such as rent expense. See Figure 1-4 for an
example of how these activities affect owner’s equity.
When Catherine asked her accountant how these transactions fit into the
accounting equation, he began by defining some terms.
Key Terms in the Accounting Equation
Revenue A service company earns revenue when it provides services to its clients and gives them a bill. Catherine’s law firm earned revenue when she provided
legal services to her clients for legal fees. When revenue is earned, owner’s equity
is increased. In effect, revenue is a subdivision of owner’s equity.
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Figure 1-4
Owner’s Equity
OWNER’S EQUITY
Beginning Capital
Net Income*
PLUS
Additional
Investments
+
Revenue
–
Withdrawals
–
Expenses
*If expenses are greater than revenue, then a net loss would result. This loss would be subtracted
from Owner’s Equity.
Assets are increased. The increase is in the form of cash if the client pays right
away. If the client promises to pay in the future, the increase is called accounts
receivable. When revenue is earned, the transaction is recorded as an increase in
revenue and an increase in assets (either as cash and/or as accounts receivable,
depending on whether it was paid right away or will be paid in the future).
Accounts receivable is an
asset. The law firm expects
to receive amounts owed
by clients at a later date.
Expenses A business’s expenses are the costs the company incurs in carrying
on operations in its effort to create revenue. Expenses are also a subdivision of
owner’s equity; when expenses are incurred, they decrease owner’s equity. Expenses
can be paid for in cash or they can be charged.
Remember: Accounts
receivable results from
earning revenue when
cash is not yet received.
Net Income/Net Loss When revenue totals more than expenses, net income
is the result; when expenses total more than revenue, net loss is the result.
Withdrawals At some point, Catherine Hall may need to withdraw cash or
other assets from the business to pay living or other personal expenses that do
not relate to the business. We will record these transactions in an account called
withdrawals. Sometimes this account is called the owner’s drawing account. The
withdrawals account is a subdivision of owner’s equity that records payments to
the owner not related to the business. Withdrawals decrease owner’s equity.
It is important to remember the difference between expenses and withdrawals.
Expenses relate to business operations; withdrawals are the result of personal needs
outside the normal operations of the business.
Now let’s analyze the September transactions for Catherine Hall’s law firm using
an expanded accounting equation that includes withdrawals, revenues, and
expenses.
Withdrawals are not the
same as salary. Catherine’s
law firm is not incorporated
and hence cannot pay her
a salary.
Expanded Accounting Equation
Transaction D: Sept. 1–30: Provided legal services for cash, $3,000.
Transactions A, B, and C were discussed earlier when the law office was being
formed in August. See Learning Unit 1-1.
In the law firm’s first month of operation, a total of $3,000 in cash was
received for legal services performed. In the accounting equation, the asset Cash
is increased by $3,000. Revenue is also increased by $3,000, resulting in an increase
in owner’s equity.
ACCOUNTING CONCEPTS AND PROCEDURES
15
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ASSETS
BAL. FWD.
TRANS.
END. BAL.
Cash 1 Accts.
Rec.
$6,100
1 Office
Equip.
1$ 2,100
1$3,000
$9,100
1$ 2,100
$11,200
OWNER’S EQUITY
5 LIABILITIES 1
5 Accts. Pay.
1 C. Hall, 2 C. Hall, 1 Revenue 2 Expenses
Capital
Withdr.
5 $ 400
1 $7,800
5 $ 400
5 $11,200
1 $7,800
1 $3,000
1 $3,000
A revenue column was added to the basic accounting equation. Amounts are
recorded in the revenue column when they are earned. They are also recorded in the
assets columns, under Cash and/or under Accounts Receivable. Do not think of
revenue as an asset. It is part of owner’s equity. It is the revenue that creates an
inward flow of cash and accounts receivable. (The term “on account” means
account’s receivable or account’s payable. In this case, it is a receivable.)
Catherine’s law practice also performed legal work on account for $4,000. Her
firm did not receive cash for these earned legal fees; it accepted an unwritten promise from these clients that payment would be made in the future.
Transaction E: Sept. 1–30: Provided legal services on account, $4,000.
ASSETS
BAL. FWD.
TRANS.
END. BAL.
Cash 1 Accts.
Rec.
$9,100
1 $4,000
$9,100 1 $4,000
1 Office
Equip.
1$ 2,100
1$ 2,100
$15,200
OWNER’S EQUITY
5 LIABILITIES 1
5 Accts.
1 C. Hall, 2 C. Hall, 1 Revenue 2 Expenses
Pay.
Capital
Withdr.
5 $ 400
1 $7,800 1 $3,000
1 $4,000
5 $ 400
1 $7,800 1 $7,000
5 $15,200
During September, some of Catherine’s clients who had received services and
promised to pay in the future decided to reduce what they owed the practice by $700
when their bills came due. This is shown as follows on the expanded accounting
equation.
Transaction F: Sept. 1–30: Received $700 cash as partial payment of
previous services performed on account.
ASSETS
BAL. FWD.
TRANS.
END. BAL.
Cash 1 Accts.
Rec.
$9,100 1 $4,000
1$700 2$700
$9,800 1 $3,300
1 Office
Equip.
1$ 2,100
OWNER’S EQUITY
5 LIABILITIES 1
Accts.
C.
Hall,
5
1
2 C. Hall, 1 Revenue 2 Expenses
Pay.
Capital
Withdr.
5 $ 400
1 $7,800 1 $7,000
1$ 2,100
$15,200
5 $ 400
5 $15,200
1 $7,800
1 $7,000
The law firm increased the asset Cash by $700 and decreased another asset,
Accounts Receivable, by $700. The total of assets does not change. The righthand side of the expanded accounting equation has not been touched because the
16
CHAPTER 1
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total on the left-hand side of the equation has not changed. The revenue was
recorded when it was earned, and the same revenue cannot be recorded twice. This transaction analyzes the situation after the revenue has been previously earned and
recorded. Transaction F shows a shift in assets—increased cash and reduced
accounts receivable.
Transaction G: Sept. 1–30: Paid salaries expense, $600.
ASSETS
BAL. FWD.
TRANS.
END. BAL.
Cash 1 Accts.
Rec.
$9,800 1 $3,300
2$600
$9,200 1 $3,300
1 Office
Equip.
1$ 2,100
1$ 2,100
$14,600
OWNER’S EQUITY
5 LIABILITIES 1
Accts.
C.
Hall,
5
1
2 C. Hall, 1 Revenue 2 Expenses
Pay.
Capital
Withdr.
1 $7,800 1 $7,000
5 $ 400
5 $ 400
5 $14,600
1 $7,800
1 $600
1 $7,000 2 $600
As expenses increase, they decrease owner’s equity. This incurred expense of
$600 reduces the cash by $600. Although the expense was paid, the total of the
expenses to date has increased by $600. Keep in mind that owner’s equity decreases as
expenses increase, so the accounting equation remains in balance.
Transaction H: Sept. 1–30: Paid rent expense, $700.
ASSETS
BAL. FWD.
TRANS.
END. BAL.
Cash 1 Accts.
Rec.
$9,200 1 $3,300
2$700
$8,500 1 $3,300
1 Office
Equip.
1$ 2,100
1$ 2,100
$13,900
OWNER’S EQUITY
5 LIABILITIES 1
5 Accts.
1 C. Hall, 2 C. Hall, 1 Revenue 2 Expenses
Pay.
Capital Withdr.
5 $ 400
1 $7,800 1 $7,000 2 $ 600
1$700
5 $ 400
1 $7,800 1 $7,000 2 $1,300
5 $13,900
During September, the practice incurred rent expenses of $700. This rent was
not paid in advance; it was paid when it came due. The payment of rent reduces the
asset Cash by $700 and increases the expenses of the firm, resulting in a decrease in
owner’s equity. The firm’s expenses are now $1,300.
Transaction I: Sept. 1–30: Incurred advertising expenses of $300, to be paid next month.
Catherine ran an ad in the local newspaper and incurred an expense of $300.
This increase in expenses caused a corresponding decrease in owner’s equity.
Since Catherine has not paid the newspaper for the advertising yet, her firm
owes $300. Thus, the firm’s liabilities (Accounts Payable) increase by $300.
Eventually, when the bill comes in and is paid, both Cash and Accounts Payable
will be decreased.
ACCOUNTING CONCEPTS AND PROCEDURES
17
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ASSETS
BAL. FWD.
TRANS.
END. BAL.
Cash 1 Accts.
Rec.
$8,500 1 $3,300
$8,500 1 $3,300
1 Office
Equip.
1$ 2,100
OWNER’S EQUITY
5 LIABILITIES 1
5 Accts.
1 C. Hall, 2 C. Hall, 1 Revenue 2 Expenses
Pay.
Capital
Withdr.
5 $ 400
1 $7,800
1 $7,000 2 $1,300
1$ 2,100
$13,900
1$300
5 $ 700
5 $ 13,900
1 $7,800
1 $7,000
1$300
2 $1,600
Transaction J: Sept. 1–30: Catherine withdrew $200 for personal use.
ASSETS
BAL. FWD.
TRANS.
END. BAL.
Cash 1 Accts.
Rec.
$8,500 1 $3,300
2$200
$8,300 1 $3,300
1 Office
Equip.
1$ 2,100
1$ 2,100
$13,700
OWNER’S EQUITY
5 LIABILITIES 1
Accts.
C.
Hall,
5
1
2 C. Hall, 1 Revenue 2 Expenses
Pay.
Capital
Withdr.
1 $7,800
1$7,000 2 $1,600
5 $ 700
5 $ 700
5 $13,700
1 $7,800
1$200
$200 1$7,000 2 $1,600
By taking $200 for personal use, Catherine has increased her withdrawals from the
business by $200 and decreased the asset Cash by $200. Note that as withdrawals
increase, the owner’s equity will decrease. Keep in mind that a withdrawal is not a business expense. It is a subdivision of owner’s equity that records money or other assets
an owner withdraws from the business for personal use.
