FINANCIALFINANCIAL

ACCOUNTINGACCOUNTING

A U s e r P e r s p e c t i v eA U s e r P e r s p e c t i v e

Third Canadian EditionThird Canadian Edition

Hoskin Hoskin FizzellFizzell

2

Double EntryDouble Entry Accounting SystemsAccounting Systems

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C h a p t e r

3

Assets = Liabilities + Assets = Liabilities + Shareholders’ Shareholders’

EquityEquity

Basic Accounting Basic Accounting EquationEquation

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Replace with a T-accountReplace with a T-account

AssetsAssets Liabilities +Liabilities + Shareholders’ Equity Shareholders’ Equity

Double Entry Double Entry AccountingAccounting

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DebitDebit Credit Credit (Left side)(Left side) (Right side) (Right side) Assets Liabilities + Assets Liabilities +

Shareholders’ Shareholders’ EquityEquity

A-Cash L-Accounts Payable A-Cash L-Accounts Payable SE-Common SE-Common SharesShares

Individual T-AccountsIndividual T-Accounts

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A-CashA-Cash L-Accounts Payable L-Accounts Payable

3,0003,000 2,500 2,500

A-Accounts ReceivableA-Accounts Receivable SE-Common Shares SE-Common Shares

00 7,500 7,500

A-InventoryA-Inventory SE-Retained Earnings SE-Retained Earnings

2,5002,500 0 0

A-EquipmentA-Equipment

4,5004,500

Demo RetailingDemo Retailing Company, Ltd. Company, Ltd.

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Liabilities & Liabilities & AssetsAssets

Shareholders’ EquityShareholders’ Equity Beginning Beginning Beginning Beginning

balancebalance balance balance

Increases DecreasesIncreases Decreases Decreases Decreases IncreasesIncreases

EndingEnding Ending Ending

balancebalance balance balance

Entries to T-AccountsEntries to T-Accounts

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Balance sheet accounts: assets, Balance sheet accounts: assets, liabilities, and shareholders’ equity liabilities, and shareholders’ equity accountsaccounts

Have balances that carry over from Have balances that carry over from one period to the nextone period to the next

Example: Retained EarningsExample: Retained Earnings

Permanent AccountsPermanent Accounts

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Used temporarily to keep track of Used temporarily to keep track of revenues, expenses, and dividends revenues, expenses, and dividends during the periodduring the period

Beginning balance is zeroBeginning balance is zero End of period balance is transferred End of period balance is transferred

to Retained Earningsto Retained Earnings

Temporary AccountsTemporary Accounts

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SE-Retained EarningsSE-Retained Earnings

Beginning balanceBeginning balance

Decrease inDecrease in Increase inIncrease in

Shareholders’ WealthShareholders’ Wealth Shareholders’ WealthShareholders’ Wealth

SE-Revenues SE-Expenses SE-Dividends SE-Revenues SE-Expenses SE-Dividends DeclaredDeclared

Decr. Incr.Decr. Incr. Incr. Decr. Incr. Decr. Incr. Decr. Incr. Decr.

Entries to T-AccountsEntries to T-Accounts

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Determines the types of accounting Determines the types of accounting information to be recordedinformation to be recorded

Summarized in the Chart of AccountsSummarized in the Chart of Accounts

Accounting CycleAccounting Cycle

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Permanent AccountsPermanent Accounts– AssetsAssets

CashCash Accounts ReceivableAccounts Receivable InventoryInventory Prepaid InsurancePrepaid Insurance LandLand EquipmentEquipment

– LiabilitiesLiabilities Accounts PayableAccounts Payable Interest PayableInterest Payable Bank LoanBank Loan

– Shareholders’ EquityShareholders’ Equity Common SharesCommon Shares Retained EarningsRetained Earnings

Chart of AccountsChart of Accounts

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Temporary AccountsTemporary Accounts– Income Statement AccountsIncome Statement Accounts

Sales RevenuesSales Revenues Cost of Goods SoldCost of Goods Sold Insurance ExpenseInsurance Expense Interest ExpenseInterest Expense Amortization ExpenseAmortization Expense

– Dividends DeclaredDividends Declared

Chart of AccountsChart of Accounts

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Chart of Accounts

Opening balances

Transactions or events

Transaction analysis

Journal entries

Posting

Trial balanceAdjusting entries

Adjusted trial balance

Preparation of financial

statements

Closing entries

Accounting CycleAccounting Cycle

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Opening BalancesOpening Balances– Balances carried forward from the end of Balances carried forward from the end of

the last accounting cyclethe last accounting cycle Transactions or EventsTransactions or Events

