NETA POWERPOINT PRESENTATIONS TO ACCOMPANY VOLUME 1 Accounting Second Canadian Edition BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER Adapted by Sheila Elworthy and Tana Kristjanson Copyright © 2014 by Nelson Education Ltd. 1 CHAPTER 1 Introduction to Accounting and Business Copyright © 2014 by Nelson Education Ltd. 2 Introduction to Accounting and Business After studying this chapter, you should be able to: 1. Describe the nature of a business, the role of accounting, and the role of ethics in business. 2. Summarize the development of accounting principles and relate them to practice. 3. State the accounting equation and define each element of the equation. Copyright © 2014 by Nelson Education Ltd. 3 Introduction to Accounting and Business After studying this chapter, you should be able to: 4. Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation. 5. Describe the financial statements of a proprietorship and explain how they interrelate. Copyright © 2014 by Nelson Education Ltd. 4 1 Describe the nature of a business, the role of accounting, and the role of ethics in business. Copyright © 2014 by Nelson Education Ltd. 5 1 Types of Businesses: Service Businesses Provide services rather than products to customers. Service Business Service Air Canada Transportation services Astral Media Entertainment services Copyright © 2014 by Nelson Education Ltd. 6 1 Types of Businesses: Merchandising Business Sell products they purchase from other businesses to customers. Merchandising Business Product Walmart General merchandise Amazon.ca Books, music, videos Copyright © 2014 by Nelson Education Ltd. 7 1 Types of Businesses: Manufacturing Business Change basic inputs into products that are sold to customers. Manufacturing Business Product General Motors Corp. Cars, trucks, vans Dell Inc. Personal computers Copyright © 2014 by Nelson Education Ltd. 8 The Role of Accounting in Business Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business. Copyright © 2014 by Nelson Education Ltd. 9 The process by which accounting provides information to users is as follows: • Identify users. • Assess users’ informational needs. • Design the accounting information system to meet users’ needs. • Record economic data about business activities and events. • Prepare accounting reports for users. Copyright © 2014 by Nelson Education Ltd. 10 1 Copyright © 2014 by Nelson Education Ltd. 11 Managerial Accounting The area of accounting that provides internal users with information is called managerial accounting. The objective of managerial accounting is to provide relevant and timely information for managers’ and employees’ decision-making needs. Copyright © 2014 by Nelson Education Ltd. 12 Financial Accounting The area of accounting that provides external users with information is called financial accounting. The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business. Copyright © 2014 by Nelson Education Ltd. 13 Role of Ethics in Accounting and Business Ethics are moral principles that guide the conduct of individuals. Copyright © 2014 by Nelson Education Ltd. 14 Copyright © 2014 by Nelson Education Ltd. 15 Opportunities for Accountants Currently, Canada has four main accounting designations: • Chartered Accountant (CA) • Certified General Accountant (CGA) • Certified Management Accountant (CMA) • Chartered Professional Accountant (CPA) Copyright © 2014 by Nelson Education Ltd. 16 Opportunities for Accountants • Accountants employed by a business firm or a not-for-profit organization are said to be employed in private accounting or “in industry.” • Accountants and their staff who provide services on a fee basis are said to be employed in public accounting. Copyright © 2014 by Nelson Education Ltd. 17 2 Summarize the development of accounting principles and relate them to practice. Copyright © 2014 by Nelson Education Ltd. 18 Generally Accepted Accounting Principles • Financial accountants follow generally accepted accounting principles (GAAP) in preparing financial statements. Copyright © 2014 by Nelson Education Ltd. 19 Generally Accepted Accounting Principles • Since 2011, all Canadian publicly accountable enterprises use International Financial Reporting Standards (IFRS) to prepare their financial statements—Part I of the CICA Handbook. • Private enterprises may use IFRS or Accounting Standards for Private Enterprises (ASPE) to prepare their financial statements—Part II of the CICA Handbook. Copyright © 2014 by Nelson Education Ltd. 20 Copyright © 2014 by Nelson Education Ltd. 21 Underlying Assumptions, Principles, and Constraints: • • • • • Going concern assumption Business entity assumption Recognition of the elements Measurement of the elements Benefit versus cost constraint Other principles will be discussed in later chapters. Copyright © 2014 by Nelson Education Ltd. 22 Going Concern Assumption If a business is a going concern, it is appropriate to prepare financial statements using the accounting principles in the CICA Handbook. Copyright © 2014 by Nelson Education Ltd. 23 Business Entity Assumption Under the business entity assumption, the activities of a business are recorded separately from the activities of its owners, creditors, or other businesses. Copyright © 2014 by Nelson Education Ltd. 24 Form of Business Entity: Proprietorship A proprietorship is owned by one individual. • 35% of business entities in Canada. • Easy and cheap to organize. • Resources are limited to those of the owner. • Used by small businesses. Copyright © 2014 by Nelson Education Ltd. 25 Form of Business