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