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Edit Comment Close By: tariqzaman (16 month(s) ago) very nice presentation Saving..... Post Reply Close Saving..... Edit Comment Close Premium member Presentation Transcript Introduction to Accounting : Introduction to Accounting Purpose : Introduction to Accounting 2 Purpose To teach the basics of accounting to those students entering the MBA program at SSB who do not have any background in accounting. To prepare all MBA students for the mandatory course, ACTG 5100 – Financial Accounting for Managers, by providing the fundamental concepts on which the course builds. Intended audience : Introduction to Accounting 3 Intended audience All incoming MBA students at The Schulich School of Business. In particular, this lecture is designed for those that have no previous education or training in accounting. The intention is for this lecture to teach at the most basic level. To teach the “alphabet” of accounting so that students can learn to speak in “full sentences” in the accounting (and other) courses at SSB. Students with even minimal background may wish to skim or skip sections of the lecture. Agenda : Introduction to Accounting 4 Agenda Fundamental concepts The Accounting Cycle Financial statements Comprehensive example Fundamental concepts : Introduction to Accounting 5 Fundamental concepts What is accounting? The language of business. A means to communicate financial information. A way to convey information about a business to users. Fundamental concepts : Introduction to Accounting 6 Fundamental concepts Who uses accounting information? Owners Managers Investors (including potential) Analysts on their behalf Creditors (including potential) Government (tax assessment) Regulators Customers Fundamental concepts : Introduction to Accounting 7 Fundamental concepts Accounting has two main divisions: Financial accounting Primarily prepared for users external to the company. Revenues, earnings, assets, etc. Management accounting Primarily for internal purposes Costing, budgeting, net present value, etc. This lecture will focus only on financial accounting. Fundamental concepts : Introduction to Accounting 8 Fundamental concepts There are several ways that cash gets into a company: Investment by owners Investment by creditors (loans) Payments from customers. Repayment of amounts loaned to other entities. Return on investments (interest and dividend) Proceeds from selling assets. Fundamental concepts : Introduction to Accounting 9 Fundamental concepts These can be organized into three categories: Operations Payments from customers Refunds from suppliers Financing Investment by owners Investment by creditors (loans) Investing Return on investments (interest and dividend) Proceeds from selling assets Repayment of amounts loaned to other entities Fundamental concepts : Introduction to Accounting 10 Fundamental concepts Similarly, money going out of an entity can be categorized: Operations Payments to suppliers Refunds to customers Financing Payment of dividends or capital to owners Repayment of creditors Investing Purchase of assets Amounts invested in other entities (debt or equity) Fundamental concepts : Introduction to Accounting 11 Fundamental concepts Financial accounting categorizes all transactions and events based on their substance. It is very important that the substance of a transaction be accurately reflected by financial accounting because the users of the information are using it with the assumption that these categorizations are being made accurately. If money invested by owners was reported as revenue, this would be counter to the fundamental definition of revenue (i.e. that it results from the operations of the company). The separation of income and capital is a fundamental concept of financial accounting. Fundamental concepts : Introduction to Accounting 12 Fundamental concepts Entity concept Going concern Unit of measure Periodic reporting Fundamental concepts : Introduction to Accounting 13 Fundamental concepts Entity concept There are three basic structures that a company can have in Canada: Sole proprietorship Partnership Corporation A sole proprietorship is not a legal entity separate from its owner A partnership is not a legal entity separate from its owners These are both sub-components of their owners/partners for legal purposes A corporation is a separate legal entity The entity concept for accounting does not simply follow the legal guidelines A business can be a separate entity for accounting even if it is not one from a legal perspective Fundamental concepts : Introduction to Accounting 14 Fundamental concepts Entity concept It is essential that we know for which entity we are accounting because it will determine if and how events are recorded. e.g. If Ms. Prop is the sole proprietor of a business called SP, there is one legal entity, Ms. Prop (SP is not a separate legal entity). If we wish to account for SP, there will be events to account for that are non-events from a legal perspective e.g. When Ms. Prop puts money into a separate account for the company. This is a non-event legally, but is an event to be accounted for from an accounting perspective. Fundamental concepts : Introduction to Accounting 15 Fundamental concepts Going concern It is assumed that an entity will complete its current plans, use its existing assets, and meet its obligations in the normal course of business. This is an underlying concept necessary for many of the fundamental recording and reporting decisions that are made in accounting. Fundamental concepts : Introduction to Accounting 16 Fundamental concepts Unit of measure In order for accounting to present information that is useful, it must be able to express things in a common unit of measure. The unit of measure in Canada is usually the Canadian dollar (or U.S. dollar). It is not useful to tell users that an entity has 30 cars, a building, some land, some equipment, and that it sold 35,000 widgets in the year. The unit of measure concept allows us to express all of these things in dollars. Fundamental concepts : Introduction to Accounting 17 Fundamental concepts Periodic reporting Meaningful financial information about an entity can be provided for periods of time that are shorter than the life of an entity. Because financial statements tell the users what the entity has and what they did to get it, the users want that information at different points in the entity’s life. Most commonly, the reporting period is annual. All companies are required to file annual financial statements with their tax returns. Other common reporting periods are monthly or quarterly. Fundamental concepts : Introduction to Accounting 18 Fundamental concepts To review: Entity concept Going concern Unit of measure Periodic reporting The Accounting Cycle : Introduction to Accounting 19 The Accounting Cycle Transaction or event occurs Could simply be the passage of time. Recorded in the Journal using a Journal Entry. event is translated into accounting language. Journal is posted to Ledger the information from all the journal entries in the period is aggregated. Ledger accounts are totalled. Financial statements are prepared. The Accounting Cycle : Introduction to Accounting 20 The Accounting Cycle Transaction or event occurs Recorded in the Journal using a Journal Entry. Journal is posted to Ledger Ledger accounts are totalled. Financial statements are prepared. It is important to note that the decision-making of accounting occurs at step 2 – Journal entry. Steps 3 – 5 are mechanical exercises. Therefore, the decisions made when making the journal entry (i.e. translating to accounting language) are very important as they determine what will ultimately be presented on the financial statements. cont’d on next slide… The Accounting Cycle : Introduction to Accounting 21 The Accounting Cycle The making of decisions about what journal entry should be made when a transaction or event occurs is the prominent theme of ACTG 5100. It is commonly believed that these decisions are bound by strict rules that dictate what the journal entry should be. In reality, this is not true. There are principles that can guide the decisions, but there are many circumstances for which there are not specific treatments prescribed and, therefore, the judgment of the preparers determines the treatment. For the purposes of