Introduction to Financial Accounting
Learning Outcomes
By the end of this module, you will be able to:
1. Recognize economic events and explain the accounting implications for these events.
2. Identify potential users of financial information.
3. Describe the purpose of Generally Accepted Accounting Principles (GAAP) including ASPE and
IFRS
4. Describe the key components of three main financial statements (Income Statement, Statement
of Owner's Equity, Balance Sheet) and how they inter-relate.
5. Use the accounting equation to capture economic events.
In your HR career, it's not likely that you will be required to maintain accounting records or prepare
accounting statements, however, it is likely that you will be looking at your company's financial
statements on a regular basis. We want you to have a general idea of what they're all about so that you
can participate with knowledge and confidence.
What is an Economic Event?
•
•
•
•
The purpose of Accounting is to record, summarize and communicate economic events.
An economic event is an activity that can be described in monetary terms. i.e. with dollars and
cents.
The event triggers the start of the accounting process. There can be hundreds of economic
events that are captured in our accounting system every month.
If an activity cannot be measured in terms of dollars and cents, it is not an economic event and it
is not included in our accounting records.
Economic Events and Accounting
Accounting is a process that:
•
•
•
allocates values to economic events,
records and summarizes these events, and
communicates this information to users
Economic event – An event that can be described in monetary terms (i.e. with dollars and cents).
Records and Summarizes – Using formal accounting rules and systems.
Communicates – Using formal financial statements: Income Statement and Balance Sheets.
Users – There are both internal and external users of financial information.
Activity: Identifying Economic Events
Accounting is a process that allocates a value to an economic event (transaction), records and
summarizes the transactions, and communicate that information to users.
•
Economic event – There are certain events that occur in business that are not economic events
and some that are. The basis of an Economic Event is that it is an event that can be described in
monetary terms (i.e. with dollars and cents).
Which of the following categorizes an economic event?
A.
B.
C.
D.
E.
Attending lectures
Paying tuition
Borrowing loan
Purchasing textbooks
Selecting courses
Answer: B – Paying tuition, C – Borrowing loan, and D – Purchasing textbooks
So if an activity doesn't fit the definition of an economic event, we can't capture it within our accounting
records.
What is an Accounting Period?
A good, general definition for an accounting period is: An accounting term that describes a span of time
with a beginning and end. The span is usually, but not always, a month, quarter or year.
At the end of the accounting period, financial statements will be prepared to summarize and
communicate this information to interested users.
In general, larger companies will set monthly accounting periods while smaller companies may choose
to report only once per year. Regardless of size, all businesses are required to produce financial
statements at least once per year.
The Accounting Process
Economic
Event
•Analyze
Transactions
Record
Summarizee
Communicate
•Enter in General
Journal
•Post to General
Ledger
•Prepare Tiral
Balance
•Prepare Financial
Statements
Don't worry if you don't know what journals and ledgers and trial balances are. We'll get into those in
more detail in a few more modules.
Communicating Economic Events
Identifying and recording economic events is pointless unless we have a process for summarizing and
sharing this information with interested users.
The main tools for communicating are financial statements. There are 3 common financial statements
that are used:
•
•
Statement of Cash Flows – Shows where our cash came from and what we did with it.
Income Statement – Tells us if we are making a profit.
•
Balance Sheet – Shows what we own and what we owe.
Don't worry too much about understanding these statements right now. We'll get into the details later.
For now, you need to understand that these statements are how we communicate.
Who Uses Financial Information?
Financial statement users can be split into two broad categories:
•
•
Internal users
External users
Internal Users
Employed by the company and need information to answer questions such as:
1.
2.
3.
4.
Is there enough cash to pay the bills?
What price should we set for the new product?
How much money can we spend on training this year?
Which production line is the most profitable?
External Users
Investors (or future investors), creditors, government and customer Need information to answer
questions such as:
1. Is this company earning enough to give me a return on my investment?
2. Does the company generate enough cash for me to get my money back if I make the loan?
3. Do I think the company will be in business long enough to service the warranty if I make a
purchase?
