Introduction To Accounting - Unknown

Introduction to
Accounting
Presented by Kevin Markle
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.
Introduction to Accounting 2
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
1. Fundamental concepts
2. The Accounting Cycle
3. Financial statements
4. Comprehensive example
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.
Who uses accounting information?
Owners
Managers
Investors (including potential)
Analysts on their behalf
Creditors (including potential)
Government (tax assessment)
Regulators
Customers Introduction to Accounting 6
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

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.
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 sellingIntroduction
assets to Accounting 9
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 Introduction to Accounting 10
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 ofto Accounting
Introduction financial accounting. 11
Entity concept
Going concern
Unit of measure
Periodic reporting
Entity concept
There are three basic structures that a company can
have in Canada:
1. Sole proprietorship
2. Partnership
3. 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 aIntroduction
separate entity for accounting even if it is not 13
to Accounting
one from a legal perspective
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.
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.
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.
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
entitys life.
Most commonly, the reporting period is annual.
All companies are required to file annual financial
statements with their tax returns.
Other commonIntroduction
reporting periods are monthly or
to Accounting 17
To review:
Entity concept
Going concern
Unit of measure
Periodic reporting
The Accounting Cycle
1. Transaction or event occurs
Could simply be the passage of time.
2. Recorded in the Journal using a Journal
Entry.
event is translated into accounting language.
3. Journal is posted to Ledger
the information from all the journal entries in the
period is aggregated.
4. Ledger accounts are totalled.
5. Financial statements are prepared.
2. Recorded in the Journal using a Journal Entry.
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. Introduction to Accounting 20
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). Introduction to Accounting 21
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 Introduction
every transaction
to Accounting must keep this 22
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:

DebitAccount name1 $amount
Credit Account name2 $amount
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
Introduction bill
to Accounting 24
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
The Basic Accounting Elements:
Asset Expense
Owners
Liability Revenue
Equity
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 economicIntroduction
resources resulting from normal
to Accounting 27
Journal Entries
Balance Sheet/
Income
Balance Sheet Stmt of Retained
Statement
The Basic Accounting Elements: Earnings
Debit Asset Expense
Owners
Credit Liability Revenue
Equity
Journal Entries
Balance Sheet/
Income Stmt of
Balance Sheet
Statement Retained
Earnings
Debit Asset Expense
Owners
Credit Liability Revenue
To increase an Asset or Expense: Debit Equity
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
Going back to the Fundamental Accounting
Equation:
Assets = Liabilities + Owners Equity
Debit Credit Credit
Journal Entries
What about the Income Statement elements (Revenue
and Expense)?
They dont 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.
Element structures
Assets
Liabilities
Owners equity
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 Introduction to Accounting 33
Product 1
Element structures
Assets
Current assets
Long-term assets
Buildings
Ontario buildings
Quebec buildings
Montreal building
Sherbrooke building
Vehicles
Cars
Trucks
Truck 1 Introduction to Accounting 34
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
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
Element structures
The balance sheet is a permanent statement
Its accounts accumulate information from the entitys
beginning.
The amounts presented on the balance sheet are aggregated from the
entitys 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
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
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
Going back to the Fundamental Accounting Equation:
Assets = Liabilities Owners Equity

+
Debit Credit Credit
Assets Liabilities Direct investment
Current assets Current liabilities Capital stock
Long-term assets Long-term liabilities Indirect investment
Dividends (debit)
Retained earnings
Revenue (credit)
Expense (debit)
Financial Statements
There are 4 statements in a standard set of financial
statements
1. Balance Sheet
The what do we have? statement
Shows what the entity owns and owes (the difference being the
owners residual interest)
2. Income Statement
The what did we do? statement
Shows the activity the entity undertook in its normal course of
operations.
3. Statement of Retained Earnings
Shows the changes in Retained earnings in the year
Often shown at the bottom of the Income Statement
4. Statement of CashIntroduction
Flows to Accounting 41
Shows the sources and uses of cash in the year
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.
Company Name Company Name

Income statement Balance Steet
For year ended December 31, 2003 As at December 31, 2003
Revenue 100,000 Assets