this lecture, we will look mostly at non-ambiguous situations. Students will become very aware of the ambiguity in the real world in ACTG 5100 (and from reading the newspaper). Accounting Equation : Introduction to Accounting 22 Accounting Equation Fundamental Accounting Equation: Assets = Liabilities + Owners’ Equity This equation is always in balance In order for this equation to remain in balance, double-entry bookkeeping is employed. That is, the recording of every transaction or event must have at least two parts Either an equal impact (increase or decrease) to both sides of the equation or equal and opposite impact to one side. The recording of every transaction must keep this equation in balance Journal Entries : Introduction to Accounting 23 Journal Entries All journal entries have two “sides”: Debit and Credit For every journal entry, the total debits must equal the total credits This ensures that the fundamental accounting equation (A = L + OE) is always in balance. The basic journal entry: Debit Account name1 $amount Credit Account name2 $amount To record… Journal Entries : Introduction to Accounting 24 Journal Entries “Debit” and “Credit” are just accounting-speak for “increase” and “decrease” “Debit” means “increase” for some elements and “decrease” for other elements. Likewise for “credit”. For example, a company pays its $500 utility bill: In English: the company has incurred an expense (the amount of expense has increased) and the amount of cash in the company has decreased. An expense (Utilities) has increased An asset (Cash) has decreased In Journal entry: Debit Utility expense $500 Credit Cash $500 To record the payment of utility bill Journal Entries : Introduction to Accounting 25 Journal Entries How do we know whether to debit or credit? Convention exists based on what element is being increased or decreased. Each element “lives in” either debit or credit. If we want to increase something that “lives in” debit, we will debit it. The convention works such that the fundamental equation (A = L + OE) is always kept in balance. Journal Entries : Introduction to Accounting 26 Journal Entries The Basic Accounting Elements: Journal Entries : Introduction to Accounting 27 Journal Entries The Basic Accounting Elements: Asset Has future benefit to the entity Liability Obligation to transfer assets in the future Owners’ Equity Owners’ interest in the company Revenue Increase in economic resources resulting from normal operations of the company Expense Decrease in economic resources resulting from normal operations of the company Journal Entries : Introduction to Accounting 28 Journal Entries The Basic Accounting Elements: Journal Entries : Introduction to Accounting 29 Journal Entries To increase an Asset or Expense: Debit To increase a Liability, Revenue, or Owners’ Equity: Credit To decrease an Asset or Expense: Credit To decrease a Liability, Revenue, or Owners’ Equity: Debit Journal Entries : Introduction to Accounting 30 Journal Entries Going back to the Fundamental Accounting Equation: Assets = Liabilities + Owners’ Equity Debit Credit Credit Journal Entries : Introduction to Accounting 31 Journal Entries What about the Income Statement elements (Revenue and Expense)? They don’t appear in the fundamental accounting equation, so how does it stay in balance when they are debited or credited? e.g. consultant sells services for $300 cash In English: Cash (asset) increases $300 Revenue increases $300 In Accounting: Debit Cash (Asset) $300 Credit Consulting Revenue $300 To record payment for consulting services rendered Assets have increased. Liabilities and Owners’ Equity appear to be unchanged. Is A = L + OE not true (i.e. out of balance)? Element structures : Introduction to Accounting 32 Element structures Assets Liabilities Owners’ equity Element structures : Introduction to Accounting 33 Element structures Assets Current assets Cash Cash on hand Bank accounts CIBC BMO Accounts receivable Accounts receivable – customer 1 Accounts receivable – customer 2 Inventory Raw materials Work in process Finished goods Product 1 Product 2 Element structures : Introduction to Accounting 34 Element structures Assets Current assets Long-term assets Buildings Ontario buildings Quebec buildings Montreal building Sherbrooke building Vehicles Cars Trucks Truck 1 Truck 2 Element structures : Introduction to Accounting 35 Element structures Liabilities Current liabilities Accounts payable Accrued liabilities Long-term liabilities Bank loans Loan from RBC Loan from Scotiabank Notes payable Bonds payable Element structures : Introduction to Accounting 36 Element structures Owners’ equity Capital stock (direct investment) Retained earnings (indirect investment) Revenue Expenses (Dividends) Although revenue and expenses are not sub-pieces of Retained earnings the way Current assets are a sub-piece of Total assets, for the purposes of understanding how they fit in to the equation, this representation is helpful. Element structures : Introduction to Accounting 37 Element structures The balance sheet is a permanent statement Its’ accounts accumulate information from the entity’s beginning. The amounts presented on the balance sheet are aggregated from the entity’s beginning to the balance sheet date. The income statement is a temporary statement Its’ accounts are temporary accounts They accumulate information for a period and then are reset to zero to begin tracking information for the next period. The amounts presented on the income statement are aggregated from the beginning of the period to the end of the period only. Element structures : Introduction to Accounting 38 Element structures The Closing Entry Whenever financial statements are to be prepared, the temporary (income statement) accounts must be “closed” to zero so that they can begin tracking data for the next period. The amounts in the accounts at closing are transferred to Retained Earnings (so named because it is the earnings (net income) of the company that is retained in the company and not distributed to the owners). We will see an example in the comprehensive example. Element structures : Introduction to Accounting 39 Element structures The Closing Entry The result of the closing entry is that all impacts on Revenue and Expenses (the temporary accounts) are indirectly impacts on Retained earnings (a permanent account). That is how A = L + OE stays in balance. The temporary accounts are sub-pieces of OE. Journal Entries : Introduction to Accounting 40 Journal Entries Going back to the Fundamental Accounting Equation: Financial Statements : Introduction to Accounting 41 Financial Statements There are 4 statements in a standard set of financial statements Balance Sheet The “what do we have?” statement Shows what the entity owns and owes (the difference being the owners’ residual interest) Income Statement The “what did we do?” statement Shows the activity the entity undertook in its normal course of operations. Statement of Retained Earnings Shows the changes in Retained earnings in the year Often shown at the bottom of the Income Statement Statement of Cash Flows Shows the sources and uses of cash in the year Information is derived from the B/S and I/S and other Financial Statements : Introduction to Accounting 42 Financial Statements Statement of Cash Flows Contains information about how cash came into and left the entity in the period. Does not contain new information i.e. the SCF is derived from the Balance Sheet and Income Statement (with some supplementary information) The SCF will not be covered in this lecture. It is covered in ACTG 5100. Financial Statements : Introduction to Accounting 43 Financial Statements Financial Statements : Introduction to Accounting 44 Financial Statements Loblaw : Introduction to Accounting 45 Loblaw Loblaw : Introduction to Accounting 46 Loblaw Loblaw : Introduction to Accounting 47 Loblaw Loblaw : Introduction to Accounting 48 Loblaw To Balance Sheet Loblaw : Introduction to Accounting 49 Loblaw From Statement of Retained Earnings Canadian Tire : Introduction to Accounting 50 Canadian Tire Canadian Tire : Introduction to Accounting 51 Canadian Tire Canadian Tire : Introduction to Accounting 52 Canadian Tire Canadian Tire : Introduction to Accounting 53 Canadian Tire To Balance Sheet Canadian Tire : Introduction to Accounting 54 Canadian Tire From Statement of Retained Earnings