Entity: Partnership A partnership is owned by two or more individuals. • Less than 10% of business organizations in Canada. • Combines the skills and resources of more than one person. Copyright © 2014 by Nelson Education Ltd. 26 Form of Business Entity: Corporation A corporation is organized under a provincial or federal charter as a separate legal entity. • More than 50% of the business organizations in Canada, generates 70% of total revenues. • Ownership is divided into shares. • Can obtain large amounts of resources by issuing shares. • Used by large businesses. Copyright © 2014 by Nelson Education Ltd. 27 Recognition of the Elements A transaction is “recognized” when: • It is likely to generate a future economic benefit to the business. • A cost for the item can be measured reliably. Copyright © 2014 by Nelson Education Ltd. 28 Measurement of the Elements An item can be measured according to many bases. Financial statements primarily use the historical cost basis, being the amount of cash received or paid for an item. Copyright © 2014 by Nelson Education Ltd. 29 EXAMPLE EXERCISE 1-1 Measurement of the Elements On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records? Copyright © 2014 by Nelson Education Ltd. 30 FOLLOW MY EXAMPLE 1-1 Measurement of the Elements $137,000. The land should be recorded at the historical cost to Gallatin Repair Service. For Practice: PE 1-1 Copyright © 2014 by Nelson Education Ltd. 31 Benefit versus Cost Constraint A trade-off exists between the accuracy of the financial information being produced and the cost to produce that information. Should a wastepaper basket be classified as an expense or an asset? Copyright © 2014 by Nelson Education Ltd. 32 Qualitative Characteristics of Accounting Principles The fundamental qualitative characteristics that should define the information in the financial statements are relevance, faithful representation, and materiality. Copyright © 2014 by Nelson Education Ltd. 33 Qualitative Characteristics of Accounting Principles • Information is considered relevant when it helps investors and others make financial decisions. • Faithful representation suggests a transaction should be recorded so as to reflect the substance of the event. • Information is considered material if omitting or misstating it could influence decisions. Copyright © 2014 by Nelson Education Ltd. 34 Qualitative Characteristics of Accounting Principles Enhancing characteristics are: • Comparability • Verifiability • Timeliness • Understandability Information that is comparable to another company or to another year is more useful. The information can be verified, for example, by confirming with source documents. Information is more useful when produced on a timely basis. Financial statements should be understandable. Copyright © 2014 by Nelson Education Ltd. 35 3 State the accounting equation and define each element of the equation. Copyright © 2014 by Nelson Education Ltd. 36 The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business Rights or claims to the assets Copyright © 2014 by Nelson Education Ltd. 37 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors are the debts of the business. Liabilities are shown before owner’s equity because creditors have first rights to the assets Copyright © 2014 by Nelson Education Ltd. 38 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners Owner’s equity is what remains after paying off the liabilities. A – L = E Copyright © 2014 by Nelson Education Ltd. 39 EXAMPLE EXERCISE 1-2 Accounting Equation John Joos is the owner and operator of You’re A Star, a motivational consulting business. At the end of its accounting period, December 31, 2014, You’re A Star has assets of $800,000 and liabilities of $350,000. Using the accounting equation, determine the following amounts: a. Owner’s equity, as of December 31, 2014. b. Owner’s equity, as of December 31, 2015, assuming that assets increased by $130,000 and liabilities decreased by $25,000 during 2015. Copyright © 2014 by Nelson Education Ltd. 40 FOLLOW MY EXAMPLE 1-2 Accounting Equation a. Assets = Liabilities + Owner’s Equity $800,000 = $350,000 + Owner’s Equity Owner’s Equity = $450,000 b. First, determine the change in Owner’s Equity during 2015 as follows: Assets = Liabilities + Owner’s Equity $130,000 = –$25,000 + Owner’s Equity Owner’s Equity = $155,000 Copyright © 2014 by Nelson Education Ltd. 41 FOLLOW MY EXAMPLE 1-2 Accounting Equation b. (continued) Next, add the change in Owner’s Equity on December 31, 2014, to arrive at Owner’s Equity on December 31, 2015, as shown below: $605,000 = $450,000 + $155,000 For Practice: PE 1-2 Copyright © 2014 by Nelson Education Ltd. 42 4 Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation. Copyright © 2014 by Nelson Education Ltd. 43 Business Transaction A business transaction is an economic event or condition that directly changes an entity’s financial condition or its results of operations. Copyright © 2014 by Nelson Education Ltd. 44 Transaction A On November 1, 2014, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions. Investment by Chris Clark Copyright © 2014 by Nelson Education Ltd. 45 Transaction B On November 5, 2014, NetSolutions paid $20,000 for the purchase of land as a future building site. Copyright © 2014 by Nelson Education Ltd. 46 Transaction C On November 10, 2014, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future. Copyright © 2014 by Nelson Education Ltd. 47 Beginning with Transaction D, the asset section will be shown first, then the liabilities and owner’s equity