Activity: Who Uses Financial Information?
Financial statement users can be split into two broad categories. Categorize the following as either
internal users or external users.
A.
B.
C.
D.
E.
F.
Banks
Employees
Unions
Investors
Managers
Government or Regulatory Agencies
Answer:
A.
B.
C.
D.
E.
F.
Banks – External user
Employees – Internal user
Unions – External user
Investors – External user
Managers – Internal user
Government or Regulatory Agencies – External user
Types of Businesses
Now that we recognize the importance of recording financial transactions, it is important to note that
how we record this information depends on the nature of the business organization.
There are 3 main forms of business organizations:
•
•
•
Proprietorship: Characterized as a single-owner business. A private business where owner
assumes complete liability. Life of the business ends with the death of the owner. Taxes are
paid by the owner.
Partnership: Two or more owners who assume complete liability for the business. Life of the
business ends with the death of the partners. Taxes are paid by the partners.
Corporation: Owned by shareholders. If shares are traded on a stock exchange it is a public
corporation. If shares are not publicly traded, it is a private corporation. Corporations have an
unlimited life and enjoy limited legal liability. Taxes are paid by the corporation.
Learning Activity
Following are descriptions of different business organizations. Identify each as Proprietorship,
Partnership or Corporation.
1. BioWind Company has one owner, Barb Smith, who is personally liable for the debts of the
business.
2. Ownership of Foxton Landscaping is divided into 1,000 shares.
3. Nancy Levens and Frank Kerr own a courier service. Both Levens and Kerr are personally liable
for the debts of the business.
4. Tiny Technologies has two owners and pays its own income taxes.
5. Mital Consulting does not have a separate legal existence apart from the one person who owns
it. Upon the death of the owner, the consulting business will cease to exist.
Answer:
1.
2.
3.
4.
5.
Proprietorship
Corporation
Partnership
Corporation
Proprietorship
Accounting Rules
If all of these people are going to use our financial statements to make important decisions, they need
to know that the information is reliable and accurate.
To assist with this task, the accounting profession has developed standards to ensure that everyone is
following the same rules. These standards are referred to as Generally Accepted Accounting Principles
(G.A.A.P.)
We'll go over some of the details of G.A.A.P. on the following screens.
For financial information to have value to its users, it depends on sound ethical behaviour. This is an
underlying foundational principle of accounting. Professional Accountants have extensive rules of
conduct to guide their behaviour and adherence to these rules is crucial.
Setting the Rules
In Canada our standards are set by the Accounting Standards Board. We call our rules A.S.P.E.
(Accounting standards for Private Enterprise). There is a set of global standards called I.F.R.S.
(International Financial Reporting Standards). Other countries can choose to follow these international
standards or set their own rules.
Depending on the type of business, Canadian companies must follow either A.S.P.E. or I.F.R.S:
•
•
Companies that are publicly traded on the stock exchange must follow the international
standards (I.F.R.S.).
Private companies where the stock is not publicly traded can choose to follow either I.F.R.S. or
A.S.P.E.
Accounting rules and theories can get complicated quickly! All you need to understand is that there are
different rules for different countries with a common set of international rules that some companies
must follow. All of these different sets of standards can be referred to as Generally Accepted
Accounting Principles (G.A.A.P.).
Key Assumptions and Principles of Accounting Standards
Although we have different standards for different companies and countries, the fundamental building
blocks of financial standards has remained as it is for hundreds of years. It is these assumptions and
principles that allow us to assume that statements between companies can be compared freely, and
without extraneous exceptions. Assumptions and principles are as follows:
Assumptions
•
•
•
Going Concern Assumption: Assumes that a business will continue to operate into the
foreseeable future and the business's assets are required for this continued operation. Because
the business assets are required for continued operations, these assets are not for sale.
Economic Entity Assumption: The business and all business related transactions must be
treated separately and distinctly from the owner(s).
Monetary Unit Assumption: Only events resulting in transactions that can be expressed as
money will be recorded. Such events are recorded in the currency of the business entity's
country (i.e. Dollars, Pounds, Yuan, Yen, Pesos, Euros).
