Chapter 1
Accounting in Action
Accounting Principles
Eighth Canadian Edition
Weygandt; Kieso; Kimmel; Trenholm; Warren; Novak
Prepared by Debbie Musil, FCPA, FCMA
Chapter 1: Learning Objective 1
1. Identify the use and users of accounting and the objective of
financial reporting.
2. Compare the different forms of business organization.
3. Explain the building blocks of accounting: ethics and the
concepts included the conceptual framework.
4. Describe the components of the financial statements and
explain the accounting equation.
5. Analyze the effects of business transactions on the accounting
equation.
6. Prepare financial statements.
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Why is Accounting Important?
• The information system that identifies, records and
communicates economic events to users
• Important to the world economy
• Helpful for all business endeavours
• Solid foundation for other business disciplines
• Relevant and useful in other disciplines
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Using Accounting Information
• Internal Users
• Used for planning, organizing and running companies
• Includes finance, marketing, human resources, production,
company officers
• External Users
• Investors, creditors, labour unions, customers, regulators
and other authorities
• Used for decisions of ownership, credit, lending, to assess
compliance, performance
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Objective of Financial Reporting
• Accounting information is communicated to external
users via financial statements.
• The main objective of financial statements is to provide
useful information to investors and creditors (external users)
to make decisions about providing resources to a business.
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Chapter 1: Learning Objective 2
1. Identify the use and users of accounting and the objective of
financial reporting.
2. Compare the different forms of business organization.
3. Explain the building blocks of accounting: ethics and the
concepts included the conceptual framework.
4. Describe the components of the financial statements and
explain the accounting equation.
5. Analyze the effects of business transactions on the accounting
equation.
6. Prepare financial statements.
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Business Organizations
Characteristic Proprietorship Partnership Corporation
Owners Proprietor: one Partners: two or more Shareholders: one or more
Owner’s liability Unlimited Unlimited Limited
Private or public Private Usually private Private or public
Taxation of profits Paid by the owner Paid by the partners Paid by the corporation
Life of organization Limited Limited Unlimited
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Chapter 1: Learning Objective 3
1. Identify the use and users of accounting and the objective of
financial reporting.
2. Compare the different forms of business organization.
3. Explain the building blocks of accounting: ethics and the
concepts included the conceptual framework.
4. Describe the components of the financial statements and
explain the accounting equation.
5. Analyze the effects of business transactions on the accounting
equation.
6. Prepare financial statements.
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Accounting & Ethics (1 of 2)
• For information to have value, must be prepared by
individuals with high standards of ethical behaviour
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Accounting & Ethics (2 of 2)
Ethics Steps used to analyze ethics cases and
situations
• Standards of
1. Identify ethical issues involved
conduct used
2. Identify the stakeholders - the persons or
to judge actions
groups that may benefit or face harm
3. Consider the alternative courses of
action and the consequences of each for
the various shareholders
• Select the most ethical alternative
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Generally Accepted Accounting
Principles (GAAP)
• Common set of accounting standards
• Developed from the guiding principles, assumptions and
concepts
• Responsibility of the Accounting Standards Board (AcSB)
• Publicly accountable enterprises must adopt International
Financial Reporting Standards (IFRS)
• Non-publicly traded(private) companies may adopt Accounting
Standards for Private Enterprises (ASPE) or IFRS
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Conceptual Framework (1 of 3)
• Coherent system that guides development and
application of accounting principles and standards
• Leads to the objective of financial reporting
• to provide information to assist users in making decisions
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Conceptual Framework (2 of 3)
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Conceptual Framework (3 of 3)
• Fundamental Qualitative Characteristics
• Relevance, Faithful representation, neutrality
• Enhancing Qualitative Characteristics
• Comparability, consistency, verifiability, timeliness,
understandability
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Foundational Concepts & Assumptions
• Reporting entity concept – activities of a unit or
organization in society are kept separate and distinct
from other reporting entities and owner
• Going concern assumption – organization will continue
to operate in the foreseeable future
• Periodicity concept – users require relevant accounting
information; organization divides up economic
activities into distinct time periods
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Recognition and Measurement
• Recognition – the process of recording a transaction in
the accounting records
• Measurement – determining the amount that should
be recognized
• Historical cost is the primary basis used – reliable and
verifiable, however may not be relevant
• Fair value may be more relevant – the amount of
consideration if sold in the open market
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Chapter 1: Learning Objective 4
1. Identify the use and users of accounting and the objective of
financial reporting.
2. Compare the different forms of business organization.
3. Explain the building blocks of accounting: ethics and the
concepts included the conceptual framework.
4. Describe the components of the financial statements and
explain the accounting equation.
5. Analyze the effects of business transactions on the accounting
equation.