Subdivision of Owner’s Equity
Take a moment to review the subdivisions of owner’s equity:
AA As capital increases, owner’s equity increases (see Transaction A).
AA As revenue increases, owner’s equity increases (see Transaction D).
AA As expenses increase, owner’s equity decreases (see Transaction G).
AA As withdrawals increase, owner’s equity decreases (see Transaction J).
Catherine Hall’s Expanded Accounting Equation
The following is a summary of the expanded accounting equation for Catherine
Hall’s law firm. The 1 or 2 sign in front of a transaction indicates whether the
account is increased or decreased by that transaction.
18
CHAPTER 1
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Barrister and Solicitor
Expanded Accounting Equation: A Summary
Cash
A.
BALANCE
B.
BALANCE
C.
BALANCE
D.
BALANCE
E.
BALANCE
F.
BALANCE
G.
BALANCE
H.
BALANCE
I.
BALANCE
J.
END. BAL.
1$7,000
7,000
2900
6,100
6,100
13,000
9,100
ASSETS
1 Accts. 1 Office
Rec.
Equip.
1$800
1
800
1900
1
1,700
1400
1
2,100
5
5
OWNER’S EQUITY
LIABILITIES 1
Accts.
1 C. Hall, 2 C. Hall, 1 Revenue 2 Expenses
Pay.
Capital
Withdr.
1$7,800
7,800
5
5
5
1400
400
5
5
7,800
1
7,800
1
14,000
9,100 1
4,000 1
1700
2700
9,800 1
3,300 1
2600
9,200 1
3,300 1
2700
8,500 1
3,300 1
2,100 5
400
1
7,800
2,100 5
400
1
7,800
13,000
3,000
1
14,000
7,000
1
2,100 5
400
1
7,800
1
8,500 1
3,300 1
2200
$8,300 1 $ 3,300 1
$13,700
2,100 5
7,000
2,100 5
400
1
7,800
1
7,000
2,100 5
400
1300
700
1
7,800
1
7,000
1
7,800
1
7,000
1600
2 600
1700
2 1,300
1300
2 1,600
1200
1 $ 7,800 2 $200
$13,700
1
$7,000
2 $1,600
$ 2,100 5
5
$700
Learning Unit 1-3 Review
AT THIS POINT you should be able to:
AA Define and explain the difference between revenue
and expenses. (pp. 14–15)
AA Define and explain the difference between net income
and net loss. (p. 15)
AA Explain the subdivision of owner’s equity. (p. 18)
TRY IT
AA Explain the effects of withdrawals, revenue, and
expenses on owner’s equity. (p. 15)
AA Record transactions in an expanded accounting equation and balance the basic accounting equation as a
means of checking the accuracy of your calculations.
(pp. 15–19)
!
Use the expanded accounting equation to solve for the missing amount.
Assets $30,000; Liabilities ?; Owner’s Capital, Beginning Balance $15,000; Revenues $10,000;
Expenses $3,000; Withdrawals $1,000
Solutions appear after
the Blueprint and on
MyLab Accounting
ACCOUNTING CONCEPTS AND PROCEDURES
19
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Quiz Tip
Think of expenses and
withdrawals as increasing.
We are keeping track of how
much we have had in
expenses or withdrawals. For
example, in Transaction 4,
withdrawals increased by
$500, resulting in total
withdrawals increasing from
$800 to $1,300.
Self-Review Quiz 1-3
(Excel templates for the Self-Review Quizzes are available on MyLab
Accounting.)
Record the following transactions in the expanded accounting equation for the
Bing Company. Note that all titles have a beginning balance.
1. Received cash revenue, $4,000.
2. Billed customers for services rendered, $6,000.
3. Received a bill for telephone expenses (to be paid next month), $125.
4. Bob Bing withdrew cash for personal use, $500.
5. Received $1,000 from customers in partial payment for services performed in
Transaction 2.
Solution to Self-Review Quiz 1-3
Cash
BEG. BAL.
1.
BALANCE
2.
BALANCE
3.
BALANCE
4.
BALANCE
5.
END. BAL.
1
$ 9,000 1
14,000
13,000 1
13,000 1
13,000 1
2500
12,500 1
11,000
$13,500
ASSETS
5 LIABILITIES 1
Accts.
Accts.
1 Cleaning 5
1 B. Bing,
Pay.
Capital
Rec.
Equip.
$ 2,500 1 $6,500 5
$1,000
1 $11,800
2,500 1
16,000
8,500 1
6,500
5
1,000
1
11,800
6,500
5
1
11,800
8,500 1
6,500
5
1,000
1125
1,125
1
11,800
8,500 1 6,500
21,000
$ 7,500
$6,500
$ 27,500
5
1,125
1
11,800
5
5
$1,125
1 $11,800
OWNER’S EQUITY
2 B. Bing, 1 Revenue 2 Expenses
Withdr.
2 $
800 1 $ 8,000 2 $2,000
14,000
2800 1 12,000 2 2,000
16,000
2800 1 18,000 2 2,000
1125
2800 1 18,000 2 2,125
1500
21,300 1 18,000 2 2,125
2 $ 1,300 1 $18,000 2 $2,125
$ 27,500
Need Help?
Let’s review first: You record revenue only when it is earned.
What can the business get? Cash, of course, but also customers’
promises to pay later, which are recorded as Accounts
Receivable. Revenue is not an asset but does provide an inward
flow of assets into the business. Revenue is part of owner’s
equity. Think of expenses as almost always increasing in a business. The end result will be a decrease in owner’s equity.
Expenses are recorded when they happen and can be paid for
by an asset (mostly cash) or charged as Accounts Payable.
Withdrawals work just like expenses, but they represent personal withdrawals by the owner. Expenses and withdrawals are
not recorded together. Each has a separate title.
Transaction 1: The company has done the work. It now records
revenue of $4,000 in the Revenue column (put numbers in this
column only when we do the work). This time the inward flow
from the revenue is all in the form of cash of $4,000.
20
CHAPTER 1
Transaction 2: This time the company does the work but is not
getting the cash. It is receiving promises that it will be paid in
the future. You record the $6,000 in the Revenue column
because you did the work. The inward flow from this revenue is
not cash but promises called accounts receivable. Thus, the
Accounts Receivable column is increased by $6,000.
Transaction 3: An expense has happened and should be
recorded whether money is paid or not. The expenses for telephone have INCREASED by $125, resulting in the total expenses
rising to $2,125. As expenses in a business rise, the end result is
a reduction in owner’s equity.
Since the expense was charged, the $125 is recorded under
Accounts Payable because the expense will be paid in the
future. At this point, this telephone expense has created a liability. Remember that an expense is not a liability.
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Transaction 4: This transaction relates to a personal transaction
and does not affect any expenses in the business. Bob Bing
takes $500 cash from the business. Think of Bob as gaining the
$500, but in reality his owner’s rights will be reduced. This is
shown by a $500 gain under Withdrawals, which now results in a
total of $1,300 (a reduction to owner’s equity) and a decrease to
Cash. Note that expenses are not affected since this is a personal transaction.
Transaction 5: No new work is done, so we do not record any
new revenue. Here customers are paying part of what they owe.
The result is that company Cash is increased by $1,000 and
Accounts Receivable is reduced by $1,000. This is a shift in
assets: more cash, less accounts receivable.
Summary
Note the four subdivisions of owner’s equity: capital, withdrawals,
revenues, and expenses. As capital and revenue increase, owner’s
equity will increase. As expenses and withdrawals increase, owner’s
equity will decrease. Revenue is not an asset. Rather, it provides
assets in the form of cash and/or accounts receivable. Record revenue only when work is done and billed. Record expenses only
when they happen, whether or not they have been paid.
Learning Unit 1-4
Preparing Financial Reports
Catherine Hall would like to be able to find out whether her firm is making a profit,
so she asks her accountant whether he can measure the firm’s financial performance
on a monthly basis. Her accountant replies that there are a number of financial
reports that he can prepare, such as the income statement, which shows how well
the law firm has performed over a specific period of time. The accountant can use
the information in the income statement to prepare other reports.
LO4 Preparing an income
statement, a statement
of owner’s equity, and a
balance sheet
The Income Statement
An income statement is an accounting report that shows business results in terms
of revenue and expenses. If revenues are greater than expenses, the report shows
net income. If expenses are greater than revenues, the report shows a net loss. An
income statement can cover any number of months up to 12. It does not usually
cover more than one year. The report shows the result of all revenues and expenses
throughout the entire period and not just as of a specific date. The income statement for Catherine Hall’s law firm is shown in Figure 1-5.
Figure 1-5
The Income Statement
CATHERINE HALL, Barrister and Solicitor
INCOME STATEMENT
FOR THE MONTH ENDED SEPTEMBER 30, 2022
Revenue:
Legal Fees
Operating Expenses:
Salaries Expense
Rent Expense
Advertising Expense
Total Operating Expenses
Net Income
The income statement is
prepared from data found
in the revenue and
expense columns of the
expanded accounting
equation.
$ 7 0 0 0 00
$ 6 0 0 00
7 0 0 00
3 0 0 00
1 6 0 0 00
$ 5 4 0 0 00
Note that the income
statement is for a period of
time while the balance sheet
was at a moment in time.
Note that withdrawals are
not shown in the income
statement. They are not
an expense.
ACCOUNTING CONCEPTS AND PROCEDURES
21
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CATHERINE HALL, Barrister and Solicitor
STATEMENT OF OWNER’S EQUITY
FOR THE MONTH ENDED SEPTEMBER 30, 2022
C. Hall, Capital, September 1, 2022
Net Income for September
Less: Withdrawals for September
Increase in Capital
C. Hall, Capital, September 30, 2022
Figure 1-6
$ 7 8 0 0 00
$ 5 4 0 0 00
2 0 0 00
Comes from
income
statement.