Principles
•
•
Historical Cost Principle: Economic or business transactions are always recorded using the
actual cost of the consideration transferred between the parties. Assets must always be
recorded at their historical (original) cost, regardless of the current perceived fair market value.
Realization (Revenue Recognition) Principle: Revenue should be recorded (recognized) in the
accounting records in the period in which it is earned, not when the cash is received. Costs
•
should be recorded (recognized) in the accounting records in the period they are incurred, not
when the cash is paid.
Matching Principle: Whenever possible, the costs incurred to generate revenue should be
matched with and recorded at the same time as the related revenue.
Activity
Match the assumption or principle with its correct definition.
1. The principle that assets must always be recorded at the original cost, regardless of the current
perceived fair market value (i.e. cost adjusted from inflation).
2. The assumption that the business will continue to operate into the future, and the business
assets are not being sold due to continuing operation.
3. The principle that the costs incurred to generate revenue is matched with and recorded the
same time as the related revenue.
4. The assumption that transactions that are expressed as money will be recorded on financial
statements.
5. The assumption that all business-related transactions must be treated separately and distinctly
from the owner(s).
6. The principle that revenue should be recorded in the period in which they are earned, not when
the cash is received. Costs should be recorded in the period in which they are incurred, not
when the cash is paid.
Answer:
1.
2.
3.
4.
5.
6.
Historical cost principle
Going concern assumption
Matching principle
Monetary unit assumption
Economic entity assumption
Realization principle
Financial Statements
We've learned that the financial statements are an important tool for communicating a company's
economic events to its users. It's time now to dig a little deeper into three of the most important
financial statements.
1. The Balance Sheet
2. The Income Statement
3. The Statement of Retained Earnings 1
What is the Balance Sheet?
The balance sheet summarizes assets, liabilities and owner’s equity.
1
For Sole Proprietorships, this is called “The Statement of Owners Equity”.
It is a snapshot of the resources (assets) and obligations (liabilities or debts) of the business, as well as
the owner's ownership of those resources, at a particular point in time (i.e. on November 30).
Melville's Bike Repair
Balance Sheet
As at December 31, 2018
Assets
Cash
Accounts Receivable
Supplies
Equipment
Total Assets
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
Wages Payable
Total Liabilities
Owner’s Equity
M. Smith, Capital,
December 31, 2018
Total Liabilities and Owner’s
Equity
$620
1,200
1,300
4,500
$570
1,300
Assets
A resource which will benefit (assist in earning income) both the current period as well as future
periods.
Examples of Assets:
•
•
•
•
•
•
•
Cash
Accounts Receivable
Supplies
Inventory for Resale
Land or Buildings
Office/Warehouse/Manufacturing Equipment
Automobiles
Liabilities
Debts or obligations incurred as expenses or to purchase assets.
Examples of Liabilities:
•
•
•
•
•
•
Bank Loan
Unpaid Utility Bills
Unpaid Rent
Unpaid Taxes
Unpaid Salary
Unpaid Interest
$7,620
$1,870
5,750
$7,620
Owner Equity
Represents the owner's ownership of assets (the difference between assets and liabilities).
Examples of Owner’s Equity:
•
•
Owner's Capital
Owner's Drawings
Essentially, the balance sheet will create a snapshot at one point in time of the company’s health. This is
not a picture of its performance over a period of time (more on that later). It only represents a listing of
all the tangible and intangible assets, debts and equities in the company - be it a sole proprietorship, a
corporation, or a partnership.
Activity
Categorize the following accounts as:
A. Assets
B. Liabilities
C. Owner’s Equity
Accounts:
1. Supplies
2. Cash
3. Bank loan
4. Capital
5. Utility bills
6. Taxes
7. Accounts receivable
8. Rent
9. Drawings
10. Inventory
11. Land
Answer:
1. Supplies – Assets
2. Cash – Assets
3. Bank loan – Liabilities
4. Capital – Liabilities
5. Utility bills – Liabilities
6. Taxes – Liabilities
7. Accounts receivable – Assets
8. Rent – Liabilities
9. Drawings – Owner’s Equity
10. Inventory - Assets
11. Land – Assets
What is the Income Statement?