Research In Motion : Introduction to Accounting 55 Research In Motion Research In Motion : Introduction to Accounting 56 Research In Motion Research In Motion : Introduction to Accounting 57 Research In Motion Research In Motion : Introduction to Accounting 58 Research In Motion Research In Motion : Introduction to Accounting 59 Research In Motion To Statement of Shareholders’ Equity Research In Motion : Introduction to Accounting 60 Research In Motion To Balance Sheet From Income Statement Research In Motion : Introduction to Accounting 61 Research In Motion From Statement of Shareholders’ Equity Accounting Methods : Introduction to Accounting 62 Accounting Methods Cash Accounting Revenue is recorded when cash is received. Expense is recorded when cash is disbursed. Very straightforward. Facts determine the timing of entries. Less room for judgment. Accrual Accounting Revenue is recorded (recognized) when the revenue has been earned. When the product or service has been provided to the customer, regardless of when payment is received. Expenses are matched to the revenue that they helped to earn, regardless of when payment is made. Accounting Methods : Introduction to Accounting 63 Accounting Methods It is possible for cash receipt to coincide with revenue recognition and cash payment to coincide with expense recognition. However, in business in North America (and, indeed globally), it is the norm for the exchange of cash to either precede or follow the actual “economic event”. Except in the simplest of entities (e.g. an individual person) or in unique circumstances, cash accounting will not yield useful information. Accrual accounting is the standard method. Accrual Accounting : Introduction to Accounting 64 Accrual Accounting 2 kinds of entries Transactional The recording of an exchange with another entity Adjusting Required only when financial statements are prepared to “adjust” accounts to where they should be Always include at least one Balance Sheet account and one Income Statement account. e.g. Depreciation of capital assets, earning of interest revenue. Journal Entries : Introduction to Accounting 65 Journal Entries Journal Entries Usually one side (the Debit or the Credit) will be obvious from the transaction (e.g. when cash is received, cash (an asset) increases. The Debit has to be to cash). It is the determination of the other side of the entry that requires thought and judgment. Journal Entries : Introduction to Accounting 66 Journal Entries It is best to reason logically: Which financial statement should be impacted? Balance sheet, Income statement, or Stmt of Retained Earnings? Which element on that statement should be impacted? Which specific account should be impacted? Element Account Example : Introduction to Accounting 67 Example We will account for a company, Tasman Inc., for its first year of operations. Tasman Inc. is a Pizza business that makes and delivers pizza in the Toronto area. It is 100% owned by Dave, who is also active in the business as its manager. Tasman Inc. is a corporation (a legal entity separate from Dave). The company begins on January 1, 2003. Its fiscal year end is December 31. We will prepare a Balance Sheet as at December 31, 2003 and an Income Statement and Statement of Retained Earnings for the year ended December 31, 2003. Tasman : Introduction to Accounting 68 Tasman Example – Tasman Inc. : Introduction to Accounting 69 Example – Tasman Inc. Our approach We will be given several transactions and events and will process them one at a time, carrying them all the way to the financial statements. This approach will reinforce the impact of each event on the financial statements as a whole. We will then go back and do the mechanical steps that get us from journal entries to financial statements. This will show the accounting cycle in its entirety. Tasman : Introduction to Accounting 70 Tasman Tasman Inc. : Introduction to Accounting 71 Tasman Inc. On January 1, 2003, the financial statements of the company are all nil A = L + OE is true because 0 = 0 + 0 Tasman Inc. : Introduction to Accounting 72 Tasman Inc. 1 Tasman Inc. (Tasman) is incorporated on January 1, 2003. Dave pays $1,000 of his own money to pay for the incorporation. Tasman Inc. : Introduction to Accounting 73 Tasman Inc. 1 Tasman Inc. (Tasman) is incorporated on January 1, 2003. Dave pays $1,000 of his own money to pay for the incorporation. If we assume that Dave is going to want to be reimbursed by Tasman: Tasman Inc. : Introduction to Accounting 74 Tasman Inc. Tasman Inc. : Introduction to Accounting 75 Tasman Inc. 2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return. Tasman Inc. : Introduction to Accounting 76 Tasman Inc. 2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return. Tasman Inc. : Introduction to Accounting 77 Tasman Inc. Tasman Inc. : Introduction to Accounting 78 Tasman Inc. 3 Tasman Inc. gets a $50,000 loan from the bank. Interest rate is 6% per year. Interest on the outstanding amount must be paid each year on the anniversary. Principal can be repaid at any time. Tasman Inc. : Introduction to Accounting 79 Tasman Inc. 3 Tasman Inc. gets a $50,000 loan from the bank. Interest rate is 6% per year. Interest on the outstanding amount must be paid each year on the anniversary. Principal can be repaid at any time. Tasman Inc. : Introduction to Accounting 80 Tasman Inc. Tasman Inc. : Introduction to Accounting 81 Tasman Inc. 4 Signed a lease for store space. Rental cost is $3,000 per month. Lease term is 36 months. Annual rent must be paid up front on the anniversary of the lease. Tasman Inc. : Introduction to Accounting 82 Tasman Inc. 4 Signed a lease for store space. Rental cost is $3,000 per month. Lease term is 36 months. Annual rent must be paid up front on the anniversary of the lease. There is no entry. Signing of a lease (or any contract) is not considered a transaction for accounting purposes. Tasman Inc. : Introduction to Accounting 83 Tasman Inc. 5 Make the rent payment for 2003 ($36,000). Tasman Inc. : Introduction to Accounting 84 Tasman Inc. 5 Make the rent payment for 2003 ($36,000). Tasman Inc. : Introduction to Accounting 85 Tasman Inc. Tasman Inc. : Introduction to Accounting 86 Tasman Inc. 6 Buy an oven which costs $15,000. Pay $5,000 cash, balance is due in one year. Interest rate on the outstanding balance is 3.5% per year. Tasman Inc. : Introduction to Accounting 87 Tasman Inc. 6 Buy an oven which costs $15,000. Pay $5,000 cash, balance is due in one year. Interest rate on the outstanding balance is 3.5% per year. Tasman Inc. : Introduction to Accounting 88 Tasman Inc. Tasman Inc. : Introduction to Accounting 89 Tasman Inc. 7 Buy $1,500 of food supplies (ingredients to make pizzas). Tasman Inc. : Introduction to Accounting 90 Tasman Inc. 7 Buy $1,500 of food supplies (ingredients to make pizzas). Tasman Inc. : Introduction to Accounting 91 Tasman Inc. Tasman Inc. : Introduction to Accounting 92 Tasman Inc. 8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days. Tasman Inc. : Introduction to Accounting 93 Tasman Inc. 8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days. Tasman Inc. : Introduction to Accounting 94 Tasman Inc. Tasman Inc. : Introduction to Accounting 95 Tasman Inc. 9 Hired a chef. Salary of $33,800 per year paid bi-weekly (26 times a year). Tasman Inc. : Introduction to Accounting 96 Tasman Inc. 9 Hired a chef. Salary of $33,800 per year paid bi-weekly (26 times a year). No entry. Hiring of an employee is not considered a transaction for accounting purposes. Tasman Inc. : Introduction to Accounting 97 Tasman Inc. 10 In addition to being the manager, Dave will be the delivery man until there is revenue enough to hire one. Dave decides to pay himself a salary of $62,400 per year paid bi-weekly. To avoid draining cash from the company, Dave will not take cash salary until further notice. Tasman Inc. : Introduction to Accounting 98 Tasman Inc. 10 In addition to being the manager, Dave will be the delivery man until there is revenue enough to hire one. Dave decides to pay himself a salary of $62,400 per year paid bi-weekly. To avoid draining cash from the company, Dave will not take cash salary until further notice. No entry. Same reason as previous example. Information will be useful in determining future journal entries. Tasman Inc. : Introduction to Accounting 99 Tasman Inc. 11 First salary