5 2 0 0 00
$ 13 0 0 0 00
Statement of Owner’s Equity
Points to Remember in Preparing an Income Statement
Heading The heading of an income statement tells the same three things as all
other accounting reports: the company’s name, the name of the report, and the
period of time the report covers (or the date of preparation).
Locate the dollar signs
used in the income
statement. They are
shown at the top of each
column and in the total.
The Set-Up As you can see on the income statement, the inside column of
numbers ($600, $700, and $300) is used to subtotal all expenses ($1,600) before
subtracting them from revenue ($7,000 2 $1,600 5 $5,400).
Operating expenses may be listed in alphabetical order, in order of largest
amounts to smallest, or in a set order established by the accountant.
The Statement of Owner’s Equity
If this statement of owner’s
equity is omitted, the
information will be included
in the owner’s equity section
of the balance sheet.
As we said, the income statement is a business report that shows business results in
terms of revenue and expenses. However, how does net income or net loss affect
owner’s equity? To find that out, we have to look at another category of report, the
statement of owner’s equity.
The statement of owner’s equity shows what changes occurred in Catherine
Hall, Capital over a certain period of time. The statement of owner’s equity is shown
in Figure 1-6.
The capital of Catherine Hall can be
Increased by:
Decreased by:
owner investment
net income (revenue greater than expenses)
owner withdrawals
net loss (expenses greater than revenue)
Remember, a withdrawal is not a business expense and thus is not involved in the
calculation of net income or net loss on the income statement. It appears on the
statement of owner’s equity. The statement of owner’s equity summarizes the effects
of all the subdivisions of owner’s equity (revenue, expenses, withdrawals) on beginning capital. The ending capital figure ($13,000) will be the beginning figure in the
next statement of owner’s equity.
The Balance Sheet
Now let’s look at how to prepare a balance sheet from the expanded accounting
equation (see Figure 1-7). As you can see, the asset accounts (Cash, Accounts
Receivable, and Office Equipment) appear on the left side of the balance sheet.
Accounts Payable and C. Hall, Capital appear on the right side. Notice that the
$13,000 of capital can be calculated within the accounting equation or read from the
statement of owner’s equity.
22
CHAPTER 1
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CATHERINE HALL, Barrister and Solicitor
BALANCE SHEET
SEPTEMBER 30, 2022
Assets
Cash
Accounts Receivable
Office Equipment
$ 8 3 0 0 00
3 3 0 0 00
2 1 0 0 00
Total Assets
$ 1 3 7 0 0 00
ASSETS
Liabilities and Owner’s Equity
Liabilities
$
7 0 0 00
Accounts Payable
Owner’s Equity
C. Hall, Capital
1 3 0 0 0 00
Total Liabilities and
Owner’s Equity
$ 1 3 7 0 0 00
= LIABILITIES +
Cash + Accts. + Office = Accts.
Rec.
Equip.
Pay.
END. BAL. $8,300 + $3,30 0 + $2,100 = $700
OWNER’S EQUITY
+ C. Hall, – C. Hall, + Revenue – Expenses
Capital Withdr.
+ $7,800 –
$13,700
Figure 1-7
$13,000 comes
from ending capital
figure on statement
of owner’s equity.
$200 + $7,000 – $1,600
$13,700
The Balance Sheet and the Accounting Equation
Main Elements of the Income Statement,
the Statement of Owner’s Equity, and the
Balance Sheet
In this chapter, we have discussed three financial reports: the income statement, the
statement of owner’s equity, and the balance sheet. Let us review the elements of the
expanded accounting equation that go into each report and the usual order in which
the reports are prepared. Figure 1-7 presents a diagram of the balance sheet and the
accounting equation. Table 1-3 summarizes what information goes on each report.
The income statement is prepared first; it includes revenues and expenses and
shows net income or net loss. This net income or net loss is used to update the
next report, the statement of owner’s equity.
AA The statement of owner’s equity is prepared second; it includes beginning capital and any additional investments, the net income or net loss shown on the
income statement, withdrawals, and the total, which is the ending capital.
AA The balance sheet is prepared last; it includes the final balances of each of the
elements listed in the accounting equation under Assets and Liabilities. The balance in Capital comes from the statement of owner’s equity.
AA
Table 1-3 What Goes on Each Financial Report
Income Statement
Statement of Owner’s Equity
Balance Sheet
Assets
X
Liabilities
X
Capital (beginning)
X
Additional Investments
X
Capital (ending)
X
Withdrawals
X
Revenues
X
Expenses
X
Net Income (Loss)
X
X
X
ACCOUNTING CONCEPTS AND PROCEDURES
23
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Learning Unit 1-4
Review
AT THIS POINT you should be able to:
AA Define and state the purpose of the income statement,
the statement of owner’s equity, and the balance sheet.
(pp. 21–23)
AA Discuss why the income statement should be prepared
first. (p. 23)
TRY IT
AA Calculate a new figure for capital on the statement of
owner’s equity and balance sheet. (p. 22)
AA Compare and contrast these three financial reports.
(p. 23)
AA Show what happens on a statement of owner’s equity
if there is a net loss. (p. 23)
!
Identify which financial statement(s) the following titles would be placed on (income statement
(IS), statement of owner’s equity (OE), or balance sheet (BS)):
1. Accounts Payable
2. John Ryan, Capital (ending)
3. Accounts Receivable
4. Computer Equipment
5. Legal Fees (Revenue)
6. Office Expense
7. Advertising Expense
8. John Ryan, Withdrawals
Solutions appear after
the Blueprint and on
MyLab Accounting
9. Salaries Payable
10. Cash
Self-Review Quiz 1-4
(Excel templates for the Self-Review Quizzes are available on MyLab Accounting.)
From the following balances for Rusty Realty, prepare:
1. Income statement for the month ended November 30, 2023
2. Statement of owner’s equity for the month ended November 30, 2023
3. Balance sheet as of November 30, 2023
Cash
Accounts Receivable
Office Furniture
Accounts Payable
R. Rusty, Capital,
November 1, 2023
24
CHAPTER 1
$40,000
13,700
14,900
9,000
50,000
R. Rusty, Withdrawals
Commissions Earned
Rent Expense
Advertising Expense
Salaries Expense
1,000
15,000
2,000
1,500
900
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Solution to Self-Review Quiz 1-4
Quiz Tip
RUSTY REALTY
INCOME STATEMENT
FOR THE MONTH ENDED NOVEMBER 30, 2023
Revenue:
Commissions Earned
$ 1 5 0 0 0 00
Operating Expenses:
Rent Expense
Advertising Expense
Salaries Expense
Total Operating Expenses
Net Income
Note that the inside
column is used only for
subtotalling.
$ 2 0 0 0 00
1 5 0 0 00
9 0 0 00
4 4 0 0 00
$ 1 0 6 0 0 00
Subtotal Columns
Quiz Tip
RUSTY REALTY
STATEMENT OF OWNER’S EQUITY
FOR THE MONTH ENDED NOVEMBER 30, 2023
R. Rusty, Capital, November 1, 2020
Net Income for November
Less: Withdrawals for November
$ 5 0 0 0 0 00
$ 1 0 6 0 0 00
1 0 0 0 00
Increase in Capital
R. Rusty, Capital, November 30, 2020
9 6 0 0 00
$ 5 9 6 0 0 00
RUSTY REALTY
BALANCE SHEET
NOVEMBER 30, 2023
Assets
Cash
Accounts Receivable
Office Furniture
Total Assets
$ 4 0 0 0 0 00
1 3 7 0 0 00
1 4 9 0 0 00
$ 6 8 6 0 0 00
The Net Income from the
income statement is used
to help build the statement of owner’s equity.
Quiz Tip
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
$ 9 0 0 0 00
Owner’s Equity
R. Rusty, Capital
Total Liabilities and
Owner’s Equity
The new figure for Capital,
from the statement of
owner’s equity, is used as
the Capital figure on the
balance sheet.
5 9 6 0 0 00
$ 6 8 6 0 0 00
ACCOUNTING CONCEPTS AND PROCEDURES
25
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Need Help?
Let’s review first: The first formal report is the income statement, which at this point in the course is made up of only revenues and expenses. This report shows how a company is
performing for a specific period of time. The second report is
the statement of the owner’s equity. This report shows how capital has changed from its beginning balance. The net income is
added to the beginning balance less any personal withdrawals,
resulting in a new figure for capital, which will be placed in the
balance sheet. This third report, the balance sheet, is made up
of assets, liabilities, and the new figure for capital. The balance
sheet shows the history of the company as of a particular date.
The Income Statement: Commissions earned is the revenue for
Rusty Realty. It is entered to the right since it is the only revenue.
The inside column is used for a subtotal if there is more than
one source of revenue.
Rent, Advertising, and Salaries are expenses that are listed on
the income statement. Note that we use the inside column to
subtotal them and then list the final figure as total operating
expenses of $4,400 in the right column. The difference
between revenue ($15,000) and the total operating expenses
($4,400) results in a net income of $10,600. Keep in mind that
net income is not cash. Remember that some revenue may not
have resulted in cash and some of the expenses may not have
been paid for in cash.
Statement of Owner’s Equity: The beginning balance of
R. Rusty, Capital is $50,000. We place this to the right because it is
one number. We then use the inside column to add net income
from the income statement ($10,600) and subtract any withdrawals ($1,000) to get an increase in Capital of $9,600, which is
placed in the right column. This figure is then added to beginning capital to arrive at R. Rusty, Capital (ending) of $59,600.
Balance Sheet: All the assets are listed on the left (cash,
accounts receivable, and office furniture), for a total of $68,600.
The liability of $9,000 for accounts payable is listed on the right
and will be added to the new figure for R. Rusty, Capital of
$59,600 from the statement of owner’s equity.