It summarizes revenues and expenses for an entire accounting period (i.e. for the month of November.)
•
•
When revenues exceed expenses, the result is Net Income.
When expenses exceed revenues, the result is a Net Loss.
Revenues
Repair Services
Expenses
Salaries Expense
Advertising Expense
Rent Expense
Total Expense
Net Income
Melville's Bike Repair
Income Statement
For the Year Ended December 31, 2018
$5,000
$1,000
500
750
2,250
$2,750
Activity
Categorize the following transactions as:
A. Revenue
B. Expenses
Transactions:
1.
2.
3.
4.
5.
6.
7.
8.
Payment received by Louie's Landscape for fertilizing a lawn
Rent paid for office space by HR consultant Mary Smith
Gas for the pickup truck used by Louie's Landscaping
Stationery supplies used by Sally's Veterinary Clinic
Sales of cell phones by George's Electronics
Utility bill for George's Electronics store
Fees for dog grooming by Sally's Veterinary Clinic
Fees earned by HR consultant for advice to a client
Answer:
1.
2.
3.
4.
5.
6.
7.
8.
Payment received by Louie's Landscape for fertilizing a lawn – Revenue
Rent paid for office space by HR consultant Mary Smith – Expenses
Gas for the pickup truck used by Louie's Landscaping – Expenses
Stationery supplies used by Sally's Veterinary Clinic – Expenses
Sales of cell phones by George's Electronics – Revenue
Utility bill for George's Electronics store – Expenses
Fees for dog grooming by Sally's Veterinary Clinic – Revenue
Fees earned by HR consultant for advice to a client – Revenue
What is the Statement of Owner’s Equity?
It summaries all economic events that affect the equity interest of the owner of the business for the
entire accounting period.
•
•
Investments and revenue increase owner equity.
Owner withdrawals and expenses decrease it.
What is the Statement of Retained Earnings?
It is used by Corporations in place of the Statement of Owners’ Equity. It includes all the earnings
accumulated by the corporation.
M. Smith, Capital, January 1,
2018
Add:
Investments
Net Income
Less:
Owner’s Drawings
M. Smith, Capital, December
31, 2018
Melville's Bike Repair
Statement of Owner’s Equity
For the Year Ended December 31, 2018
$5,000
$0
2,750
2,750
2,000
$5,750
How do Financial Statements Inter-relate?
Knowing what these statements are, in principle, is a fine start; but, knowing how they interrelate is key.
At a very high level, you can think of it in the following way:
•
•
•
A business makes (or loses) money from the economic activities undertaken during the year.
This is reflected on the income statement (revenues minus expenses).
This profit or loss is added to the opening balance equity balance along with any investments or
drawings to calculate the ending equity (Statement of Owner's Equity).
This new equity figure is then reported on the Balance Sheet.
Example
Melville's Bike Repair
Income Statement
For the Year Ended December 31, 2018
Revenues
Repair Services
Expenses
Salaries Expense
$1,000
Advertising Expense
500
Rent Expense
750
Total Expense
Net Income
Net income value appears in the Statement of Owner’s Equity:
$5,000
2,500
$2,750
Melville's Bike Repair
Statement of Owner’s Equity
For the Year Ended December 31, 2018
M. Smith, Capital, January 1,
2018
Add:
Investments
$0
Net Income
2,750
Less:
Owner’s Drawings
M. Smith, Capital, December
31, 2018
M. Smith, Capital, December 31, 2018 appears in the Balance Sheet:
Assets
Cash
Accounts Receivable
Supplies
Equipment
Total Assets
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
Wages Payable
Total Liabilities
Owner’s Equity
M. Smith, Capital,
December 31, 2018
Total Liabilities and Owner’s
Equity
$5,000
2,750
2,000
$5,750
Melville's Bike Repair
Balance Sheet
As at December 31, 2018
$620
1,200
1,300
4,500
$570
1,300
$7,620
$1,870
5,750
$7,620
Learning Activity
Determine which financial statements each account belongs to:
A. Income Statement
B. Statement of Owner’s Equity
C. Balance Sheet
Hint: Use your textbook (Illustration 1-14) as a guide when sorting where each of these accounts belong
in the financial statements.