– Evidenced by source documentsEvidenced by source documents

Accounting CycleAccounting Cycle

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Transaction AnalysisTransaction Analysis– Decide which accounts are affected and Decide which accounts are affected and

by how muchby how much Journal EntriesJournal Entries

– JournalJournal: chronological listing of events: chronological listing of events

Accounting CycleAccounting Cycle

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Date Account Name Debit Credit

1 Jan 31 A-Accounts receivable SE-Sales revenue

2,500 2,500

Sold inventory on account

2

Jan 31

SE-Cost of goods sold A-Inventory

1,800

1,800 Recorded cost of

inventory sold

Journal EntriesJournal Entries

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Posting to the LedgerPosting to the Ledger– PostingPosting: transferring the information : transferring the information

from the journal entry to the ledger from the journal entry to the ledger accountsaccounts

– Ledger Ledger Each account is listed separatelyEach account is listed separately Each page represents a specific T-accountEach page represents a specific T-account

Accounting CycleAccounting Cycle

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SE-Sales revenueSE-Sales revenue

0 0 Bal.Bal.

2,500 12,500 1

SE-Cost of goods soldSE-Cost of goods sold

Bal. 0Bal. 0

2 1,8002 1,800

A-Accounts receivableA-Accounts receivableBal. 0Bal. 0 1 2,5001 2,500

A-InventoryA-InventoryBal. 2,500 1,800 2Bal. 2,500 1,800 2

Posting to the LedgerPosting to the Ledger

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Trial BalanceTrial Balance– List of debit and credit balancesList of debit and credit balances– Ensures that:Ensures that:

Total debit balances = Total credit Total debit balances = Total credit balancesbalances

Accounting CycleAccounting Cycle

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Adjusting EntriesAdjusting Entries– To correct an errorTo correct an error– To recognize a transaction or event not To recognize a transaction or event not

recorded during the periodrecorded during the period– GAAP: report revenues earned in a GAAP: report revenues earned in a

period, and expenses incurred to period, and expenses incurred to generate that revenuegenerate that revenue

Accounting CycleAccounting Cycle

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Adjusted trial balanceAdjusted trial balance– After adjusting entriesAfter adjusting entries

Financial statement preparationFinancial statement preparation– Income Statement, Balance Sheet, and Cash Income Statement, Balance Sheet, and Cash

Flow StatementFlow Statement Closing entriesClosing entries

– Balances in temporary accounts are transferred Balances in temporary accounts are transferred to Retained Earningsto Retained Earnings

Accounting CycleAccounting Cycle

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Single-step Income Single-step Income StatementStatement– All revenues are listed All revenues are listed

togethertogether– All expenses are listed All expenses are listed

togethertogether

Income Statement Income Statement FormatFormat

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Multi-step income statementMulti-step income statement– Results of different kinds of operations Results of different kinds of operations

are segregatedare segregated– Gross profit (or gross margin):Gross profit (or gross margin): sales less sales less

cost of salescost of sales

Income Statement Income Statement FormatFormat

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Multi-stepMulti-step Income StatementIncome Statement

Income from continuing operationsIncome from continuing operations Income from nonoperating sourcesIncome from nonoperating sources Income from unusual or infrequent sourcesIncome from unusual or infrequent sources Corporate income taxesCorporate income taxes Discontinued operationsDiscontinued operations Extraordinary itemsExtraordinary items

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Multi-stepMulti-step Income Statement Income Statement

Income from Income from continuing continuing operationsoperations– Revenues and Revenues and

expenses resulting expenses resulting from the sale of from the sale of goods and services goods and services to customersto customers

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Multi-step Multi-step Income StatementIncome Statement

Income from nonoperating sourcesIncome from nonoperating sources– Transactions that do not involve the Transactions that do not involve the

normal sales or goods or servicesnormal sales or goods or services Income from unusual or infrequent Income from unusual or infrequent

eventsevents Corporate income taxesCorporate income taxes

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Multi-stepMulti-step Income Statement Income Statement

Discontinued operationsDiscontinued operations– Income or loss from significant Income or loss from significant

discontinued segmentdiscontinued segment– Gain or loss on disposal of the segmentGain or loss on disposal of the segment

Extraordinary itemsExtraordinary items– Unusual, infrequent, and not resulting Unusual, infrequent, and not resulting

from management decisionsfrom management decisions

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Net incomeNet income

Weighted average number ofWeighted average number of

common shares outstandingcommon shares outstanding

Earnings per ShareEarnings per Share

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Assets and LiabilitiesAssets and Liabilities– Listed in order of liquidityListed in order of liquidity

The ability to convert into cashThe ability to convert into cash

– Separate current and noncurrect itemsSeparate current and noncurrect items

Balance Sheet FormatBalance Sheet Format

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