Chapter 1 Accounting in Action

1. Chapter 1Accounting in Action Adapted from PowerPoint prepared by: Debbie Musil Kwantlen University College

2. Accounting & Ethics To Solve Ethical Dilemmas • Recognize situation and ethical issues involved • Identify and analyse elements • Identify alternatives and weigh effects on stakeholders • Select the most ethical alternative Ethics • Standards of conduct used to judge actions • Ethics - “The Language of Business” • Must be understandable, useful, truthful

3. Users of Accounting Information • Internal Users • Includes Marketing, Human Resources, Production, Senior Management • Used for planning, organizing and running the business • External Users • Investors, Creditors, Labour Unions, Customers, Regulators and other authorities • Used for decisions of ownership, credit, lending, assess compliance, performance

4. GAAP “Generally Accepted Accounting Principles” • Common set of accounting standards • Developed by the Canadian Institute of Chartered Accountants (“CICA”) • Consult with organizations and individuals • Authority through Canadian and provincial business and securities statutes

5. GAAPS • Cost Principle–assets are recorded at original cost • Going concern – organization will continue to operate in the foreseeable future • Monetary unit – only include transactions that can be expressed as an amount of money • Economic entity – activities of a unit or organization in society are kept separate and distinct from other entities and owner

6. GAAP - Assumptions • Going concern – organization will continue to operate in the foreseeable future • Monetary unit – only include transactions that can be expressed as an amount of money • Economic entity – activities of a unit or organization in society are kept separate and distinct from other entities and owner

7. Assets & Liabilities • Assets • Resources owned by the organization • Liabilities • Claims against assets • Existing debts and obligations

8. Owner’s Equity • Equals total assets less total liabilities • Represents ownership claim on assets • Components of owner’s equity: • Investments – assets put into business by owner • Drawings – cash or other assets withdrawn by owner for personal use • Net income (loss)– revenues less expenses

9. Revenues & Expenses • Revenues • Result from business activities that are performed to earn income • Result in an increase in an asset and in owner’s equity • Expenses • The cost of assets consumed or services used in order to earn revenue • Result in an decrease in an asset and in owner’s equity

10. Accounting Equation Revisited Assets = Liabilities + Owner’s Equity Investments - Drawings+/- Net Income (Loss) Revenues - Expenses

11. Accounting Equation Distinctions by Type of Organization • Sole Proprietorship: • Assets = Liabilities + Owner’s Equity • Partnership: • Assets = Liabilities + Partner’s Equity • Corporation: • Assets = Liabilities + Shareholders’ Equity

12. Financial Statements • Prepared after all transactions identified, recorded and summarized: • Income Statement – presents revenues, expenses and net income (loss) for a specific period of time • Statement of Owner’s Equity – summarizes the changes in owner’s equity for a specific time period • Balance Sheet – reports assets, liabilities and owner’s equity at a specific date • Cash Flow Statement – summarizes cash inflows and outflows for a specific period of time

13. Income Statement

14. Statement of Owner’s Equity

15. Owner’s capital of $16,450 is brought forward from the Statement of Owner’s Equity Balance Sheet

16. Cash shown on the Balance Sheet equals ending cash on the Cash Flow Statement Cash Flow Statement