payments are made. Tasman Inc. : Introduction to Accounting 100 Tasman Inc. 11 First salary payments are made. Tasman Inc. : Introduction to Accounting 101 Tasman Inc. Tasman Inc. : Introduction to Accounting 102 Tasman Inc. 12 Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms. Tasman Inc. : Introduction to Accounting 103 Tasman Inc. 12 Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms. Tasman Inc. : Introduction to Accounting 104 Tasman Inc. Tasman Inc. : Introduction to Accounting 105 Tasman Inc. 13 Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days. Tasman Inc. : Introduction to Accounting 106 Tasman Inc. 13 Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days. Tasman Inc. : Introduction to Accounting 107 Tasman Inc. Tasman Inc. : Introduction to Accounting 108 Tasman Inc. 14 Store is open for business. Cash register reports revenue of $1,200 for the day. Tasman Inc. : Introduction to Accounting 109 Tasman Inc. 14 Store is open for business. Cash register reports revenue of $1,200 for the day. Tasman Inc. : Introduction to Accounting 110 Tasman Inc. Tasman Inc. : Introduction to Accounting 111 Tasman Inc. 15 The company upstairs in Tasman’s building approaches Dave about an exclusive catering arrangement whereby the company will pay Tasman $4,000 up front to cater 5 functions throughout the year. Dave accepts the deal and $4,000 cash. Tasman Inc. : Introduction to Accounting 112 Tasman Inc. 15 The company upstairs in Tasman’s building approaches Dave about an exclusive catering arrangement whereby the company will pay Tasman $4,000 up front to cater 5 functions throughout the year. Dave accepts the deal and $4,000 cash. Tasman Inc. : Introduction to Accounting 113 Tasman Inc. Tasman Inc. : Introduction to Accounting 114 Tasman Inc. 16 Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days. Tasman Inc. : Introduction to Accounting 115 Tasman Inc. 16 Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days. Tasman Inc. : Introduction to Accounting 116 Tasman Inc. Tasman Inc. : Introduction to Accounting 117 Tasman Inc. 17 Pay off the balances owing on the office equipment and the food supplies. Tasman Inc. : Introduction to Accounting 118 Tasman Inc. 17 Pay off the balances owing on the office equipment and the food supplies. Tasman Inc. : Introduction to Accounting 119 Tasman Inc. Tasman Inc. : Introduction to Accounting 120 Tasman Inc. 18 Dave finds out that the company that owes Tasman $600 for the catering job has gone bankrupt and Tasman will not be receiving payment. Tasman Inc. : Introduction to Accounting 121 Tasman Inc. 18 Dave finds out that the company that owes Tasman $600 for the catering job has gone bankrupt and Tasman will not be receiving payment. Tasman Inc. : Introduction to Accounting 122 Tasman Inc. Tasman Inc. : Introduction to Accounting 123 Tasman Inc. 19 Tasman provides the catering for an event for the company upstairs. Everything goes fine. Tasman Inc. : Introduction to Accounting 124 Tasman Inc. 19 Tasman provides the catering for an event for the company upstairs. Everything goes fine. Tasman Inc. : Introduction to Accounting 125 Tasman Inc. Tasman Inc. : Introduction to Accounting 126 Tasman Inc. Summary amount 1 Store revenues have been $220,000. Tasman Inc. : Introduction to Accounting 127 Tasman Inc. Summary amount 1 Store revenues have been $220,000. Tasman Inc. : Introduction to Accounting 128 Tasman Inc. Tasman Inc. : Introduction to Accounting 129 Tasman Inc. Summary amount 2 All salaries have been paid. Dave has taken half of his salary in cash. Tasman Inc. : Introduction to Accounting 130 Tasman Inc. Summary amount 2 All salaries have been paid. Dave has taken half of his salary in cash. Tasman Inc. : Introduction to Accounting 131 Tasman Inc. Tasman Inc. : Introduction to Accounting 132 Tasman Inc. Summary amount 3 Additional food supply purchases were $80,000. Tasman Inc. : Introduction to Accounting 133 Tasman Inc. Summary amount 3 Additional food supply purchases were $80,000. Tasman Inc. : Introduction to Accounting 134 Tasman Inc. Tasman Inc. : Introduction to Accounting 135 Tasman Inc. Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003. Tasman Inc. : Introduction to Accounting 136 Tasman Inc. Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003. Total purchased in the year = 1,500 + 5,000 + 80,000 = 86,500 86,500 – 3,500 = 83,000 = Cost of the inventory used = Cost of goods sold Tasman Inc. : Introduction to Accounting 137 Tasman Inc. Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003. Total purchased in the year = 1,500 + 5,000 + 80,000 = 86,500 86,500 – 3,500 = 83,000 = Cost of the inventory used = Cost of goods sold Tasman Inc. : Introduction to Accounting 138 Tasman Inc. Tasman Inc. : Introduction to Accounting 139 Tasman Inc. Summary amount 5 Utilities expenses were all paid in cash on the last day of each month. Total for the year was $9,600. Tasman Inc. : Introduction to Accounting 140 Tasman Inc. Summary amount 5 Utilities expenses were all paid in cash on the last day of each month. Total for the year was $9,600. Tasman Inc. : Introduction to Accounting 141 Tasman Inc. Tasman Inc. : Introduction to Accounting 142 Tasman Inc. Summary amount 6 Tasman catered 3 of the remaining events for the company upstairs. The last one will be held on January 7, 2004. Tasman Inc. : Introduction to Accounting 143 Tasman Inc. Summary amount 6 Tasman catered 3 of the remaining events for the company upstairs. The last one will be held on January 7, 2004. Tasman Inc. : Introduction to Accounting 144 Tasman Inc. Tasman Inc. : Introduction to Accounting 145 Tasman Inc. Adjusting entry 1 Costs related to the oven, the office equipment, and the Camaro must be recorded. Tasman Inc. : Introduction to Accounting 146 Tasman Inc. Adjusting entry 1 Costs related to the oven, the office equipment, and the Camaro must be recorded. Tasman Inc. : Introduction to Accounting 147 Tasman Inc. Tasman Inc. : Introduction to Accounting 148 Tasman Inc. Adjusting entry 2 Interest has accrued on the bank loan and the amount due to the oven supplier. Tasman Inc. : Introduction to Accounting 149 Tasman Inc. Adjusting entry 2 Interest has accrued on the bank loan and the amount due to the oven supplier. Tasman Inc. : Introduction to Accounting 150 Tasman Inc. Tasman Inc. : Introduction to Accounting 151 Tasman Inc. Adjusting entry 3 Rent expense must be recorded. Recall that $36,000 was paid at the beginning of the year for the full year and was recorded as an asset, Prepaid rent expense. Tasman Inc. : Introduction to Accounting 152 Tasman Inc. Adjusting entry 3 Rent expense must be recorded. Recall that $36,000 was paid at the beginning of the year for the full year and was recorded as an asset, Prepaid rent expense. Tasman Inc. : Introduction to Accounting 153 Tasman Inc. The Accounting Cycle : Introduction to Accounting 154 The Accounting Cycle Transaction or event occurs Recorded in the Journal using a Journal Entry. Journal is posted to Ledger Ledger accounts are totalled. Financial statements are prepared. We have done step 2 (journal entries). Step 3 is most easily done using a spreadsheet (Friedlan text provides a template). We will use the old-fashioned method known as T-accounts. Each account is represented by a T. All debits are “posted” on the left, all credits are “posted” on the right. Spreadsheets have made this practice virtually obsolete, but it is informative to do it to help understand the fundamentals. T-Accounts (posting to ledgers) : Introduction to Accounting 155 T-Accounts (posting to ledgers) Before the closing entry: The closing entry : Introduction to Accounting 156 The closing entry The closing entry resets all of the temporary accounts to zero and send the residual to Retained earnings. Dr Catering revenue 4,700 Dr Store sales 221,200 Cr Cost of goods sold 83,000 Cr Incorporation costs 1,000 Cr Salaries 96,200 Cr Bad debts 600 Cr Utilities 9,600 Cr Rent 36,000 Cr Depreciation 6,000 Cr Interest 3,350 Dr Retained earnings 9,850 To close the temporary accounts for the year T-Accounts (posting to ledgers) : Introduction to Accounting 157 T-Accounts (posting to ledgers) After the closing entry: Financial statements : Introduction to Accounting 158 Financial statements Numbers to go to the financial statements Tasman Inc. : Introduction to Accounting 159 Tasman Inc. You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.