Current assets 3,000
Expenses Long-term assets 40,000
Salaries 45,000
Utilities 13,000
Rent 30,000
Other 8,000 Total Assets 43,000
- 96,000
Liabilities
Net Income 4,000 Current liabilities 15,000
Long-term liabilities 20,000
35,000
Company Name Owners' Equity
Statement of Retained Earnings Capital stock 1,000
For year ended December 31, 2003 Retained Earnings 7,000
Opening Retained Earnings 3,500 8,000

Net Income (Loss) 4,000
Dividends - 500 Total Liabilities and OE 43,000
Closing Retained Earnings 7,000
Company Name Company Name

For year ended December 31, 2003 As at December 31, 2003
Revenue 100,000 Assets

Current assets 3,000
Expenses Long-term assets 40,000
Salaries 45,000
Utilities 13,000
Rent 30,000
Other 8,000 Total Assets 43,000
- 96,000
Liabilities
Net Income 4,000 Current liabilities 15,000
35,000
Company Name Owners' Equity
For year ended December 31, 2003 Retained Earnings 7,000
Opening Retained Earnings 3,500 8,000

Dividends - 500 Total Liabilities and OE 43,000
Loblaw
Loblaw
Loblaw
Loblaw
Introduction to Accounting To Balance Sheet 48

Loblaw
Introduction to Accounting
From Statement of 49
Retained Earnings
Canadian Tire
Canadian Tire
Canadian Tire
Canadian Tire
To Balance Sheet 53
Canadian Tire
From Statement of 54
Retained Earnings
Research In Motion
Research In Motion
Research In Motion
Research In Motion
Research In Motion
To Statement of
Shareholders Equity
Research In Motion
From Income
Statement
To Balance Sheet
Research In Motion
From Statement of
Shareholders Equity
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 ofIntroduction
whento Accounting
payment is made. 62
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. Introduction to Accounting 63
Accrual Accounting
2 kinds of entries
1. Transactional
The recording of an exchange with another entity
2. 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
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
It is best to reason logically:
1. Which financial statement should be impacted?
Balance sheet, Income statement, or Stmt of Retained Earnings?
2. Which element on that statement should be impacted?
3. Which specific account should be impacted?
Assets Liabilities Owners Equity
Current assets Current liabilities Direct investment
Cash Accts payable Capital stock
Accts Long-term liabilities Indirect investment
receivable Bank loan Dividends (debit)
Long-term assets Retained earnings
Building Revenue (credit)
Land Expense (debit)
Account Element
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. Introduction to Accounting 67
Tasman
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 theIntroduction
accounting to Accounting cycle in its entirety. 69
Tasman
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. Tasman Inc.
For year ended December 31, 2003 As at January 1, 2003
Revenue - Assets
Current assets -
Expenses Long-term assets -
-
-
-
- Total Assets -
-
Liabilities
Net Income - Current liabilities -
Long-term liabilities -
-
Tasman Inc. Owners' Equity
Statement of Retained Earnings Capital stock -
For year ended December 31, 2003 Retained Earnings -
Opening Retained Earnings - -

Net Income (Loss) -
Dividends - Total Liabilities and OE -
Closing Retained Earnings -
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.
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:
Incorporation costs Expense
Debit 1,000
Due to shareholder Liability
Credit 1,000
To record payment of incorporation costs by shareholder.
Tasman Inc.
For year ended December 31, 2003 As at
Revenue - Assets
Current assets -
Expenses Long-term assets -
Incorp costs 1,000
-
-
- Total Assets -
- 1,000
Liabilities
Net Income - 1,000 Current liabilities
Due to shareholder 1,000
Tasman Inc. Total current liabilities 1,000

Statement of Retained Earnings Long-term liabilities -
For year ended December 31, 2003 1,000
Owners' Equity
Opening Retained Earnings - Capital stock -
Net Income (Loss) - 1,000 Retained Earnings - 1,000
Dividends -
- 1,000
Closing Retained Earnings - 1,000
Total Liabilities and OE -
Tasman Inc.
2
Dave opens a bank account for Tasman and deposits
$10,000. He receives 1,000 common shares in
return.
Tasman Inc.
2
Dave opens a bank account for Tasman and deposits
$10,000. He receives 1,000 common shares in
return.
Cash Asset
Debit 10,000
Capital stock Owners Equity
Credit 10,000
To record sale of common shares.
Tasman Inc.
Revenue - Assets
Current assets
Expenses Cash 10,000 -
Incorp costs 1,000 Total current assets 10,000
- Long-term assets
-
- Total Assets 10,000
- 1,000
Liabilities