will be shown in the following slide. Copyright © 2014 by Nelson Education Ltd. 48 Transaction D On November 18, 2014, NetSolutions received cash of $7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called Revenue. Copyright © 2014 by Nelson Education Ltd. 49 Transaction D Copyright © 2014 by Nelson Education Ltd. 50 Transaction D Copyright © 2014 by Nelson Education Ltd. 51 Expenses During the month, NetSolutions spent cash or used up other assets in earning revenue. Assets used in this process of earning revenue are called expenses. Copyright © 2014 by Nelson Education Ltd. 52 Transaction E On November 30, 2014, NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Copyright © 2014 by Nelson Education Ltd. 53 Transaction E Copyright © 2014 by Nelson Education Ltd. 54 Transaction E Copyright © 2014 by Nelson Education Ltd. 55 Transaction F On November 30, 2014, NetSolutions paid creditors on account, $950. Copyright © 2014 by Nelson Education Ltd. 56 Transaction F Copyright © 2014 by Nelson Education Ltd. 57 Transaction F Copyright © 2014 by Nelson Education Ltd. 58 Transaction G On November 30, 2015, Chris Clark withdrew $2,000 from NetSolutions for personal use. Copyright © 2014 by Nelson Education Ltd. 59 Transaction G Copyright © 2014 by Nelson Education Ltd. 60 Transaction G Copyright © 2014 by Nelson Education Ltd. 61 Summary Copyright © 2014 by Nelson Education Ltd. 62 Copyright © 2014 by Nelson Education Ltd. 63 5 Describe the financial statements of a proprietorship and explain how they interrelate. Copyright © 2014 by Nelson Education Ltd. 64 Financial Statements After transactions have been recorded and summarized, reports are prepared for users. The accounting reports providing this information are called financial statements. Copyright © 2014 by Nelson Education Ltd. 65 Order of Preparation • • • • Income statement Statement of owner’s equity Balance sheet Cash flow statement Copyright © 2014 by Nelson Education Ltd. 66 Income Statement A summary of the revenue and expenses for a specific period of time, such as a month or a year. The excess of revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the excess is a net loss. Copyright © 2014 by Nelson Education Ltd. 67 EXAMPLE EXERCISE 1-3 Income Statement The assets and liabilities of Chickadee Travel Service at December 31, 2015, the end of the current year, and its revenue and expenses for the year are listed below. Prepare an income statement for the current year ended December 31, 2015. Copyright © 2014 by Nelson Education Ltd. 68 FOLLOW MY EXAMPLE 1-3 Income Statement For Practice: PE 1-3 Copyright © 2014 by Nelson Education Ltd. 69 Statement of Owner’s Equity The statement of owner’s equity reports the changes in the owner’s equity for a period of time. Copyright © 2014 by Nelson Education Ltd. 70 EXAMPLE EXERCISE 1-4 Statement of Owner’s Equity Using the data for Chickadee Travel Service shown in Example Exercise 1-3, prepare a statement of owner’s equity for the current year ended December 31, 2015. The capital of the owner, Adam Cellini, was $80,000 at January 1, 2015. Adam invested an additional $50,000 in the business during the year and withdrew cash of $30,000 for personal use. Copyright © 2014 by Nelson Education Ltd. 71 FOLLOW MY EXAMPLE 1-4 Statement of Owner’s Equity For Practice: PE 1-4 Copyright © 2014 by Nelson Education Ltd. 72 Net income is carried to the statement of owner’s equity. Copyright © 2014 by Nelson Education Ltd. 73 From the income statement. To the balance sheet. Copyright © 2014 by Nelson Education Ltd. 74 From the statement of owner’s equity. This amount is compared to the net cash flow on the cash flow statement. Copyright © 2014 by Nelson Education Ltd. 75 This amount should match Cash on the balance sheet. Copyright © 2014 by Nelson Education Ltd. 76 Balance Sheet A balance sheet is a list of the assets, liabilities, and owner’s equity as of a specific date, usually at the close of the last day of a month or a year. Copyright © 2014 by Nelson Education Ltd. 77 EXAMPLE EXERCISE 1-5 Balance Sheet Using the data for Chickadee Travel Service shown in Example Exercises 1-3 and 1-4, prepare the balance sheet as of December 31, 2015. Copyright © 2014 by Nelson Education Ltd. 78 FOLLOW MY EXAMPLE 1-5 Balance Sheet For Practice: PE 1-5 Copyright © 2014 by Nelson Education Ltd. 79 Account Form The account form of a balance sheet lists the assets on the left and the liabilities and owner’s equity on the right—similar to the format of the accounting equation. Copyright © 2014 by Nelson Education Ltd. 80 Cash Flow Statement A cash flow statement is a summary of the cash receipts and payments for a specific period of time. Copyright © 2014 by Nelson Education Ltd. 81 Interrelationships Among Financial Statements • The income statement and the statement of owner’s equity are interrelated. Net income or net loss appears on both statements. Copyright © 2014 by Nelson Education Ltd. 82 Interrelationships Among Financial Statements • The statement of owner’s equity and the balance sheet are interrelated. The owner’s capital at the end of the period on the statement of owner’s equity also appears on the balance sheet as owner’s capital. Copyright © 2014 by Nelson Education Ltd. 83 Interrelationships Among Financial Statements • The balance sheet and the cash flow statement are interrelated. The cash reported on the balance sheet is also reported as the end-ofperiod cash on the cash flow statement. Copyright © 2014 by Nelson Education Ltd. 84 The End Copyright © 2014 by Nelson Education Ltd. 85