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Edit Comment Close By: tariqzaman (16 month(s) ago) very nice presentation Saving..... Post Reply Close Saving..... Edit Comment Close Premium member Presentation Transcript Introduction to Accounting : Introduction to Accounting Purpose : Introduction to Accounting 2 Purpose To teach the basics of accounting to those students entering the MBA program at SSB who do not have any background in accounting. To prepare all MBA students for the mandatory course, ACTG 5100 – Financial Accounting for Managers, by providing the fundamental concepts on which the course builds. Intended audience : Introduction to Accounting 3 Intended audience All incoming MBA students at The Schulich School of Business. In particular, this lecture is designed for those that have no previous education or training in accounting. The intention is for this lecture to teach at the most basic level. To teach the “alphabet” of accounting so that students can learn to speak in “full sentences” in the accounting (and other) courses at SSB. Students with even minimal background may wish to skim or skip sections of the lecture. Agenda : Introduction to Accounting 4 Agenda Fundamental concepts The Accounting Cycle Financial statements Comprehensive example Fundamental concepts : Introduction to Accounting 5 Fundamental concepts What is accounting? The language of business. A means to communicate financial information. A way to convey information about a business to users. Fundamental concepts : Introduction to Accounting 6 Fundamental concepts Who uses accounting information? Owners Managers Investors (including potential) Analysts on their behalf Creditors (including potential) Government (tax assessment) Regulators Customers Fundamental concepts : Introduction to Accounting 7 Fundamental concepts Accounting has two main divisions: Financial accounting Primarily prepared for users external to the company. Revenues, earnings, assets, etc. Management accounting Primarily for internal purposes Costing, budgeting, net present value, etc. This lecture will focus only on financial accounting. Fundamental concepts : Introduction to Accounting 8 Fundamental concepts There are several ways that cash gets into a company: Investment by owners Investment by creditors (loans) Payments from customers. Repayment of amounts loaned to other entities. Return on investments (interest and dividend) Proceeds from selling assets. Fundamental concepts : Introduction to Accounting 9 Fundamental concepts These can be organized into three categories: Operations Payments from customers Refunds from suppliers Financing Investment by owners Investment by creditors (loans) Investing Return on investments (interest and dividend) Proceeds from selling assets Repayment of amounts loaned to other entities Fundamental concepts : Introduction to Accounting 10 Fundamental concepts Similarly, money going out of an entity can be categorized: Operations Payments to suppliers Refunds to customers Financing Payment of dividends or capital to owners Repayment of creditors Investing Purchase of assets Amounts invested in other entities (debt or equity) Fundamental concepts : Introduction to Accounting 11 Fundamental concepts Financial accounting categorizes all transactions and events based on their substance. It is very important that the substance of a transaction be accurately reflected by financial accounting because the users of the information are using it with the assumption that these categorizations are being made accurately. If money invested by owners was reported as revenue, this would be counter to the fundamental definition of revenue (i.e. that it results from the operations of the company). The separation of income and capital is a fundamental concept of financial accounting. Fundamental concepts : Introduction to Accounting 12 Fundamental concepts Entity concept Going concern Unit of measure Periodic reporting Fundamental concepts : Introduction to Accounting 13 Fundamental concepts Entity concept There are three basic structures that a company can have in Canada: Sole proprietorship Partnership Corporation A sole proprietorship is not a legal entity separate from its owner A partnership is not a legal entity separate from its owners These are both sub-components of their owners/partners for legal purposes A corporation is a separate legal entity The entity concept for accounting does not simply follow the legal guidelines A business can be a separate entity for accounting even if it is not one from a legal perspective Fundamental concepts : Introduction to Accounting 14 Fundamental concepts Entity concept It is essential that we know for which entity we are accounting because it will determine if and how events are recorded. e.g. If Ms. Prop is the sole proprietor of a business called SP, there is one legal entity, Ms. Prop (SP is not a separate legal entity). If we wish to account for SP, there will be events to account for that are non-events from a legal perspective e.g. When Ms. Prop puts money into a separate account for the company. This is a non-event legally, but is an event to be accounted for from an accounting perspective. Fundamental concepts : Introduction to Accounting 15 Fundamental concepts Going concern It is assumed that an entity will complete its current plans, use its existing assets, and meet its obligations in the normal course of business. This is an underlying concept necessary for many of the fundamental recording and reporting decisions that are made in accounting. Fundamental concepts : Introduction to Accounting 16 Fundamental concepts Unit of measure In order for accounting to present information that is useful, it must be able to express things in a common unit of measure. The unit of measure in Canada is usually the Canadian dollar (or U.S. dollar). It is not useful to tell users that an entity has 30 cars, a building, some land, some equipment, and that it sold 35,000 widgets in the year. The unit of measure concept allows us to express all of these things in dollars. Fundamental concepts : Introduction to Accounting 17 Fundamental concepts Periodic reporting Meaningful financial information about an entity can be provided for periods of time that are shorter than the life of an entity. Because financial statements tell the users what the entity has and what they did to get it, the users want that information at different points in the entity’s life. Most commonly, the reporting period is annual. All companies are required to file annual financial statements with their tax returns. Other common reporting periods are monthly or quarterly. Fundamental concepts : Introduction to Accounting 18 Fundamental concepts To review: Entity concept Going concern Unit of measure Periodic reporting The Accounting Cycle : Introduction to Accounting 19 The Accounting Cycle Transaction or event occurs Could simply be the passage of time. Recorded in the Journal using a Journal Entry. event is translated into accounting language. Journal is posted to Ledger the information from all the journal entries in the period is aggregated. Ledger accounts are totalled. Financial statements are prepared. The Accounting Cycle : Introduction to Accounting 20 The Accounting Cycle Transaction or event occurs Recorded in the Journal using a Journal Entry. Journal is posted to Ledger Ledger accounts are totalled. Financial statements are prepared. It is important to note that the decision-making of accounting occurs at step 2 – Journal entry. Steps 3 – 5 are mechanical exercises. Therefore, the decisions made when making the journal entry (i.e. translating to accounting language) are very important as they determine what will ultimately be presented on the financial statements. cont’d on next slide… The Accounting Cycle : Introduction to Accounting 21 The Accounting Cycle The making of decisions about what journal entry should be made when a transaction or event occurs is the prominent theme of ACTG 5100. It is commonly believed that these decisions are bound by strict rules that dictate what the journal entry should be. In reality, this is not true. There are principles that can guide the decisions, but there are many circumstances for which there are not specific treatments prescribed and, therefore, the judgment of the preparers determines the