Summary
The income statement lists out revenue and expenses. No withdrawals are found on this report. The statement of owner’s
equity will show how capital changes by net income, net loss,
and/or withdrawals. The balance sheet shows the new history of
the company’s assets, liabilities, and a new figure for capital
after the net income has been calculated.
Demonstration Problem
Chapter
Assignments
(Excel templates for all questions are available in MyLab Accounting. Working papers
for the Demonstration Problem are available in the print Workbook.)
Michael Brown opened his law office on June 1, 2022. During the first month of operations, Michael conducted the following transactions:
1. Invested $6,000 in cash into the law practice.
2. Paid $600 for office equipment.
3. Purchased additional office equipment on account, $1,000.
4. Received cash for performing legal services for clients, $2,000.
5. Paid part-time salaries, $800.
6. Performed legal services for clients on account, $1,000.
7. Paid rent, $1,200.
8. Withdrew $500 from his law practice for personal use.
9. Received $500 from clients in partial payment for legal services performed in
­Transaction 6.
Assignment
Record these transactions in the expanded accounting equation.
Prepare the financial statements at June 30 for Michael Brown, Barrister and Solicitor.
26
CHAPTER 1
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Solution to Demonstration Problem
ASSETS
A.
Cash
1.
BAL.
2.
BAL.
3.
BAL.
4.
BAL.
5.
BAL.
6.
BAL.
7.
BAL.
8.
BAL.
1$6,000
6,000
9.
END.
BAL.
1 Accts.
Rec.
2600
5,400
1 Office
Equip.
1600
600
11,000
1 1,600
1
5,400
12,000
7,400
1
2800
6,600
1,600
OWNER’S EQUITY
5 LIABILITIES 1
Accts.
5
1 M. Brown, 2 M. Brown, 1 Legal 2 Expenses
Pay.
Capital
Withdr.
Fees
1$6,000
6,000
5
1
6,000
5
11,000
1,000
1
6,000
5
1,000
1
6,000
5
1
6,000
2,000 2 11,000
1 3,000 2 1800
800
1
6,000
1
800
11,200
3,000 2 2,000
1,000
1
6,000
1
3,000 2 $1,000
$7,500
1 $6,000
1
1,600
5
1,000
1
6,000
11,000
1,000
1
1,600
5
1,000
1
1,000
1
1,600
5
1,000
1
1,600
5
1500
1,000
2500
$5,400
1 $ 500
1 $1,600
$7,500
5
5
6,600
1
21,200
5,400 1
2500
4,900 1
1$2,000
1 2,000
1500
21 500
2
$500
2,000
1 $3,000 2 $2,000
Solution Tips to Expanded Accounting Equation
Transaction 1: The business increased its Cash by $6,000. Owner’s Equity (Capital)
increased when Michael supplied the cash to the business.
AA Transaction 2: A shift in assets occurred when the equipment was purchased. The
business lowered its Cash by $600, and a new column—Office Equipment—was
increased for the $600 of equipment that was bought. The amount of capital is not
touched because the owner did not supply any new funds.
AA Transaction 3: When creditors supply $1,000 of additional equipment, the business Accounts Payable shows the debt. The business increased what it owes the
creditors.
AA Transaction 4: Legal Fees, a subdivision of Owner’s Equity, is increased when the
law firm provides a service even if no money is received. The service provides an
inward flow of $2,000 to Cash, an asset. Remember that Legal Fees are not an asset.
As Legal Fees increase, Owner’s Equity increases.
AA Transaction 5: The salary paid by Michael’s law office shows an $800 increase in
Expenses and a corresponding decrease in Owner’s Equity as well as a decrease
in Cash.
AA Transaction 6: Michael did the work and earned the $1,000. That $1,000 is recorded
as revenue. This time the Legal Fees create an inward flow of assets called Accounts
Receivable for $1,000. Remember that Legal Fees are not an asset. They are a subdivision of Owner’s Equity.
AA Transaction 7: The $1,200 rent expense reduces Owner’s Equity as well as Cash.
AA
ACCOUNTING CONCEPTS AND PROCEDURES
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Transaction 8: Withdrawals are for personal use. Here the business decreases
AA
Cash by $500 while Michael’s withdrawals increase by $500. Withdrawals decrease
Owner’s Equity.
AA Transaction 9: This transaction does not reflect new revenue in the form of Legal
Fees. It is only a shift in assets: more cash and less accounts receivable.
Solution Tips to Financial Statements
B-1. The income statement lists only revenues and expenses for a period of time. The
inside column is for subtotalling. Withdrawals are not listed here.
B-2. The statement of owner’s equity takes the net income figure of $1,000 and adds
it to beginning capital less any withdrawals. This new capital figure of $6,500 will go on
the balance sheet. This statement shows changes in capital for a period of time.
B-3. The $5,400, $500, $1,600, and $1,000 came from the totals of the expanded
accounting equation. The capital figure of $6,500 came from the statement of owner’s
equity. This balance sheet reports assets, liabilities, and a new figure for capital at a
specific date.
B-1.
MICHAEL BROWN, BARRISTER AND SOLICITOR
INCOME STATEMENT
FOR THE MONTH ENDED JUNE 30, 2022
Revenue:
Legal Fees
Operating Expenses:
Salaries Expense
Rent Expense
Total Operating Expenses
Net Income
B-2.
$3,000
$ 800
1,200
2,000
$1,000
MICHAEL BROWN, BARRISTER AND SOLICITOR
STATEMENT OF OWNER’S EQUITY
FOR THE MONTH ENDED JUNE 30, 2022
Michael Brown, Capital, June 1, 2022
Net income for June
Less withdrawals for June
Increase in Capital
Michael Brown, Capital, June 30, 2022
B-3.
CHAPTER 1
500
$6,500
MICHAEL BROWN, BARRISTER AND SOLICITOR
BALANCE SHEET
JUNE 30, 2022
Assets
28
$6,000
$1,000
500
Liabilities and Owner’s Equity
Cash
Accounts Receivable
Office Equipment
$5,400
500
1,600
Total Assets
$7,500
Liabilities
Accounts Payable
Owner’s Equity
M. Brown, Capital
Total Liabilities and Owner’s Equity
$ 1,000
6,500
$7,500
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Summary of Key Points
Here are the key terms and equations to help you understand the concepts of this chapter and prepare you for your exam. After completing this review, go to MyLab
Accounting for more practice opportunities.
LO1 ▶
Concepts You Should Know
Defining and listing the functions of
accounting (p. 5)
1. The functions of accounting involve analyzing,
recording, classifying, summarizing, reporting, and
interpreting financial information.
2. A sole proprietorship is a business owned by one
person. A partnership is a business owned by two or
more persons. A corporation is a business owned by
shareholders.
3. Different specialists in accounting have made it
possible to serve the needs of many different business entities in Canada. CPAs have training and
experience.
4. Assets 5 Liabilities 1 Owner’s Equity is the basic
accounting equation that helps in analyzing business
transactions.
5. Liabilities represent amounts owed to creditors,
while capital represents what is invested by the
owner.
6. Capital does not mean cash. Capital is the owner’s
current investment. The owner could have invested
in equipment that was purchased before the new
business was started.
7. In a shift of assets, the composition of assets
changes, but the total value of assets does not
change. For example, if a bill is paid by a customer,
the firm increases cash (an asset) but decreases
accounts receivable (an asset), so there is no overall
increase in assets; total assets remain the same. In
contrast, when you borrow money from a bank, you
have an increase in cash (an asset) and an increase in
liabilities; overall there is an increase in assets, not
just a shift.
LO2 ▶
Recording transactions in the basic
accounting equation (p. 8)
1. The balance sheet is a report written as of a particular date. It lists the assets, liabilities, and owner’s
equity of a business. The heading of the balance
sheet answers the questions Who, What, and When
(as of a specific date).
2. The balance sheet is a formal report of a financial
position.
Key Terms
Accounting A system that measures a business’s
activities in financial terms, provides written reports
and financial statements about those activities, and
communicates these reports to decision-makers and
others. (p. 5)
Accounting process See Accounting. (p. 5)
Accounts payable Amounts owed to creditors that
result from the purchase of goods or services on account;
a liability. (p. 10)
Accounts receivable Amounts to be paid by customers
resulting from sales of goods and/or services on credit;
an asset. (p. 15)
Assets Properties (resources) of value owned by
a business (cash, supplies, equipment, land, and so
on). (p. 7)
Balance sheet A report, as of a particular date, that
shows the amount of assets owned by a business as well
as the amount of claims (liabilities and owner’s equity)
against these assets. (p. 12)
Basic accounting equation Assets 5 Liabilities 1
Owner’s Equity. (p. 8)
Business entity In accounting, it is assumed that a business is separate and distinct from the personal assets of
the owner. Each unit or entity requires separate accounting functions. (p. 7)
Capital The owner’s investment of equity in the company. (p. 8)
Corporation A type of business organization that is
owned by shareholders. Usually, shareholders are not
personally liable for the corporation’s debts. (p. 2)
Creditor Someone who has a claim to assets. (p. 8)
Ending capital Beginning Capital 1 Additional
Investments 1 Net Income 2 Withdrawals 5 Ending
Capital. Or Beginning Capital 1 Additional Investments 2
Net Loss 2 Withdrawals 5 Ending Capital. (p. 23)
Equipment Assets acquired to be used in business
activities, usually with an expected life of two to ten
years. (p. 9)
Equities The financial claim of creditors (liabilities) and
owners (owner’s equity) who supply the assets and
expenses to a firm. (p. 7)
ACCOUNTING CONCEPTS AND PROCEDURES
29
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LO3 ▶
Concepts You Should Know
Seeing how revenue, expenses, and
withdrawals expand the basic accounting
equation (p. 14)
1. Revenue generates an inward flow of assets. Expenses
generate an outward flow of assets or a potential outward flow. Revenue and expenses are subdivisions of
owner’s equity. Revenue is not an asset.