1. Accounts Payable
2. Accounts Receivable
3. J. Doe, Capital, September 1
4. Services
5. Owner’s Equity
6. Add: Investments, J. Doe
7. Assets
8. J. Doe, Capital, September 30
9. Total Assets
10. Less: Drawings
11. Total Expenses
12. September, 20, 2011
13. Rent
14. Liabilities
15. Salaries
16. Expenses
17. Revenue
18. Cash
19. Total Liabilities and Owner’s Equity
20. Total revenue
21. Net Income (less)
22. Total Liabilities
Answer:
1. Accounts Payable – Balance sheet
2. Accounts Receivable – Balance sheet
3. J. Doe, Capital, September 1 – Statement of Owner’s Equity
4. Services – Income statement
5. Owner’s Equity – Balance sheet
6. Add: Investments, J. Doe – Statement of Owner’s Equity
7. Assets – Balance sheet
8. J. Doe, Capital, September 30 – Statement of Owner’s Equity
9. Total Assets – Balance sheet
10. Less: Drawings – Statement of Owner’s Equity
11. Total Expenses – Income statement
12. Rent – Income statement
13. Liabilities – Balance sheet
14. Salaries – Income statement
15. Expenses – Income statement
16. Revenue – Income statement
17. Cash – Balance sheet
18. Total Liabilities and Owner’s Equity – Balance sheet
19. Total revenue – Income statement
20. Net Income (less) – Income statement
21. Total Liabilities – Balance sheet
Recording Economic Events
Now that we've given you a brief glimpse of the financial statements and how they work together, the
next step is to learn how the numbers change within them. In other words, we are going to learn how
we record economic events!
Let's start right back at the beginning with something many of us can relate to - owning a house. Now,
most of us don't own a house outright, we have a mortgage. We own the house but we also owe the
bank for usually quite a large amount of the value of that house.
1. Let's say that I own a $500,000 house and that my mortgage is $400,000. I think it's common
terminology for me to say that I have $100,000 of equity built up in my house.
• House: $500,000
• Mortgage: $400,000
• Equity: $100,000
Now, the next time that I make a mortgage payment to my bank, my loan goes down and my
equity goes up just a little bit.
2. Let's say that my mortgage payment is $1,000 against the principle (plus some interest) So my
numbers now look like this:
• Mortgage: $399,000 – I now owe $1,000 less on my mortgage.
• Equity: $101,000 – I have increased my equity in my house by $1,000.
The value of my house hasn't changed, just the split between my equity and the bank loan.
3. Next, I need to buy some furniture and other things for my house so I go to the bank and get a
loan: $20,000 is put into my bank account:
• Cash: $20,000 – The bank has given me this cash to spend as I wish.
• Bank loan: $20,000 – I now owe the bank the value of the loan.
4. I use $5,000 of that cash to buy my furniture and $10,000 for a used car:
• Cash: $5,000 – I no longer have as much cash, but I do own some furniture and a car!
• Furniture: $5,000
• Car: $10,000
While we've just been working through some day to day activities and writing them down, I have been
writing them down in strategic places.
Balance Sheet
Assets
Liabilities
House
$500,000
Mortgage
$399,000
Cash
5,000
Bank Loan
20,000
Furniture
5,000 Total Liabilities
419,000
Owner’s Equity
Car
10,000
Equity
101,000
Total Assets
$520,000 Total Liabilities and Equity
$520,000
None of the numbers have changed. The only difference is that I have wrapped my finances within the
framework of a balance sheet.
You can see that everything in the left column are things that I own. We might want to call those my
Assets. Top of the right column is all of the money that I owe, my Liabilities.