6. Prepare financial statements.
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Balance Sheet (1 of 2)
• Assets
• Economic resources controlled by a business
• Used to carry out activities such as production and
distribution
• Have the potential to produce economic benefit
• Liabilities
• Obligations arising from past events to make a future
payment of assets or services
• Present debts and obligations
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Balance Sheet (2 of 2)
• Owner’s Equity
• Represents owner’s claim on assets
• Owner’s Equity = Assets − Liabilities
• Components of owner’s equity (Shown in the Statement
of Owner’s Equity):
• Investments: Assets put into business by owner
• Drawings: Cash or other assets withdrawn by owner for
personal use
• Profit = Revenues − Expenses
Increases In owner’s equity Decreases In owner’s equity
Investments by the owner Drawings by the owner
Revenues Expenses
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Accounting Equation
• Assets must equal the sum of liabilities and owner’s
equity
• Liabilities are shown before owner’s equity because
creditors’ claims are paid before ownership claims
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Income Statement
• Revenues: Increase Owner’s Equity
• Result from business activities that are performed to earn
profit
• Result in an increase in an asset or a decrease in a liability
• Expenses: Decrease Owner’s Equity
• The cost of assets consumed or services used
• Result in an decrease in an asset or an increase in a liability
• Exclude withdrawals made by owners
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Accounting Differences by Type of
Business Organization
Corporation (reporting
Proprietorship Partnership under IFRS)
Equity section called: Owner’s equity Partners’ equity Shareholders’ equity
Investments by owners
added to: Owner’s capital Partners’ capital Share capital
Profits added to: Owner’s capital Partners’ capital Retained earnings
Withdrawals by owners
called: Drawings Drawings Dividends
Withdrawals deducted
from: Owner’s capital Partners’ capital Retained earnings
Name of statement: Statement of Statement of Statement of changes in
owner’s equity partners’ equity equity
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Accounting Equation Expanded
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Chapter 1: Learning Objective 5
1. Identify the use and users of accounting and the objective of
financial reporting.
2. Compare the different forms of business organization.
3. Explain the building blocks of accounting: ethics and the
concepts included the conceptual framework.
4. Describe the components of the financial statements and
explain the accounting equation.
5. Analyze the effects of business transactions on the accounting
equation.
6. Prepare financial statements.
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Transaction Analysis
• Accounting identifies, records and communicates the
economic events of an organization
• Only events that cause changes in assets, liabilities or
owner’s equity are recorded
• Accounting equation must always equal
• Each transaction will have a “dual effect” on the equation
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1: Investment by Owner
• Owner invests $15,000 cash in computer business and
names it “Softbyte”
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2: Purchase of Equipment
• Softbyte purchases computer equipment for $7,000
cash
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3: Purchase of Supplies on Credit
• Softbyte purchases supplies that will last several
months for $1,600 on account
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4: Services Provided for Cash
• Softbyte receives from customers $1,200 cash for
programming services it has provided
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5: Purchase of Advertising on Credit
• Softbyte receives a bill for advertising for $250, which
it pays at a later date
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6: Services Provided for Cash & Credit
• Softbyte provides $3,500 of programming services and
receives payment of $1,500
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7: Payment of Expenses
• Expenses paid in cash: rent of $600, salaries of $900,
utilities of $200
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8: Payment of Accounts Payable
• Softbyte pays its outstanding advertising bill of $250 in
cash
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9: Receipt of Cash on Account
• Softbyte receives $600 in cash from customers billed in
transaction (6)
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10: Signed Contract to Rent Equipment
• No effect on the accounting equation because assets,
liabilities and owner’s equity have not changed
• Accounting transaction has not occurred
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11: Withdrawal of Cash by Owner
• Softbyte’s owner withdraws $1,300 for his personal use
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Chapter 1: Learning Objective 6
1. Identify the use and users of accounting and the objective of
financial reporting.
2. Compare the different forms of business organization.
3. Explain the building blocks of accounting: ethics and the
concepts included the conceptual framework.
4. Describe the components of the financial statements and
explain the accounting equation.
5. Analyze the effects of business transactions on the accounting
equation.
6. Prepare financial statements.
Copyright ©2019 John Wiley & Sons Canada, Ltd. 37
Financial Statements
• Prepared after all transactions identified, recorded
and summarized and are prepared in the following
order:
1. Income Statement – presents revenues, expenses and
profit or loss for a specific period of time
2. Statement of Owner’s Equity – summarizes the
changes in owner’s equity for a specific time period
3. Balance Sheet – reports assets, liabilities and owner’s
equity at a specific date
4. Cash Flow Statement – summarizes cash inflows and
outflows for a specific period of time
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Interrelationship of the Financial
Statements (1 of 2)
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Interrelationship of the Financial
Statements (2 of 2)
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Copyright
Copyright © 2019 John Wiley & Sons, Canada, Ltd.
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the information contained herein.
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