treatment. For the purposes of this lecture, we will look mostly at non-ambiguous situations. Students will become very aware of the ambiguity in the real world in ACTG 5100 (and from reading the newspaper). Accounting Equation : Introduction to Accounting 22 Accounting Equation Fundamental Accounting Equation: Assets = Liabilities + Owners’ Equity This equation is always in balance In order for this equation to remain in balance, double-entry bookkeeping is employed. That is, the recording of every transaction or event must have at least two parts Either an equal impact (increase or decrease) to both sides of the equation or equal and opposite impact to one side. The recording of every transaction must keep this equation in balance Journal Entries : Introduction to Accounting 23 Journal Entries All journal entries have two “sides”: Debit and Credit For every journal entry, the total debits must equal the total credits This ensures that the fundamental accounting equation (A = L + OE) is always in balance. The basic journal entry: Debit Account name1 $amount Credit Account name2 $amount To record… Journal Entries : Introduction to Accounting 24 Journal Entries “Debit” and “Credit” are just accounting-speak for “increase” and “decrease” “Debit” means “increase” for some elements and “decrease” for other elements. Likewise for “credit”. For example, a company pays its $500 utility bill: In English: the company has incurred an expense (the amount of expense has increased) and the amount of cash in the company has decreased. An expense (Utilities) has increased An asset (Cash) has decreased In Journal entry: Debit Utility expense $500 Credit Cash $500 To record the payment of utility bill Journal Entries : Introduction to Accounting 25 Journal Entries How do we know whether to debit or credit? Convention exists based on what element is being increased or decreased. Each element “lives in” either debit or credit. If we want to increase something that “lives in” debit, we will debit it. The convention works such that the fundamental equation (A = L + OE) is always kept in balance. Journal Entries : Introduction to Accounting 26 Journal Entries The Basic Accounting Elements: Journal Entries : Introduction to Accounting 27 Journal Entries The Basic Accounting Elements: Asset Has future benefit to the entity Liability Obligation to transfer assets in the future Owners’ Equity Owners’ interest in the company Revenue Increase in economic resources resulting from normal operations of the company Expense Decrease in economic resources resulting from normal operations of the company Journal Entries : Introduction to Accounting 28 Journal Entries The Basic Accounting Elements: Journal Entries : Introduction to Accounting 29 Journal Entries To increase an Asset or Expense: Debit To increase a Liability, Revenue, or Owners’ Equity: Credit To decrease an Asset or Expense: Credit To decrease a Liability, Revenue, or Owners’ Equity: Debit Journal Entries : Introduction to Accounting 30 Journal Entries Going back to the Fundamental Accounting Equation: Assets = Liabilities + Owners’ Equity Debit Credit Credit Journal Entries : Introduction to Accounting 31 Journal Entries What about the Income Statement elements (Revenue and Expense)? They don’t appear in the fundamental accounting equation, so how does it stay in balance when they are debited or credited? e.g. consultant sells services for $300 cash In English: Cash (asset) increases $300 Revenue increases $300 In Accounting: Debit Cash (Asset) $300 Credit Consulting Revenue $300 To record payment for consulting services rendered Assets have increased. Liabilities and Owners’ Equity appear to be unchanged. Is A = L + OE not true (i.e. out of balance)? Element structures : Introduction to Accounting 32 Element structures Assets Liabilities Owners’ equity Element structures : Introduction to Accounting 33 Element structures Assets Current assets Cash Cash on hand Bank accounts CIBC BMO Accounts receivable Accounts receivable – customer 1 Accounts receivable – customer 2 Inventory Raw materials Work in process Finished goods Product 1 Product 2 Element structures : Introduction to Accounting 34 Element structures Assets Current assets Long-term assets Buildings Ontario buildings Quebec buildings Montreal building Sherbrooke building Vehicles Cars Trucks Truck 1 Truck 2 Element structures : Introduction to Accounting 35 Element structures Liabilities Current liabilities Accounts payable Accrued liabilities Long-term liabilities Bank loans Loan from RBC Loan from Scotiabank Notes payable Bonds payable Element structures : Introduction to Accounting 36 Element structures Owners’ equity Capital stock (direct investment) Retained earnings (indirect investment) Revenue Expenses (Dividends) Although revenue and expenses are not sub-pieces of Retained earnings the way Current assets are a sub-piece of Total assets, for the purposes of understanding how they fit in to the equation, this representation is helpful. Element structures : Introduction to Accounting 37 Element structures The balance sheet is a permanent statement Its’ accounts accumulate information from the entity’s beginning. The amounts presented on the balance sheet are aggregated from the entity’s beginning to the balance sheet date. The income statement is a temporary statement Its’ accounts are temporary accounts They accumulate information for a period and then are reset to zero to begin tracking information for the next period. The amounts presented on the income statement are aggregated from the beginning of the period to the end of the period only. Element structures : Introduction to Accounting 38 Element structures The Closing Entry Whenever financial statements are to be prepared, the temporary (income statement) accounts must be “closed” to zero so that they can begin tracking data for the next period. The amounts in the accounts at closing are transferred to Retained Earnings (so named because it is the earnings (net income) of the company that is retained in the company and not distributed to the owners). We will see an example in the comprehensive example. Element structures : Introduction to Accounting 39 Element structures The Closing Entry The result of the closing entry is that all impacts on Revenue and Expenses (the temporary accounts) are indirectly impacts on Retained earnings (a permanent account). That is how A = L + OE stays in balance. The temporary accounts are sub-pieces of OE. Journal Entries : Introduction to Accounting 40 Journal Entries Going back to the Fundamental Accounting Equation: Financial Statements : Introduction to Accounting 41 Financial Statements There are 4 statements in a standard set of financial statements Balance Sheet The “what do we have?” statement Shows what the entity owns and owes (the difference being the owners’ residual interest) Income Statement The “what did we do?” statement Shows the activity the entity undertook in its normal course of operations. Statement of Retained Earnings Shows the changes in Retained earnings in the year Often shown at the bottom of the Income Statement Statement of Cash Flows Shows the sources and uses of cash in the year Information is derived from the B/S and I/S and other Financial Statements : Introduction to Accounting 42 Financial Statements Statement of Cash Flows Contains information about how cash came into and left the entity in the period. Does not contain new information i.e. the SCF is derived from the Balance Sheet and Income Statement (with some supplementary information) The SCF will not be covered in this lecture. It is covered in ACTG 5100. Financial Statements : Introduction to Accounting 43 Financial Statements Financial Statements : Introduction to Accounting 44 Financial Statements Loblaw : Introduction to Accounting 45 Loblaw Loblaw : Introduction to Accounting 46 Loblaw Loblaw : Introduction to Accounting 47 Loblaw Loblaw : Introduction to Accounting 48 Loblaw To Balance Sheet Loblaw : Introduction to Accounting 49 Loblaw From Statement of Retained Earnings Canadian Tire : Introduction to Accounting 50 Canadian Tire Canadian Tire : Introduction to Accounting 51 Canadian Tire Canadian Tire : Introduction to Accounting 52 Canadian Tire Canadian Tire : Introduction to Accounting 53 Canadian Tire To Balance Sheet Canadian Tire : Introduction to Accounting 54 Canadian Tire From