WEYGANDT . KIESO . KIMMEL . TRENHOLM . KINNEAR . BARLOW .

ATKINS

PRINCIPLES OF
FINANCIAL ACCOUNTING
CANADIAN EDITION

Chapter 1
Accounting in Action

Prepared by:
Debbie Musil
Kwantlen Polytechnic University
1
Chapter 1: Accounting in Action
Study Objectives
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business organizations
and explain how Canadian accounting standards
apply to these organizations.
3. Describe the components of the financial
statements and explain the accounting equation.
4. Determine what events are recognized in the
financial statements and how the events are
measured.
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, 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 a business.

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 Accounting & Ethics
• For information to have value, must
be prepared by individuals with high
standards of ethical behaviour
Ethics To Solve Ethical Dilemmas
● Standards of 1.Recognize situation and
conduct used to ethical issues involved
judge actions 2.Identify and analyse
elements
3.Identify alternatives and
weigh effects on stakeholders

⮚Select the most ethical

alternative

Copyright John Wiley & Sons Canada, Ltd.

 Chapter 1: Accounting in Action
Study Objectives
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business organizations
and explain how Canadian accounting standards
apply to these organizations.
3. Describe the components of the financial
statements and explain the accounting equation.
4. Determine what events are recognized in the
financial statements and how the events are
measured.
5. Analyze the effects of business transactions on the
accounting equation.
6. Prepare financial statements.
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Business Organizations

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 Generally Accepted
Accounting Principles (GAAP)
• Common set of accounting standards
• Responsibility of the Accounting
Standards Board (AcSB)
– Publicly accountable enterprises must
adopt International Financial Reporting
Standards (IFRS)
– Private companies may adopt
Accounting Standards for Private
Enterprises (ASPE) or IFRS

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 Concepts and Assumptions
• Economic entity concept – activities of
a unit or organization in society are
kept separate and distinct from other
entities and owner
• Going concern assumption –
organization will continue to operate
in the foreseeable future
• Monetary unit – only include
transactions that can be expressed as
an amount of money
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 Chapter 1: Accounting in Action
Study Objectives
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business
organizations and explain how Canadian
accounting standards apply to these
organizations.
3. Describe the components of the financial
statements and explain the accounting equation.
4. Determine what events are recognized in the
financial statements and how the events are
measured.
5. Analyze the effects of business transactions on
the accounting
Copyright John Wileyequation.
& Sons Canada, Ltd. 11
 Balance Sheet
• Assets
– Resources owned or controlled by a
business
– Used to carry out activities such as
production and distribution
– Provide future services or benefits and
helps the business generate revenue
• 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
(Continued)
• 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
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 Accounting Equations
• Assets must equal the sum of liabilities and owner’s equity
• Shows that a business’s assets are financed by a combination
of debts owed to creditors (i.e., liabilities) and the owner’s
investment (i.e., 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
Organization

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Accounting Equation Expanded

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 Chapter 1: Accounting in Action
Study Objectives
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business organizations
and explain how Canadian accounting standards apply
to these organizations.
3. Describe the components of the financial statements
and explain the accounting equation.
4. Determine what events are recognized in the financial
statements and how the events are measured.
5. Analyze the effects of business transactions on the
accounting equation.
6. Prepare financial statements.

Copyright John Wiley & Sons Canada, Ltd. 18

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

Copyright John Wiley & Sons Canada, Ltd. 19

 Chapter 1: Accounting in Action
Study Objectives
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business organizations
and explain how Canadian accounting standards
apply to these organizations.
3. Describe the components of the financial statements
and explain the accounting equation.
4. Determine what events are recognized in the
financial statements and how the events are
measured.
5. Analyze the effects of business transactions on the
accounting equation.
6. Prepare financial statements.
Copyright John Wiley & Sons Canada, Ltd. 20
 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 in computer business
and names it “Softbyte”

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 2: Purchase Equipment
• Softbyte purchases computer equipment for
$7,000 cash

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 3: Purchases 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 provided

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 5: Purchase 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 Credit and Cash
• 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: Owner Withdrawal of Cash
• Softbyte’s owner withdraws $1,300 for his
personal use

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 Chapter 1: Accounting in Action
Study Objectives
1. Identify the use and users of accounting and the
objective of financial reporting.
2. Compare different forms of business organizations
and explain how Canadian accounting standards
apply to these organizations.
3. Describe the components of the financial
statements and explain the accounting equation.
4. Determine what events are recognized in the
financial statements and how the events are
measured.
5. Analyze the effects of business transactions on the
accounting equation.
6. Prepare financial statements.
Copyright John Wiley & Sons Canada, Ltd. 33
 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
Always prepared first to determine the amount of
profit or loss in the Statement of Owner’s Equity
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

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Interrelationship of the Financial
Statements (Continued)

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 Copyright

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