That equity that I built up in my house is in its own section called Equity: We've created a Balance Sheet!
So can you see that the balance sheet simply lists the things that I own (my Assets) and then describes
the proportion that has been paid for by me versus what I still owe the bank. If I add both of the two
pieces on the right, (what I paid for and what I still owe the bank), it should come to the full value of my
assets. My Assets = My Liabilities + My Equity.
This is called the Accounting Equation. And everything that we do in accounting has to have an end
result of this equation remaining in balance.
Learning Activity: Basic Accounting Equation
Fill in the chart below.
Assets = Liabilities + Equity
Remember, Assets must always equal the total of your liabilities plus equity.
Assets
Liabilities
30,000
60,000
40,000
80,000
Answer: Assets: 75,000. Liabilities: 30,000. Owner’s Equity: 20,000.
Owner’s Equity
45,000
50,000
Expanding the Accounting Equation
Ok….let's move on and do some more things with my money.
Finally, pay day has arrived and my work places $5,000 in my bank account! I immediately go out and
spend $1,000 on gas, groceries, cleaning supplies - all kinds of things for my house.
•
•
Cash: $9,000 – My cash balance has increased $4,000 - $5,000 in pay less $1,000 spent.
Groceries, gas and supplies: $1,000 – I don't want to add these purchases to my asset list as they
are consumables - I'm going to use them up right away; they'll be gone by the end of the month.
Have you noticed that my balance sheet doesn't balance anymore? The problem is that $4,000 I have
left over from my pay cheque. How are we going to recognize that extra money to make sure the
accounting equation balances?
If we call my pay my Revenue and my spending spree my Expenses, we can see that I have earned a Net
Income or Profit from my work of $4,000. Seems like an Income Statement!
Revenues
Expenses
Net Income
Income Statement
5,000 – my pay this week
1,000 – the things I purchased with from my paycheque that I have
used up immediately.
4,000
My profit is money that I worked hard for and now have available to use later. I've built up some more
Equity in my life! So let’s transfer that profit into my Equity so that I can use it later:
Balance Sheet
Assets
Liabilities
House
$500,000
Mortgage
Cash
5,000
Bank Loan
Furniture
5,000 Total Liabilities
Owner’s Equity
Car
10,000
Equity
Total Assets
$520,000 Total Liabilities and Equity
My equity has increased by $4,000 - the money I had leftover from my paycheque.
$399,000
20,000
419,000
105,000
$520,000
We can now expand our basic accounting equation to include revenues and expenses (and other
changes to our equity).
Equity = +Revenues − Expenses + Investments − Drawings
•
•
Assets = Liabilities + Equity
Revenues and Expenses flow from the Income Statement.
If you refer back to our work with the Statement of Owner's Equity, you will see that these 4
columns capture everything in that statement.
And that, in a nutshell, is everything there is to know about the Accounting Equation and Financial
Statements. In a business environment, we have a few different names and accounts, but the basic idea
doesn't change.
Learning Activity
Now it's your turn: For the following events, see if you can figure out how the accounting equation
changes. Begin with a chart as follows:
Assets
Liabilities
Revenues (+)
Equity
Expenses (−) Investments (+)
Drawings (−)
Revenues (+)
500
Equity
Expenses (−) Investments (+)
Drawings (−)
Situations:
1. Received $500 for services provided.
2. Paid $300 of operating expenses.
3. Invested $1,000 cash in the business.
4. Owner withdrew $400 cash.
5. Purchased $600 in equipment in exchange for a note payable. Loyalist User: A note payable is
like an IOU - we will pay the vendor later.
Answer:
Assets
500
(300)
Liabilities
(300)
Equity
Expenses (−) Investments (+) Drawings (−)
1,000
(1400)
Assets
Liabilities
Revenues (+)
1,000
(400)
600
600
1,400
600
500
(300)
1,000
Assets = Liabilities + Revenues (+) − Expenses (-) + Investments (+) − Drawings (-)
(400)
1,400 = 600 + 500 + (300) + 1,000 + (400)
1,400 = 1,400
We balance!