Statement of Retained Earnings Long-term liabilities -
Owners' Equity
Opening Retained Earnings - Capital stock 10,000
Dividends -
9,000
Total Liabilities and OE 10,000
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.
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.
Cash Asset
Debit 50,000
Bank loan Liability
Credit 50,000
To record the receipt of bank loan.
Tasman Inc.
Revenue - Assets
Current assets
Incorp costs 1,000 Total current assets 60,000
- Long-term assets
-
- Total Assets 60,000
- 1,000
Liabilities

Statement of Retained Earnings Long-term liabilities 50,000
Owners' Equity
Dividends -
9,000
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.
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.
5
Make the rent payment for 2003 ($36,000).
Tasman Inc.
5
Make the rent payment for 2003 ($36,000).
Prepaid rent expense Asset

Debit 36,000
Cash Asset
Credit 36,000
To record the payment of 2003 rent in advance.
Tasman Inc.
Revenue - Assets
Current assets
Incorp costs 1,000 Prepaid rent expense 36,000
-
- Total current assets 60,000
- Long-term assets
- 1,000
Total Assets 60,000
Net Income - 1,000
Liabilities
Current liabilities
Tasman Inc. Due to shareholder 1,000
Statement of Retained Earnings
For year ended December 31, 2003 Total current liabilities 1,000
Opening Retained Earnings - 51,000
Net Income (Loss) - 1,000 Owners' Equity
Dividends - Capital stock 10,000
Retained Earnings - 1,000
9,000
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.
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.
Cooking equipment Asset

Debit 15,000
Cash Asset
Credit 5,000
Accounts payable Liability
Credit 10,000
To record the purchase of oven partially on credit.
Income statement
For year ended December 31, 2003 Tasman Inc. Balance Steet
As at
Revenue - Assets
Current assets
-
- Long-term assets
- 1,000 Cooking equipment 15,000
Net Income - 1,000 15,000

Total Assets 70,000
Tasman Inc. Liabilities

Statement of Retained Earnings Current liabilities
For year ended December 31, 2003 Due to shareholder 1,000
Accounts payable 10,000
Opening Retained Earnings - Total current liabilities 11,000
Net Income (Loss) - 1,000 Long-term liabilities 50,000
Dividends - 61,000
Owners' Equity
Closing Retained Earnings - 1,000 Capital stock 10,000
9,000
Tasman Inc.
7
Buy $1,500 of food supplies (ingredients to make
pizzas).
Tasman Inc.
7
Buy $1,500 of food supplies (ingredients to make
pizzas).
Food inventory Asset

Debit 1,500
Cash Asset
Credit 1,500
To record the purchase of supplies to be used in making pizzas for sale.
Income statement
As at
Revenue - Assets
Current assets
- Food inventory 1,500
- Long-term assets
Net Income - 1,000 15,000

Total Assets 70,000

Dividends - 61,000
Owners' Equity
9,000
Tasman Inc.
8
Purchase office equipment costing $4,000 on credit.
Full amount to be paid within 30 days.
Tasman Inc.
8
Purchase office equipment costing $4,000 on credit.
Full amount to be paid within 30 days.
Office equipment Asset

Debit 4,000
Credit 4,000
To record the purchase of office equipment on credit.
Income statement
As at
Revenue - Assets
Current assets
- Food inventory 1,500
- Long-term assets
Office equipment 4,000
Net Income - 1,000 19,000
Total Assets 74,000

Dividends - 65,000
Owners' Equity
9,000
Tasman Inc.
9
Hired a chef. Salary of $33,800 per year paid bi-
weekly (26 times a year).
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.
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.
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.
11
First salary payments are made.
Tasman Inc.
11
First salary payments are made.
Salary expense Expense

Debit 1,300
Cash Asset
Credit 1,300
To record payment of chef (33,800/26 = 1,300).