2. When revenue totals more than expenses, net
income is the result; when expenses total more than
revenue, net loss is the result.
3. Owner’s equity can be subdivided into four elements: capital, withdrawals, revenue, and expenses.
4. Withdrawals decrease owner’s equity; revenue
increases owner’s equity; expenses decrease owner’s
equity. A withdrawal is not a business expense; it is
for personal use.
LO4 ▶
Preparing an income statement, a
statement of owner’s equity, and a
balance sheet (p. 21)
1. The income statement is a report written for a specific period of time that lists earned revenue and
expenses incurred to produce the earned revenue.
The net income or net loss will be used in the statement of owner’s equity.
2. The statement of owner’s equity reveals the causes
of a change in capital. This report lists additional
investments in the company, net income (or net
loss), and withdrawals. The ending figure for capital
will be used on the balance sheet.
3. The balance sheet uses the ending balances of assets
and liabilities from the accounting equation and the
capital from the statement of owner’s equity.
4. The income statement should be prepared first
because the information on it relating to net income
or net loss is used to prepare the statement of owner’s equity, which in turn provides information about
capital for the balance sheet. In this way, each document builds upon information provided by the previous report.
Key Terms
Ethics In accounting, ethics is a matter of both guidelines and principles. Specific standards are set by governing bodies and trade organizations who craft the rules of
accounting, but personal values and professional ethics
must guide accountants as well. (p. 6)
Expanded accounting equation Assets 5 Liabilities 1
Capital 2 Withdrawals 1 Revenue 2 Expenses. (p. 15)
Expense Cost incurred in running a business by consuming goods or services in producing revenue; a subdivision of owner’s equity. When expenses increase, there
is a decrease in owner’s equity. (p. 15)
External users Users of accounting information who
are not directly involved in running the organization.
(p. 4)
Financial accounting Serves the needs of external
users by providing financial statements. (p. 4)
Generally accepted accounting principles (GAAP)
The procedures and guidelines that must be followed
during the accounting process. (p. 6)
Income statement Is a financial statement that reports
a company’s financial performance over a specific
accounting period. Financial performance is assessed by
giving a summary of how the business incurs its revenues and expenses through both operating and nonoperating activities. (p. 21)
Income tax Tax raised by federal and provincial governments based on income earned by taxpayers. (p. 5)
Internal users Users of accounting information who
are directly involved in managing and operating the organization. (p. 4)
International Financial Reporting Standards (IFRS)
Adopted in Canada effective January 1, 2010, for companies listing their shares on a stock exchange. May be
adapted by other Canadian companies as well, but is
optional. (p. 6)
Liability An obligation that comes due in the future. A
liability increases the financial rights or claims of creditors to assets. (p. 8)
Managerial accounting Serves the needs of internal
users by providing special-purpose reports. (p. 5)
Manufacturing companies Businesses that make a
product and sell it to their customers. (p. 3)
Merchandising companies Businesses that buy a
product from a manufacturing company, distributor, or
wholesaler to sell to their customers. (p. 3)
Net income When revenue totals more than expenses,
the result is net income. (p. 15)
Net loss When expenses total more than revenue, the
result is net loss. (p. 15)
30
CHAPTER 1
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Concepts You Should Know
Key Terms
Not-for-profit A type of organization that does not earn
profits for its owners. All of the money earned by or
donated to a not-for-profit organization is used in pursuing
the organization’s objectives and keeping it running. (p. 3)
Owner’s equity Rights or financial claims to the assets
of a business by the owner (in the accounting equation,
assets minus liabilities). (p. 8)
Partnership A form of business organization that has
at least two owners. The partners are usually personally
liable for the partnership’s debts. There are also corporate partnerships or professional partnerships. These are
usually set up as corporations. In that case, the owners
may not be personally liable. (p. 2)
Revenue An amount earned by performing services for
customers or selling goods to customers. Revenue
increases cash and/or accounts receivable. It is a subdivision of owner’s equity—as revenue increases, owner’s
equity increases. (p. 14)
Sarbanes-Oxley Act (SOX) Legislation passed in the
United States that attempts to prevent the presentation
of false or misleading financial statements by public
companies. (p. 6)
Service company Business that provides a service. (p. 3)
Shift in assets A shift that occurs when the composition of the assets has changed but the total of the assets
remains the same. (p. 9)
Sole proprietorship A business that has one owner.
The owner is personally liable for paying the business’s
debts. (p. 2)
Statement of financial position Another name for a
balance sheet. (p. 12)
Statement of owner’s equity A financial report that
reveals the change in capital. The ending figure for capital is then placed on the balance sheet. (p. 22)
Supplies One type of asset acquired by a firm. A supply
item is temporarily treated as an asset until it is consumed,
when its value is transferred to expense. Sometimes if it is
not a significant amount it is treated as an expense when
purchased—both treatments are possible. (p. 9)
Withdrawals A subdivision of owner’s equity that
records money or other assets an owner withdraws from
a business for personal use. (p. 15)
QUICK REVIEW
The following Tips are from Learning Units 1-1 to 1-4. Answer the Assess Your Progress
questions and use the How Did You Do? at the end of the section to see how you well
you know the material. The Quick Review provides tips before each Assess Your
Progress to help you avoid common accounting errors.
ACCOUNTING CONCEPTS AND PROCEDURES
31
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capital on the statement of owner’s equity is the one
LU 1-1 The Accounting Equation
Tips: After a transaction is recorded in the accounting equation, the sum of all the assets must equal the total of all the
liabilities and owner’s equity.
Assess Your Progress
Answer true or false to the following statements:
1. Capital is cash.
2. Accounts Payable is a liability.
3. A shift in assets means liabilities will increase.
4. Assets 2 Liabilities 5 Owner’s Equity.
5. Assets represent what the company owns or has possession of by the business.
LU 1-2 The Balance Sheet
Tips: The balance sheet is a formal report listing assets,
liabilities, and owner’s equity as of a particular date.
Assess Your Progress
Answer true or false to the following statements:
1. Cash is a liability.
2. Office Equipment is an asset.
3. Accounts Payable is listed under assets.
4. Capital is listed under liabilities under the section
called equity.
5. A heading of a financial report is required to have a
date or period of time covered.
LU 1-3 The Accounting Equation
Expanded
Tips: Revenue is recorded when earned even if cash is not
received. Expenses are recorded when they happen (incurred)
whether they are paid then or to be paid later.
Assess Your Progress
Answer true or false to the following statements:
1. Revenue is an asset.
2. Withdrawals increase owner’s equity.
3. An advertising bill incurred but unpaid is recorded as
an increase in Advertising Expense and a decrease in
liability.
4. Revenue inflows can only be in the form of cash.
LU 1-4 Preparing Financial Reports
Tips: Net income from the income statement is used to
update the statement of owner’s equity. The ending figure
32
CHAPTER 1
used to update the balance sheet.
Assess Your Progress
Answer true or false to the following statements:
1. Net income occurs when expenses are greater than
revenue.
2. Withdrawals will reduce owner’s capital on the income
statement.
3. The balance sheet lists assets, liabilities, and expenses.
4. Withdrawals are listed on the income statement.
5. Assets are listed on the income statement.
How Did You Do? Answers to the Assess Your
Progress Questions
LU 1-1
1. False—Capital represents the owner’s claim to the assets.
2. True.
3. False—A shift in assets means liabilities will stay the
same.
4. True.
5. True.
LU 1-2
1. False—Cash is an asset.
2. True.
3. False—Accounts Payable is listed under liabilities.
4. False—Capital is listed under owner’s equity.
5. True.
LU 1-3
1. False—Revenue is part of owner’s equity.
2. False—Withdrawals decrease owner’s equity.
3. False—An advertising bill incurred but unpaid is
recorded as an increase in Advertising Expense and an
increase in liability.
4. False—Revenue inflows can be in the form of cash
and/or accounts receivable, or other types of assets.
LU 1-4
1. False—Net income occurs when expenses are less
than revenue.
2. False—Withdrawals will reduce owner’s capital on the
statement of owner’s equity.
3. False—Expenses are listed on the income statement.
4. False—Withdrawals are listed on the statement of
owner’s equity.
5. False—Assets are listed on the balance sheet.
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Blueprint of Financial Reports
1 Income
Statement
Measuring
performance
Revenue
Less: Operating expenses:
Expense 1
Expense 2
Expense 3
XXX
XXX
XXX
XXX
Net Income
XXX
XXX
2 Statement of Owner’s Equity
Calculating
new figure
for Capital
Beginning Capital
Additional Investments
Total Investments
Net Income (or Loss)
Less: Withdrawals
Change in Capital
Ending Capital
XXX
XXX
XXX
XXX
XXX
XXX
XXX
3 Balance Sheet
Showing where
we now stand
Assets
Asset 1
Asset 2
Asset 3
XXX
XXX
XXX
Liabilities and Owner’s Equity
Liabilities
Owner’s Equity
Ending Capital
Total Assets
XXX
Total Liabilities + Owner’s Equity
XXX
XXX
XXX
ACCOUNTING CONCEPTS AND PROCEDURES
33
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TRY IT
!
SOLUTIONS
Learning Unit 1-1
Assets
Liabilities 1 Owner’s Equity
5
Cash 1 Salon Equip.
Accounts Pay. 1 B. Rey, Capital
1.
1 $20,000
5
2.
2 $ 4,000 1 $10,000
5
$16,000 1 $10,000
5
1 $20,000
1$6,000
$6,000 1 $20,000
Learning Unit 1-2
Flynn Co.