Using Account Names
Up to this point, we have been recording our economic events (transactions) using the broad categories
of Assets, Liabilities, Investments, Drawings, Revenues and Expenses. In real life, to make the
information more meaningful, we break these categories down into much smaller accounts. Here are
some typical accounts for each category:
Assets
Cash
Liabilities
Accounts Payable
Accounts Receivable
Use this account for day to day purchases
from our suppliers (supplies, inventory etc).
Notes Payable
This is money owed to
us by our customers.
Supplies
Equipment
Use this account for large, one-off
purchases where we have specified
payment terms and usually interest charge.
Usually equipment or vehicle purchases.
Revenues
Service
Revenue
Expenses
Supplies
Expense
Rent
Revenue
Wages Expense
Utilities Expense
Learning Activity 1
Indicate whether each of the following items is an asset (A), liability (L) or part of the owner's equity
group (OE).
1.
2.
3.
4.
5.
6.
7.
8.
Accounts Receivable
Wages Expense
Salaries Payable
Equipment
Supplies
Service Revenue
Notes Payable
Owners Drawings
Answer:
1.
2.
3.
4.
5.
6.
7.
8.
Accounts Receivable – A
Wages Expense – OE
Salaries Payable – L
Equipment – A
Supplies – A
Service Revenue – OE
Notes Payable – L
Owners Drawings – OE
Now that we have learned some typical account names, let's practice analyzing some more transactions
using account names.
Learning Activity 2
Below are 4 economic events. Match one of the basic transaction analyses to each event.
Transaction Analysis:
1.
2.
3.
4.
Cash increased by $9,000 and the owner's capital account increased by $9,000
Cash is decreased by $4,000 and the Rent Expense is increased by $4,000
Supplies is increased by $1,000 and the liability, Accounts Payable is increased by $1,000
Accounts Receivable is increased by $900 and Service Revenue is increased by $900
Economic Events:
A.
B.
C.
D.
Paid cash for rent
Owner invests cash in business
Supplies are purchased on account
Company provides service on account
Answers:
1. Cash increased by $9,000 and the owner's capital account increased by $9,000 – Owner invests
cash in business
2. Cash is decreased by $4,000 and the Rent Expense is increased by $4,000 – Paid cash for rent
3. Supplies is increased by $1,000 and the liability, Accounts Payable is increased by $1,000 –
Supplies are purchased on account
4. Accounts Receivable is increased by $900 and Service Revenue is increased by $900 – Company
provides service on account
Practice Activities
Please see the Course Timeline posted on Blackboard for your homework questions for this module.
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All homework questions come from the end of the chapter in your textbook.
Answers to the multiple choice questions can be found at the end of the chapter.
Solutions for selected questions and exercises are posted on Blackboard under "Practice
Problems"
We've covered a lot of material in a very short amount of time. The best thing for you to do to help with
retaining it is to do some practice questions on your own! Don't just read through them. Sit down with
a paper and pencil and work through each one! If you have any questions, be sure to post on the
Discussion board.
Summary
In this module, we have explored:
1.
2.
3.
4.
5.
Economic events and their implications for accounting.
Users of financial statements.
Generally accepted accounting principles.
The general principles and assumptions of accounting.
The 3 main financial statements (Income Statement, Statement of Owner's Equity, Balance
Sheet) and how they inter-relate.
6. Capturing economic events using the accounting equation.
Module Checklist
You have now completed all of the modules and activities for week 2. Check off each item below to
confirm you have successfully completed all items in the module.
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I have completed the learning activities in all assigned modules for week 2 (see Timeline for
details).
I have completed the assigned practice problems from the textbook.
I have posted any questions that I have on the Discussion Board in Blackboard.
I have checked the Announcements and the Discussion Board on Blackboard for any tips and
tricks for this week.
I have completed and submitted the graded assignment for this week (See Timeline for details)
You have completed Introduction to Financial Accounting!
Now that you know a bit about financial statements and how financial transactions affect them, it's time
to move on to learn the recording process in detail.