Debit 2,400
Credit 2,400
To record salary expense for Manager, not paid in cash (62,400/26 = 2,400)

Income statement
As at
Revenue - Assets
Current assets
Salaries 3,700 Food inventory 1,500
- Long-term assets
Net Income - 4,700 19,000
Total Assets 72,700

Dividends - 67,400
Owners' Equity
5,300

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.
12
Buy a delivery car, a used 1989 Camaro, for $10,000.
Expected remaining life is 5 years or 100,000 kms.
Vehicle Asset
Debit 10,000
Cash Asset
Credit 10,000
To record purchase of used vehicle to be used as delivery vehicle.

Income statement
As at
Revenue - Assets
Current assets
Expenses Cash 6,200
Salaries 3,700 Food inventory 1,500
- Long-term assets
Net Income - 4,700 Vehicle 10,000 29,000
Total Assets 72,700

Dividends - 67,400
Owners' Equity
5,300

Tasman Inc.
13
Tasman caters an event for $1,500. Receives $900 in
cash. The balance is due in 30 days.

Tasman Inc.
13
Tasman caters an event for $1,500. Receives $900 in
cash. The balance is due in 30 days.
Cash Asset
Debit 900
Accounts receivable Asset
Debit 600
Catering revenue Revenue
Credit 1,500
To record the earning of catering revenue.

Tasman Inc.
Revenue Assets
Catering 1,500 Current assets
1,500 Cash 7,100
Expenses Prepaid rent expense 36,000
Incorp costs 1,000 Food inventory 1,500
Salaries 3,700 Accounts receivable 600
- Long-term assets
Total Assets 74,200

Dividends - 67,400
Owners' Equity
6,800

Tasman Inc.
14
Store is open for business. Cash register reports
revenue of $1,200 for the day.

Tasman Inc.
14
Store is open for business. Cash register reports
revenue of $1,200 for the day.
Cash Asset
Debit 1,200
Store revenue Revenue
Credit 1,200
To record the aggregate sales for the first day of business.

Income statement
As at
Revenue Assets
Store sales 1,200 2,700 Cash 8,300
Salaries 3,700 Accounts receivable 600
- Long-term assets
Total Assets 75,400

Dividends - 67,400
Owners' Equity
8,000

Tasman Inc.
15
The company upstairs in Tasmans 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.
15
The company upstairs in Tasmans 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.
Cash Asset
Debit 4,000
Unearned revenue Liability
Credit 4,000
To record the receipt of cash for work to be performed in the future.

Income statement
As at
Revenue Assets
Salaries 3,700 Accounts receivable 600 50,400
- Long-term assets
- Cooking equipment 15,000
- 4,700 Office equipment 4,000
Vehicle 10,000 29,000
Net Income - 2,000 Total Assets 79,400
Liabilities
Tasman Inc. Current liabilities
Statement of Retained Earnings Due to shareholder 3,400
For year ended December 31, 2003 Accounts payable 14,000
Unearned revenue 4,000 21,400
Opening Retained Earnings - Long-term liabilities 50,000
Net Income (Loss) - 2,000 71,400
Dividends - Owners' Equity
Capital stock 10,000
Closing Retained Earnings - 2,000 Retained Earnings - 2,000
8,000

Tasman Inc.
16
Purchase $5,000 more of food supplies on credit
with the supplier. To be paid within 30 days.

Tasman Inc.
16
Purchase $5,000 more of food supplies on credit
with the supplier. To be paid within 30 days.

Debit 5,000
Credit 5,000
To record the purchase of food inventory on credit.

Income statement
As at
Revenue Assets
- Long-term assets
Vehicle 10,000 29,000
Liabilities
8,000

Tasman Inc.
17
Pay off the balances owing on the office
equipment and the food supplies.

Tasman Inc.
17
Pay off the balances owing on the office
equipment and the food supplies.

Debit 4,000
Cash Asset
Credit 4,000
To record the payment of amounts owing to supplier of office equipment.
Debit 5,000
Cash Asset
Credit 5,000
To record the payment of amount owing to supplier of food inventory.