Balance Sheet
November 30, 2022
Assets
Liabilities and Owner’s Equity
Cash
$ 8,000
iPads
4,000
Liabilities
Accounts Payable
$ 3,000
Owner’s Equity
P. Flynn, Capital
$12,000
Total Assets
Total Liabilities and Owner’s Equity
Learning Unit 1-3
The calculation of $21,000 for Owner’s Equity was:
Owner’s Capital, Beginning Balance $15,000 1 Revenue of $10,000 2
Expenses $3,000 2 Withdrawals $1,000
Total Assets $30,000 2 Owner’s Equity $21,000 5 Liabilities $9,000
Learning Unit 1-4
34
CHAPTER 1
1. BS
6. IS
2. OE, BS
7. IS
3. BS
8. OE
4. BS
9. BS
5. IS
10. BS
9,000
$12,000
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Questions, Classroom Demonstration Exercises,
Exercises, and Problems
DISCUSSION QUESTIONS AND CRITICAL THINKING/ETHICAL CASE
1. What are the six functions of accounting?
2. Define, compare, and contrast sole proprietorships, partnerships, and corporations.
3. What type of businesses would you see in industry.
4. Why are ethics important in accounting?
5. List the three elements of the basic accounting equation.
6. Define capital.
7. The total of the left-hand side of the accounting equation must equal the total of
the right-hand side. True or false? Please explain.
8. A balance sheet tells a company where it is going and how well it will perform. True
or false? Please explain.
9. Revenue is an asset. True or false? Please explain.
10. Into what four categories is owner’s equity subdivided?
11. A withdrawal is a business expense. True or false? Please explain.
12. As expenses increase and revenue remains the same, they cause owner’s equity to
increase. Defend or reject this statement.
13. What does an income statement show?
14. The statement of owner’s equity calculates only ending withdrawals. True or false?
Please explain.
15. Paul Kloss, accountant for Lowe & Co., travelled to Vancouver on company business. His total expenses came to $350. Paul felt that since the trip extended over the
weekend, he could pad his expense account with an additional $100 of expenses.
After all, weekends represent his own time, not the company’s. What would you
do? Write your specific recommendations to Paul.
Make the grade with MyLab Accounting. The exercises and problems marked with a
can be
found on MyLab Accounting. You can practise them as often as you want, and many of them feature step-by-step guided solutions to help you find the right answer. Excel templates for all questions are available on MyLab Accounting in the Multimedia Library and Chapter Resources sections.
MyLab Accounting
CLASSROOM DEMONSTRATION EXERCISES
(Excel templates for all questions are available in MyLab Accounting. Working papers
for select questions are available in the print Workbook.)
Classifying Accounts
CDE1. Classify each of the following items as an asset (A), liability (L), or part of
­owner’s equity (OE):
a. Apple iPad
b. Accounts Receivable
c. Accounts Payable
d. Cash
e. B. James, Capital
f. Office Equipment
Preparing to record transactions
❷ (5 min)
_____________
_____________
_____________
_____________
_____________
_____________
ACCOUNTING CONCEPTS AND PROCEDURES
35
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The Accounting Equation
Accounting equation details
CDE2. Complete the following using the terms from the accounting equation or
accounting categories:
❷ (5 min)
a. ___________ are rights of the creditors.
b. ___________ are the total value of items owned by a business.
c. ___________ ___________ are promises (often unwritten) to pay creditors.
Shift versus Increase in Assets
Recording transactions in the
basic accounting equation
❷ (5 min)
CDE3. Identify which transaction below results in a shift in assets (S) and which transac-
tion causes an increase in assets (I):
a. Jay’s Internet Cafe bought computer equipment on account.
b. Eastern Tile Co. bought office equipment for cash.
The Balance Sheet
Preparing a balance sheet
❷ ❹ (5 min)
CDE4. From the following, calculate the total of assets on the balance sheet:
B. Fleese, Capital
Computer Equipment
Accounts Payable
Cash
$18,000
12,000
6,000
12,000
The Accounting Equation Expanded
Expanding the basic
accounting equation
❷ (5 min)
CDE5. Identify with a ✓ which of the following are subdivisions of owner’s equity:
a. Vehicles
b. Accounts Receivable
c. J. Penny, Capital
d. Advertising Expense
________
________
________
________
e. Accounts Payable
f. Taxi Fees Earned
g. J. Penny, Withdrawals
h. Computer Equipment
________
________
________
________
Identifying Assets
Steps in the recording
of transactions
❷ (5 min)
CDE6. Identify with a ✓ which of the following are not assets:
a. DVD Player
b. Accounts Receivable
c. Accounts Payable
d. Grooming Fees Earned
_______
_______
_______
_______
The Accounting Equation Expanded
Revenue and expenses
expand the basic accounting
equation
❸ (5 min)
CDE7. Which of the following statements are false?
a. _______ Revenue provides only outward flows of cash.
b. _______ Revenue is a subdivision of assets.
c. _______ Revenue provides an inward flow of cash and/or accounts receivable.
d. _______ Expenses are part of total assets.
Preparing Financial Statements
Expanded accounting
equation details are used to
prepare financial statements
❹ (5 min)
36
CHAPTER 1
CDE8. Indicate whether the following items would appear on the income statement (IS),
statement of owner’s equity (OE), or balance sheet (BS):
a. _______
b. _______
c. _______
Tutoring Fees Earned
Office Equipment
Accounts Receivable
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d. _______ Supplies on Hand
e. _______
f. _______
g. _______
h. _______
Legal Fees Earned
Advertising Expense
J. Earl, Capital (Beginning)
Accounts Payable
Preparing Financial Statements
CDE9. Indicate next to each comment whether it refers to the income statement (IS),
statement of owner’s equity (OE), or balance sheet (BS).
a. _______
b. _______
c. _______
d. _______
Financial statements
❹ (5 min)
Withdrawals are found on it
Lists total of all assets
Statement that is prepared last
Statement listing net income
CDE10. Fill in the blanks with the correct terms from the list below.
accounting equation
accounts payable
accounts receivable
assets
balance sheet
creditor
liability
owner’s equity
service
transaction
1. A financial statement that proves the fundamental accounting equation is
the
.
2.
are items owned by a business.
3. Debts owed by a business are called
.
4. A 5 L 1 OE is the
.
5. A(n)
results when a business purchases a service or
merchandise and agrees to pay later.
6. An accounting firm is an example of a(n)
business.
7. The owner’s investments, net income, or net loss are recorded in
.
8.
are formed when amounts are to be paid by customers at a later date.
9. A purchase or a sale, receipt or payment of cash, or any other business
occurrence that can be measured in dollars and cents is called a(n)
.
10. An entity to which money is owed is a(n)
.
EXERCISES
Set A
(Excel templates for all questions are available in MyLab Accounting. Working papers
for select questions are available in the print Workbook.)
E1-1A. Complete the following table:
The accounting equation
Assets
5
Liabilities
1
Owner’s Equity
a. $19,000
5
?
1
$4,000
b.
?
5
$6,000
1
$9,000
c. $10,000
5
$4,000
1
?
❷ (5 min)
ACCOUNTING CONCEPTS AND PROCEDURES
37
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E1-2A. Indicate whether each of the following companies is primarily a service, mer-
Defining companies by
activities
❷ (5 min)
chandise, or manufacturing business. If you are unfamiliar with a company,
research it online.
1. Century 21
2. eBay Inc.
3. WestJet Airlines
4. Walmart
5. Hudson’s Bay Company
Accounting definitions
❶ (10 min)
6. Purolator
7. Days Inn
8. The Dow Chemical Company
9. Ford Motor Company
10. Roots Canada
E1-3A. Many accounting professionals work in one of the following areas:
a. Financial accounting
b. Managerial accounting
c. Taxation accounting
d. Other accounting related activities
For each of the following responsibilities, identify the area of accounting that
most likely involves that responsibility:
__________ 1. Cost accounting
__________ 2. Budgeting
__________ 3. Internal auditing
__________ 4. Preparing financial statements
__________ 5. Accounting consultation
__________ 6. Investigating violations of tax laws
__________ 7. Insurance appraising
__________ 8. Reviewing cost data per unit produced
__________ 9. Preparing tax returns
__________ 10. Reviewing financial statements for loan requirements
Recording transactions in the
expanded accounting equation
E1-4A. Record the following transactions in the expanded accounting equation. The
running balance may be omitted for simplicity:
❸ (15 min)
ASSETS
OWNER’S EQUITY
5 LIABILITIES 1
Cash 1 Accounts 1 Computer 5
Accounts
1 B. Bell, 2 B. Bell,
1 Revenue 2 Expenses
Receivable
Equipment
Payable
Capital
Withdrawals
A. B. Bell invested $60,000 in Bell’s Computer Company.
B. Bought computer equipment on account, $7,000.
C. Paid personal telephone bill from company bank account, $200.
D. Received cash for services rendered, $14,000.
E. Billed customers for services rendered for the month, $30,000.
F. Paid current rent expense, $4,000.
G. Paid supplies expense, $1,500.
Preparing the income
statement, statement of
owner’s equity, and balance sheet
❹ (20 min)
38
E1-5A. From the following account balances for November 2022, prepare in proper
form (a) an income statement, (b) a statement of owner’s equity, and (c) a balance sheet for Frederick Realty.
Cash
$4,800
Accounts Receivable
1,230
Office Equipment
8,300
Accounts Payable
4,000
S. Frederick, Capital, Nov. 1, 2022 9,000
CHAPTER 1
S. Frederick, Withdrawals $120
Professional Fees
3,000
Salaries Expense
550
Utilities Expense
200
Rent Expense
800
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EXERCISES
Set B
E1-1B. Use the fundamental accounting equation to find the missing element in each of
the following:
The accounting equation
❷ (5 min)
a. A 5 ?
L 5 $4,200
OE 5 $7,100
d. A 5 $7,500
L 5 ?
OE 5 $4,000
b. A 5 $18,000
L 5 $6,600
OE 5 ?
e. A 5 ?
L 5 $5,800
OE 5 $9,470
c. A 5 $21,000
L 5 $8,000
OE 5 ?
f.