Statement of Retained Earnings Research In Motion : Introduction to Accounting 55 Research In Motion Research In Motion : Introduction to Accounting 56 Research In Motion Research In Motion : Introduction to Accounting 57 Research In Motion Research In Motion : Introduction to Accounting 58 Research In Motion Research In Motion : Introduction to Accounting 59 Research In Motion To Statement of Shareholders’ Equity Research In Motion : Introduction to Accounting 60 Research In Motion To Balance Sheet From Income Statement Research In Motion : Introduction to Accounting 61 Research In Motion From Statement of Shareholders’ Equity Accounting Methods : Introduction to Accounting 62 Accounting Methods Cash Accounting Revenue is recorded when cash is received. Expense is recorded when cash is disbursed. Very straightforward. Facts determine the timing of entries. Less room for judgment. Accrual Accounting Revenue is recorded (recognized) when the revenue has been earned. When the product or service has been provided to the customer, regardless of when payment is received. Expenses are matched to the revenue that they helped to earn, regardless of when payment is made. Accounting Methods : Introduction to Accounting 63 Accounting Methods It is possible for cash receipt to coincide with revenue recognition and cash payment to coincide with expense recognition. However, in business in North America (and, indeed globally), it is the norm for the exchange of cash to either precede or follow the actual “economic event”. Except in the simplest of entities (e.g. an individual person) or in unique circumstances, cash accounting will not yield useful information. Accrual accounting is the standard method. Accrual Accounting : Introduction to Accounting 64 Accrual Accounting 2 kinds of entries Transactional The recording of an exchange with another entity Adjusting Required only when financial statements are prepared to “adjust” accounts to where they should be Always include at least one Balance Sheet account and one Income Statement account. e.g. Depreciation of capital assets, earning of interest revenue. Journal Entries : Introduction to Accounting 65 Journal Entries Journal Entries Usually one side (the Debit or the Credit) will be obvious from the transaction (e.g. when cash is received, cash (an asset) increases. The Debit has to be to cash). It is the determination of the other side of the entry that requires thought and judgment. Journal Entries : Introduction to Accounting 66 Journal Entries It is best to reason logically: Which financial statement should be impacted? Balance sheet, Income statement, or Stmt of Retained Earnings? Which element on that statement should be impacted? Which specific account should be impacted? Element Account Example : Introduction to Accounting 67 Example We will account for a company, Tasman Inc., for its first year of operations. Tasman Inc. is a Pizza business that makes and delivers pizza in the Toronto area. It is 100% owned by Dave, who is also active in the business as its manager. Tasman Inc. is a corporation (a legal entity separate from Dave). The company begins on January 1, 2003. Its fiscal year end is December 31. We will prepare a Balance Sheet as at December 31, 2003 and an Income Statement and Statement of Retained Earnings for the year ended December 31, 2003. Tasman : Introduction to Accounting 68 Tasman Example – Tasman Inc. : Introduction to Accounting 69 Example – Tasman Inc. Our approach We will be given several transactions and events and will process them one at a time, carrying them all the way to the financial statements. This approach will reinforce the impact of each event on the financial statements as a whole. We will then go back and do the mechanical steps that get us from journal entries to financial statements. This will show the accounting cycle in its entirety. Tasman : Introduction to Accounting 70 Tasman Tasman Inc. : Introduction to Accounting 71 Tasman Inc. On January 1, 2003, the financial statements of the company are all nil A = L + OE is true because 0 = 0 + 0 Tasman Inc. : Introduction to Accounting 72 Tasman Inc. 1 Tasman Inc. (Tasman) is incorporated on January 1, 2003. Dave pays $1,000 of his own money to pay for the incorporation. Tasman Inc. : Introduction to Accounting 73 Tasman Inc. 1 Tasman Inc. (Tasman) is incorporated on January 1, 2003. Dave pays $1,000 of his own money to pay for the incorporation. If we assume that Dave is going to want to be reimbursed by Tasman: Tasman Inc. : Introduction to Accounting 74 Tasman Inc. Tasman Inc. : Introduction to Accounting 75 Tasman Inc. 2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return. Tasman Inc. : Introduction to Accounting 76 Tasman Inc. 2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return. Tasman Inc. : Introduction to Accounting 77 Tasman Inc. Tasman Inc. : Introduction to Accounting 78 Tasman Inc. 3 Tasman Inc. gets a $50,000 loan from the bank. Interest rate is 6% per year. Interest on the outstanding amount must be paid each year on the anniversary. Principal can be repaid at any time. Tasman Inc. : Introduction to Accounting 79 Tasman Inc. 3 Tasman Inc. gets a $50,000 loan from the bank. Interest rate is 6% per year. Interest on the outstanding amount must be paid each year on the anniversary. Principal can be repaid at any time. Tasman Inc. : Introduction to Accounting 80 Tasman Inc. Tasman Inc. : Introduction to Accounting 81 Tasman Inc. 4 Signed a lease for store space. Rental cost is $3,000 per month. Lease term is 36 months. Annual rent must be paid up front on the anniversary of the lease. Tasman Inc. : Introduction to Accounting 82 Tasman Inc. 4 Signed a lease for store space. Rental cost is $3,000 per month. Lease term is 36 months. Annual rent must be paid up front on the anniversary of the lease. There is no entry. Signing of a lease (or any contract) is not considered a transaction for accounting purposes. Tasman Inc. : Introduction to Accounting 83 Tasman Inc. 5 Make the rent payment for 2003 ($36,000). Tasman Inc. : Introduction to Accounting 84 Tasman Inc. 5 Make the rent payment for 2003 ($36,000). Tasman Inc. : Introduction to Accounting 85 Tasman Inc. Tasman Inc. : Introduction to Accounting 86 Tasman Inc. 6 Buy an oven which costs $15,000. Pay $5,000 cash, balance is due in one year. Interest rate on the outstanding balance is 3.5% per year. Tasman Inc. : Introduction to Accounting 87 Tasman Inc. 6 Buy an oven which costs $15,000. Pay $5,000 cash, balance is due in one year. Interest rate on the outstanding balance is 3.5% per year. Tasman Inc. : Introduction to Accounting 88 Tasman Inc. Tasman Inc. : Introduction to Accounting 89 Tasman Inc. 7 Buy $1,500 of food supplies (ingredients to make pizzas). Tasman Inc. : Introduction to Accounting 90 Tasman Inc. 7 Buy $1,500 of food supplies (ingredients to make pizzas). Tasman Inc. : Introduction to Accounting 91 Tasman Inc. Tasman Inc. : Introduction to Accounting 92 Tasman Inc. 8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days. Tasman Inc. : Introduction to Accounting 93 Tasman Inc. 8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days. Tasman Inc. : Introduction to Accounting 94 Tasman Inc. Tasman Inc. : Introduction to Accounting 95 Tasman Inc. 9 Hired a chef. Salary of $33,800 per year paid bi-weekly (26 times a year). Tasman Inc. : Introduction to Accounting 96 Tasman Inc. 9 Hired a chef. Salary of $33,800 per year paid bi-weekly (26 times a year). No entry. Hiring of an employee is not considered a transaction for accounting purposes. Tasman Inc. : Introduction to Accounting 97 Tasman Inc. 10 In addition to being the manager, Dave will be the delivery man until there is revenue enough to hire one. Dave decides to pay himself a salary of $62,400 per year paid bi-weekly. To avoid draining cash from the company, Dave will not take cash salary until further notice. Tasman Inc. : Introduction to Accounting 98 Tasman Inc. 10 In addition to being the manager, Dave will be the delivery man until there is revenue enough to hire one. Dave decides to pay himself a salary of $62,400 per year paid bi-weekly. To avoid draining cash from the company, Dave will not take cash salary until further notice. No entry. Same reason as previous example. Information will be useful in determining future journal entries. Tasman Inc. : Introduction to Accounting 99 