A 5 $17,600
L 5 ?
OE 5 $12,000
E1-2B. Give an example of a business transaction that has each of the following effects
on the accounting equation:
Transactions in the accounting
equation
❷ (10 min)
1. Increases an asset and increases a liability
2. Increases one asset and decreases another asset
3. Decreases an asset and decreases owner’s equity
4. Decreases an asset and decreases a liability
5. Increases an asset and increases owner’s equity
E1-3B. Identify at least four main areas of accounting for accounting professionals. For
each accounting area, identify at least three accounting-related opportunities in
practice.
E1-4B. Record the following transactions in the expanded accounting equation. The
running balance may be omitted for simplicity.
Accounting definitions
❶ (10 min)
Record transactions in the
expanded accounting equation
❸ (15 min)
ASSETS
OWNER’S EQUITY
5 LIABILITIES 1
Cash 1 Accounts 1 Computer 5
Accounts
1 B. Bell, 2B. Bell,
1 Revenue 2 Expenses
Receivable
Equipment
Payable
Capital Withdrawals
A. B. Bell invested $40,000 in Bell’s Computer Company.
B. Bought computer equipment on account, $8,000.
C. Paid personal telephone bill from company bank account, $150.
D. Received cash for services rendered, $12,000.
E. Billed customers for services rendered for the month, $25,000.
F. Paid current rent expense, $3,000.
G. Paid supplies expense, $900.
E1-5B. From the following account balances for June 2022, prepare in proper form (a)
an income statement, (b) a statement of owner’s equity, and (c) a balance sheet
for French Realty.
Cash
$4,650 S. French, Withdrawals
640
Accounts Receivable
2,600 Professional Fees
5,600
Office Equipment
8,500 Salaries Expense
800
Accounts Payable
4,000 Utilities Expense
760
S. French, Capital, June 1, 2022
9,000 Rent Expense
650
Preparing the income statement,
statement of owner’s equity, and
balance sheet
❹ (20 min)
ACCOUNTING CONCEPTS AND PROCEDURES
39
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GROUP A PROBLEMS
(Excel templates for all questions are available in MyLab Accounting. Working papers
for select questions are available in the print Workbook.)
The accounting equation
P1-1A. Mia Anabelle, who lives in Winnipeg, decided to open Mia’s Nail Spa. Mia com-
pleted the following transactions:
❷ (15 min)
Check Figure
Total Assets $25,000
A. Invested $20,000 cash from her personal bank account into the business.
B. Bought equipment for cash, $4,000.
C. Bought additional equipment on account, $6,000.
D. Paid $1,000 cash to reduce what was owed from Transaction C.
Based on the above information, record these transactions in the basic accounting equation.
Preparing a balance sheet
❶ (10 min)
struct a balance sheet from the following information, as of September 30, 2023,
in proper form. Could you help him?
Check Figure
Total Assets $52,000
Recording transactions in the
expanded accounting equation
❸ (20 min)
Check Figure
Total Assets $29,255
Preparing the income
statement, statement of
owner’s equity, and balance
sheet
❹ (30 min)
Check Figure
Total Assets $3,385
Comprehensive problem
❷ ❸ ❹ (45 min)
Check Figure
Total Assets Nov. 30 $12,915
40
P1-2A. Arjun Agarwal is the accountant for See’s Internet Service. His task is to con-
CHAPTER 1
Building
Accounts Payable
B. See, Capital
$20,000
15,000
37,000
Cash
Equipment
18,000
14,000
P1-3A. At the end of June, Rick Fontan of Corner Brook decided to open his own com-
puter service, Fontan Computer Service. Analyze the following transactions he
completed by recording their effects in the expanded accounting equation:
A. Invested $25,000 in his computer service.
B. Bought new computer equipment on account, $2,500.
C. Received cash for computer services rendered, $800.
D. Performed computer services on account, $2,100.
E. Paid part-time secretary’s salary, $275.
F. Paid office supplies expense for the month, $170.
G. Rent expense for office due but not yet paid, $1,200.
H. Rick Fontan withdrew cash for personal use, $700.
P1-4A. Jane West, owner of West’s Stencilling Service in Grande Prairie, has requested
that you prepare from the following balances (a) an income statement for June
2023, (b) a statement of owner’s equity for June, and (c) a balance sheet as of
June 30, 2023.
Cash
Accounts Receivable
Equipment
Accounts Payable
J. West, Capital, June 1, 2023
J. West, Withdrawals
$2,300
400
685
310
1,200
300
Stencilling Fees
Advertising Expense
Repair Expense
Travel Expense
Supplies Expense
Rent Expense
3,000
110
25
250
190
250
P1-5A. Jill Martin of Regina opened Martin’s Catering Service. As her accountant, ana-
lyze the transactions listed below and present in proper form:
1. The analysis of the transactions by utilizing the expanded accounting
­equation
2. A balance sheet showing the position of the firm before opening on
November 1, 2022
3. An income statement for the month of November
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4. A statement of owner’s equity for November
5. A balance sheet as of November 30, 2022
2022
Oct. 28 Jill Martin invested $8,000 in the catering business from her
personal savings account.
29 Bought equipment for cash from Munroe Co., $900.
30 Bought additional equipment on account from Ryan Co., $1,800.
31 Paid $1,000 to Ryan Co. as partial payment of the October 30
transaction.
(You should now prepare your balance sheet as of October 31, 2022.)
Nov.
1 Catered a graduation and immediately collected cash, $2,900.
4 Paid salaries of employees, $720.
8 Prepared desserts for customers on account, $300.
11 Received $100 cash as partial payment of November 8 transaction.
15 Paid telephone bill, $75.
18 Jill paid her home electricity bill from the company’s bank
account, $90.
19 Catered a wedding and received cash, $1,800.
25 Bought additional equipment on account, $400.
28 Rent expense due but not yet paid, $600.
29 Paid supplies expense, $400.
GROUP B PROBLEMS
(Excel templates for all questions are available in MyLab Accounting.)
P1-1B. Mia Anabelle of Winnipeg began a new business called Mia’s Nail Spa. The
following transactions resulted:
The accounting equation
❷ (15 min)
A. Mia invested $16,000 cash from her personal bank account into the salon.
B. Bought equipment on account, $1,500.
C. Paid $800 cash to reduce what was owed from Transaction B.
D. Purchased additional equipment for cash, $3,000.
Check Figure
Total Assets $16,700
Record these transactions in the basic accounting equation.
P1-2B. Bill See has asked you to prepare a balance sheet as of September 30, 2023, for
See’s Internet Service of Halifax. Assist Bill.
B. See, Capital
Accounts Payable
Equipment
Building
Cash
Preparing a balance sheet
❷ ❹ (15 min)
$24,000
60,000
40,000
28,000
16,000
Check Figure
Total Assets $84,000
P1-3B. Rick Fox of Corner Brook decided to open his own desktop publishing com-
pany at the end of November. Analyze the following transactions by recording
their effects in the expanded accounting equation:
A. Rick Fox invested $9,000 in the desktop publishing business.
B. Purchased new office equipment on account, $3,000.
C. Received cash for desktop publishing services rendered, $1,290.
Recording transactions in the
expanded accounting equation
❸ (20 min)
Check Figure
Total Assets $14,505
ACCOUNTING CONCEPTS AND PROCEDURES
41
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Paid part-time secretary’s salary, $625.
E. Billed customers for desktop publishing services rendered, $2,690.
F. Paid rent expense for the month, $500.
G. Rick withdrew cash for personal use, $350.
H. Advertising expense due but not yet paid, $100.
Preparing an income statement,
statement of owner’s equity, and
balance sheet
❹ (30 min)
Check Figure
Total Assets $3,723
Comprehensive problem
❷ ❸ ❹ (45 min)
Check Figure
Total Assets Nov. 30 $30,380
P1-4B. Aya Antoun, owner of Antoun’s Stencilling Service in Grande Prairie, has
requested that you prepare from the following balances (a) an income statement
for June 2023, (b) a statement of owner’s equity for June, and (c) a balance sheet
as of June 30, 2023.
Cash
Accounts Receivable
Equipment
Accounts Payable
A. Antoun, Capital, June 1, 2023
A. Antoun, Withdrawals
$2,043
1,140
540
45
3,720
360
Stencilling Fees
Advertising Expense
Repair Expense
Travel Expense
Supplies Expense
Rent Expense
$1,098
135
45
90
270
240
P1-5B. John Thildore of Regina opened Thildore’s Catering Service. As his accountant,
analyze the transactions listed below and present the following information in
proper form:
1. The analysis of the transactions using the expanded accounting equation
2. A balance sheet showing the financial position of the firm before opening on
October 31, 2022
3. An income statement for the month of November
4. A statement of owner’s equity for November
5. A balance sheet as of November 30, 2022
2022
Oct. 25 John Thildore invested $25,000 in the catering business.
27 Bought equipment for cash from Small Co., $1,200.
28 Bought additional equipment on account from Ryan Co., $800.
29 Paid $400 to Ryan Co. as partial payment of the October 28
transaction.
(You should now prepare your balance sheet as of October 31, 2022.)
Nov.
42
CHAPTER 1
1 Catered a graduation and immediately collected cash, $2,200.
5 Paid salaries of employees, $550.
8 Prepared desserts for customers on account, $250.
10 Received $80 cash as partial payment of November 8 transaction.
15 Paid telephone bill, $50.
17 John paid his home electric bill with a company cheque, $120.
20 Catered a wedding and received cash, $2,500.
25 Bought additional equipment on account, $1,300.
28 Rent expense due but not yet paid, $650.
30 Paid supplies expense, $550.
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GROUP C PROBLEMS
(Excel templates for all questions are available in MyLab Accounting.)
P1-1C. The following are incomplete financial statements for Good Home Hardware.
Calculate the missing values and complete the statements.
GOOD HOME HARDWARE
Income Statement
For the Year Ended July 31, 2022
Revenue:
Service Revenue
Repair Revenue
Total Revenue
Operating Expenses:
Wages Expense
Rent Expense
Supplies Expense
Utilities Expense
Interest Expense
Total Operating Expenses
Net Income
Preparing an income statement,
statement of owner’s equity, and
balance sheet
❹ (20 min)
Check Figure
Net Income $50,300
$142,000
6,000
$148,000
$52,000
24,000
11,400
(a)
500
97,700
(b)
GOOD HOME HARDWARE
Statement of Owner’s Equity
For the Year Ended July 31, 2022
M. Good, Capital, August 1, 2021
Add: Investments by Owner
Net Income
Total
Less: Withdrawals by Owner
M. Good, Capital, July 31, 2022
$ 79,300
$ (c)
(d)
(e)
$129,600
(f )
$ 95,600
GOOD HOME HARDWARE
Balance Sheet
July 31, 2022
Assets
Cash
Accounts Receivable
Supplies
Prepaid Rent
Office Equipment
Furniture
Total Assets
$11,800
(g)
2,400
12,000
29,200
19,000
(h)
Liabilities
Accounts Payable
Notes Payable
Total Liabilities
Equity
M. Good, Capital
Total Liabilities
and Owner’s Equity
(i)
20,000
$ 34,800
(j)
$130,400
P1-2C. Miguel Neves of Vancouver decided to open his own training services company
at the end of October. Analyze the following transactions by recording their
effects in the expanded accounting equation:
A. Miguel invested $9,000 in the company.
B. Purchased new office equipment on account, $4,250.
C. Received cash for services rendered, $2,350.
Recording transactions in the
expanded accounting equation
❸ (25 min)
Check Figure
Total Assets $16,658
ACCOUNTING CONCEPTS AND PROCEDURES
43
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Paid secretary’s salary, $800.
E. Billed customers for training services rendered, $3,650.
F. Paid rent expense for the month, $600.
G. Miguel withdrew cash for personal use, $1,000.
H. Advertising invoice was received for October (to be paid in November), $400.
I. Repair to office equipment paid, $192.
Comprehensive problem
❷ ❸ ❹ (50 min)
Check Figure
Total Assets May 31 $27,722
P1-3C. Howard McGraw of Windsor opened First City Surveying Service. As his
accountant, analyze the transactions listed and present to Howard the following
information, in proper form:
1. The analysis of the transactions using the expanded accounting equation
2. A balance sheet showing the financial position of the firm before opening on
May 1, 2022
3. An income statement for the month of May
4. A statement of owner’s equity for May
5. A balance sheet as of May 31, 2022
2022
Apr. 23 Howard invested $17,000 in the surveying business.
26 Bought equipment for $5,000, paying $250 in cash and leaving
the balance on account.
29 Bought equipment for cash from Majestic Co., $2,895.
30 Paid $2,375 to Chapman & Co. as partial payment of the April 26
transaction.
May
2 Surveyed a new business location and immediately collected cash,
$2,350.
3 Paid salaries of employees, $975.
10 Provided surveying services to City Community College, $4,950,
of which $2,000 was collected in cash and the balance was on
account.
13 Received from City Community College $2,500 cash as partial
payment of the May 10 transaction.
14 Paid telephone bill, $104.
17 Howard paid his home mortgage from the company’s bank
account, $1,043.
21 Provided surveying services and received cash, $1,825.
24 Bought additional equipment on account from Jensen Bros.,
$2,415.
27 Paid rent expense for the month, $825.
28 Paid supplies expense, $246.
31 Advertising bill received but not yet paid, $410.
Recording and reporting
transactions
❸ ❹ (20 min)
44
CHAPTER 1
P1-4C. You have just been hired to prepare, if possible, an income statement for the
year ended December 31, 2022, for Roger’s Window Washing Company. The
problem is that Roger kept only the following records (on the back of a piece of
cardboard):
Assume that Roger’s Window Washing Company records all revenues when
earned and all expenses when incurred.
You feel that it is part of your job to tell Roger how to organize his records
better. What would you tell him?
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Check Figure
Money in:
Window cleaning
My investment
Loan from brother-in-law
Total Operating Expenses $8,675
$11,376
1,200
4,000
Money out:
Salaries
Withdrawals
Supplies expense
$5,080
6,200
1,400
What I owe or they owe me
A. People that work for me, but I still owe salaries to $1,800
B. Owe bank interest of $300
C. Work done but clients still owe me $2,900
D. Advertising bill due but not paid $95
P1-5C. While Jon Lune was on a business trip, he asked Abby Simpson, the bookkeeper
for Lune Co., to try to complete a balance sheet for the year ended December 31,
2022. Abby, who had been on the job only two months, submitted the following:
$ 4 4 6 0 0 00
7 2 9 3 5 00
7 5 3 2 8 00
1 0 0 1 6 00
$ 5 0 0 4 9 00
Accounts Payable
Accounts Receivable
Auto
Desks
Total Equity
❸ ❹ (30 min)
Check Figure
LUNE CO.
FOR THE YEAR ENDED DECEMBER 31, 2022
Building
Land
Notes Payable
Cash
J. Lune, Capital
Preparing accurate balance sheets
J. Lune, Capital $50,049
$127 6 0 4 00
104 3 3 7 00
1 4 2 6 8 00
6 8 2 5 00
$250 0 3 4 00
1. Help Abby fix and complete the balance sheet.
2. What written recommendations would you make about the bookkeeper?
3. Suppose that (a) Jon Lune invested an additional $20,000 in cash as well as
additional desks with a value of $8,000 and (b) Lune Co. bought a car for
$6,000, paying $2,000 down and issuing a note payable for the balance.
Prepare an updated balance sheet. Assume that these two transactions
occurred on January 4 of the next year.
ETHICAL CONSIDERATIONS
EC1-1. The Role of Ethics in Everyday Living
The ethical decisions we confront daily are toughest when there is a significant
downside to making the “correct” choice—or when it is unclear what that choice is.
Form groups of three students and discuss each situation below. What would
you do? Compare your answers.
1. If something at a yard sale was far more valuable than the posted price,
would you let the seller know?
2. Is it considered stealing to take pens from a bank? What about extra napkins
from a fast-food restaurant?
ACCOUNTING CONCEPTS AND PROCEDURES
45
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3. Is it unfair to move into better (unoccupied) seats at a sporting event or concert?
4. Imagine your boss gives you credit for a project that your colleague did most
of the work on. Should you accept the praise?
5. Are you obligated to lend money to friends and family?
6. Your boss asks you to cover for him on his expense report by saying you
were at a meal with him when really you weren’t. Should you do it?
ANALYSIS OF FINANCIAL STATEMENTS
AFS1-1. Analysis of Financial Statements—Roots Corporation
Roots Corporation, or Roots, is a publicly held Canadian brand that sells apparel
for women, men, children, and babies; leather bags; footwear; active athletic
wear; small leather goods; and home furnishings. The company was founded in
1973 by Michael Budman and Don Green and opened its first store in Toronto
on Yonge St. near the Rosedale subway station. It now employs 1,600 people in
Canada. Roots started using the beaver logo in 1985 with the launch of its athletic brand.
Go to the Roots website and find its 2017 Annual Report.
1. Refer to the Consolidated Statement of Financial Position (the Balance Sheet),
which is on page 41 of the annual report.
a. List two assets.
b. List two liabilities.
2. Refer to the Consolidated Statement of Net Income on page 42 of the
annual report.
a. What were the sales for the current period?
b. What were the sales for the previous period?
c. Have the sales increased or decreased?
3. What type of business is Roots?
AFS1-2. Analysis of Financial Statements—Company of Your Choice
Select a company that interests you and find its recent annual report online. Use
the report to answer the following questions about the company:
1. What type of business is the company?
2. Name an internal user and an external user of the company’s information.
3. List two assets of the company.
4. List two liabilities of the company.
5. What is the company’s reporting period?
6. What were the company’s sales?
46
CHAPTER 1
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Continuing Problem
T
he following problem will continue from one chapter to the next, carrying the balances forward from month to month. Each chapter will focus
on the learning experience of the chapter and add additional information
as the business grows. Excel templates for the Continuing Problem are
available in MyLab Accounting.
Preparing financial statements
from the expanded accounting
equation
❸ ❹ (45 min)
Assignment
1. Set up an expanded accounting equation spreadsheet using the following accounts:
Assets
Cash
Liabilities
Accounts Payable
Owner’s Equity
T. Freedman, Capital
Supplies
T. Freedman, Withdrawals
Computer Shop
Service Revenue
Equipment
Expenses (notate type)
Office Equipment
2. Analyze and record each transaction in the expanded accounting
equation.
3. Prepare the financial statements for Precision Computer Centre for the
period ending May 31.
T
ony Freedman decided to begin his own computer service business
on May 2, 2022. He named the business the Precision Computer
Centre. During the month of May, Tony conducted the following business
transactions:
A. Invested $4,500 of his savings into the business.
B. Paid $1,200 (cheque No. 201) for a computer from Multi Systems, Inc.
C. Paid $600 (cheque No. 202) for office equipment from Office Furniture,
Inc.
D. Set up a new account with Staples and purchased $250 in office supplies on credit.
E. Paid May rent, $400 (cheque No. 203).
F. Repaired a system for a customer; collected $250.
G. Collected $200 for system upgrade labour charge from a customer.
H. Electric bill due at May 31 but unpaid, $85.
I. Received $1,200 for services performed on Taylor Golf computers.
J. Tony withdrew $100 (cheque No. 204) to take his wife Carol out in celebration of opening the new business. Note: The business is too small
to worry about GST (or HST), and PST is not applicable either. Tony’s
company may on occasion pay some GST or HST, but these details are
not used in any transactions until a later chapter.
ACCOUNTING CONCEPTS AND PROCEDURES
47
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