Tasman Inc. 11 First salary payments are made. Tasman Inc. : Introduction to Accounting 100 Tasman Inc. 11 First salary payments are made. Tasman Inc. : Introduction to Accounting 101 Tasman Inc. Tasman Inc. : Introduction to Accounting 102 Tasman Inc. 12 Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms. Tasman Inc. : Introduction to Accounting 103 Tasman Inc. 12 Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms. Tasman Inc. : Introduction to Accounting 104 Tasman Inc. Tasman Inc. : Introduction to Accounting 105 Tasman Inc. 13 Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days. Tasman Inc. : Introduction to Accounting 106 Tasman Inc. 13 Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days. Tasman Inc. : Introduction to Accounting 107 Tasman Inc. Tasman Inc. : Introduction to Accounting 108 Tasman Inc. 14 Store is open for business. Cash register reports revenue of $1,200 for the day. Tasman Inc. : Introduction to Accounting 109 Tasman Inc. 14 Store is open for business. Cash register reports revenue of $1,200 for the day. Tasman Inc. : Introduction to Accounting 110 Tasman Inc. Tasman Inc. : Introduction to Accounting 111 Tasman Inc. 15 The company upstairs in Tasman’s building approaches Dave about an exclusive catering arrangement whereby the company will pay Tasman $4,000 up front to cater 5 functions throughout the year. Dave accepts the deal and $4,000 cash. Tasman Inc. : Introduction to Accounting 112 Tasman Inc. 15 The company upstairs in Tasman’s building approaches Dave about an exclusive catering arrangement whereby the company will pay Tasman $4,000 up front to cater 5 functions throughout the year. Dave accepts the deal and $4,000 cash. Tasman Inc. : Introduction to Accounting 113 Tasman Inc. Tasman Inc. : Introduction to Accounting 114 Tasman Inc. 16 Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days. Tasman Inc. : Introduction to Accounting 115 Tasman Inc. 16 Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days. Tasman Inc. : Introduction to Accounting 116 Tasman Inc. Tasman Inc. : Introduction to Accounting 117 Tasman Inc. 17 Pay off the balances owing on the office equipment and the food supplies. Tasman Inc. : Introduction to Accounting 118 Tasman Inc. 17 Pay off the balances owing on the office equipment and the food supplies. Tasman Inc. : Introduction to Accounting 119 Tasman Inc. Tasman Inc. : Introduction to Accounting 120 Tasman Inc. 18 Dave finds out that the company that owes Tasman $600 for the catering job has gone bankrupt and Tasman will not be receiving payment. Tasman Inc. : Introduction to Accounting 121 Tasman Inc. 18 Dave finds out that the company that owes Tasman $600 for the catering job has gone bankrupt and Tasman will not be receiving payment. Tasman Inc. : Introduction to Accounting 122 Tasman Inc. Tasman Inc. : Introduction to Accounting 123 Tasman Inc. 19 Tasman provides the catering for an event for the company upstairs. Everything goes fine. Tasman Inc. : Introduction to Accounting 124 Tasman Inc. 19 Tasman provides the catering for an event for the company upstairs. Everything goes fine. Tasman Inc. : Introduction to Accounting 125 Tasman Inc. Tasman Inc. : Introduction to Accounting 126 Tasman Inc. Summary amount 1 Store revenues have been $220,000. Tasman Inc. : Introduction to Accounting 127 Tasman Inc. Summary amount 1 Store revenues have been $220,000. Tasman Inc. : Introduction to Accounting 128 Tasman Inc. Tasman Inc. : Introduction to Accounting 129 Tasman Inc. Summary amount 2 All salaries have been paid. Dave has taken half of his salary in cash. Tasman Inc. : Introduction to Accounting 130 Tasman Inc. Summary amount 2 All salaries have been paid. Dave has taken half of his salary in cash. Tasman Inc. : Introduction to Accounting 131 Tasman Inc. Tasman Inc. : Introduction to Accounting 132 Tasman Inc. Summary amount 3 Additional food supply purchases were $80,000. Tasman Inc. : Introduction to Accounting 133 Tasman Inc. Summary amount 3 Additional food supply purchases were $80,000. Tasman Inc. : Introduction to Accounting 134 Tasman Inc. Tasman Inc. : Introduction to Accounting 135 Tasman Inc. Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003. Tasman Inc. : Introduction to Accounting 136 Tasman Inc. Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003. Total purchased in the year = 1,500 + 5,000 + 80,000 = 86,500 86,500 – 3,500 = 83,000 = Cost of the inventory used = Cost of goods sold Tasman Inc. : Introduction to Accounting 137 Tasman Inc. Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003. Total purchased in the year = 1,500 + 5,000 + 80,000 = 86,500 86,500 – 3,500 = 83,000 = Cost of the inventory used = Cost of goods sold Tasman Inc. : Introduction to Accounting 138 Tasman Inc. Tasman Inc. : Introduction to Accounting 139 Tasman Inc. Summary amount 5 Utilities expenses were all paid in cash on the last day of each month. Total for the year was $9,600. Tasman Inc. : Introduction to Accounting 140 Tasman Inc. Summary amount 5 Utilities expenses were all paid in cash on the last day of each month. Total for the year was $9,600. Tasman Inc. : Introduction to Accounting 141 Tasman Inc. Tasman Inc. : Introduction to Accounting 142 Tasman Inc. Summary amount 6 Tasman catered 3 of the remaining events for the company upstairs. The last one will be held on January 7, 2004. Tasman Inc. : Introduction to Accounting 143 Tasman Inc. Summary amount 6 Tasman catered 3 of the remaining events for the company upstairs. The last one will be held on January 7, 2004. Tasman Inc. : Introduction to Accounting 144 Tasman Inc. Tasman Inc. : Introduction to Accounting 145 Tasman Inc. Adjusting entry 1 Costs related to the oven, the office equipment, and the Camaro must be recorded. Tasman Inc. : Introduction to Accounting 146 Tasman Inc. Adjusting entry 1 Costs related to the oven, the office equipment, and the Camaro must be recorded. Tasman Inc. : Introduction to Accounting 147 Tasman Inc. Tasman Inc. : Introduction to Accounting 148 Tasman Inc. Adjusting entry 2 Interest has accrued on the bank loan and the amount due to the oven supplier. Tasman Inc. : Introduction to Accounting 149 Tasman Inc. Adjusting entry 2 Interest has accrued on the bank loan and the amount due to the oven supplier. Tasman Inc. : Introduction to Accounting 150 Tasman Inc. Tasman Inc. : Introduction to Accounting 151 Tasman Inc. Adjusting entry 3 Rent expense must be recorded. Recall that $36,000 was paid at the beginning of the year for the full year and was recorded as an asset, Prepaid rent expense. Tasman Inc. : Introduction to Accounting 152 Tasman Inc. Adjusting entry 3 Rent expense must be recorded. Recall that $36,000 was paid at the beginning of the year for the full year and was recorded as an asset, Prepaid rent expense. Tasman Inc. : Introduction to Accounting 153 Tasman Inc. The Accounting Cycle : Introduction to Accounting 154 The Accounting Cycle Transaction or event occurs Recorded in the Journal using a Journal Entry. Journal is posted to Ledger Ledger accounts are totalled. Financial statements are prepared. We have done step 2 (journal entries). Step 3 is most easily done using a spreadsheet (Friedlan text provides a template). We will use the old-fashioned method known as T-accounts. Each account is represented by a T. All debits are “posted” on the left, all credits are “posted” on the right. Spreadsheets have made this practice virtually obsolete, but it is informative to do it to help understand the fundamentals. T-Accounts (posting to ledgers) : Introduction to Accounting 155 T-Accounts (posting to ledgers) Before the closing entry: The closing entry : Introduction to Accounting 156 The closing entry The closing entry resets all of the temporary accounts to zero and send the residual to Retained earnings. Dr Catering revenue 4,700 Dr Store sales 221,200 Cr Cost of goods sold 83,000 Cr Incorporation costs 1,000 Cr Salaries 96,200 Cr Bad debts 600 Cr Utilities 9,600 Cr Rent 36,000 Cr Depreciation 6,000 Cr Interest 3,350 Dr Retained earnings 9,850 To close the temporary accounts for the year T-Accounts (posting to ledgers) : Introduction to Accounting 157 T-Accounts (posting to ledgers) After the closing entry: Financial statements : Introduction to Accounting 158 Financial statements Numbers to go to the financial statements Tasman Inc. : Introduction to Accounting 159 Tasman Inc.