Income statement
As at
Revenue Assets
- Long-term assets
Vehicle 10,000 29,000
Liabilities
8,000

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.
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.
Bad debt expense Expense

Debit 600
Accounts receivable Asset
Credit 600
To record the write-off of amount owing from customer.

Income statement
As at
Revenue Assets
Salaries 3,700 Accounts receivable - 45,800
Bad debts 600 Long-term assets
Vehicle 10,000 29,000
Liabilities
7,400

Tasman Inc.
19
Tasman provides the catering for an event for the
company upstairs. Everything goes fine.

Tasman Inc.
19
Tasman provides the catering for an event for the
company upstairs. Everything goes fine.

Debit 800
Credit 800
To record the earning of catering revenue (assume $4,000 is earned evenly over 5 events)

Income statement
As at
Revenue Assets
Vehicle 10,000 29,000
Liabilities
8,200

Tasman Inc.
Summary amount 1
Store revenues have been $220,000.

Tasman Inc.
Summary amount 1
Store revenues have been $220,000.
Cash Asset
Debit 220,000
Store revenue Revenue
Credit 220,000
To record aggregate store revenue for the year.

Income statement
As at
Revenue Assets
Store sales 221,200 223,500 Cash 223,300
Vehicle 10,000 29,000
Net Income 218,200 Total Assets 294,800
Liabilities
Net Income (Loss) 218,200 66,600
Closing Retained Earnings 218,200 Retained Earnings 218,200
228,200

Tasman Inc.
Summary amount 2
All salaries have been paid. Dave has taken half of
his salary in cash.

Tasman Inc.
Summary amount 2
All salaries have been paid. Dave has taken half of
his salary in cash.

Debit 32,500
Cash Asset
Credit 32,500
To record payment of chef s salary (33,800 - 1,300 (previously recorded) = 32,500).

Debit 60,000
Cash Asset
Credit 31,200
Credit 28,800
To record salary expense for Manager (62,400 2,400 (previously recorded) = 60,000)

Income statement
As at
Revenue Assets
Store sales 221,200 223,500 Cash 159,600
Vehicle 10,000 29,000
Liabilities
135,700

Tasman Inc.
Summary amount 3
Additional food supply purchases were $80,000.

Tasman Inc.
Summary amount 3
Additional food supply purchases were $80,000.

Debit 80,000
Cash Asset
Credit 80,000
To record aggregate food supply purchases for the year.

Income statement
As at
Revenue Assets
Store sales 221,200 223,500 Cash 79,600
Vehicle 10,000 29,000
Liabilities
135,700

Tasman Inc.
Summary amount 4
Food supplies that had cost $3,500 are on hand on
December 31, 2003.

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.
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
Cost of goods sold Expense
Debit 83,000
Food inventory Liability
Credit 83,000
To record the cost of food inventory used in the year.

Income statement
As at
Revenue Assets
Store sales 221,200 223,500 Cash 79,600
Prepaid rent expense 36,000
Cost of goods sold - 83,000 Food inventory 3,500
Gross margin 140,500 Accounts receivable - 119,100
Long-term assets
Expenses Cooking equipment 15,000
Incorp costs 1,000 Office equipment 4,000
Salaries 96,200 Vehicle 10,000 29,000
Bad debts 600 Total Assets 148,100
-
- 97,800 Liabilities
Current liabilities
Net Income 42,700 Due to shareholder 32,200
Tasman Inc. Long-term liabilities 50,000
Statement of Retained Earnings 95,400
For year ended December 31, 2003 Owners' Equity
Opening Retained Earnings - Retained Earnings 42,700
Dividends - 52,700
Closing Retained Earnings 42,700 Total Liabilities and OE 148,100

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.
Summary amount 5
Utilities expenses were all paid in cash on the last day
of each month. Total for the year was $9,600.
Utilities expense Expense

Debit 9,600
Cash Asset
Credit 9,600
To record aggregate payment of utilities expense for the year.

Income statement
As at
Revenue Assets
Store sales 221,200 223,500 Cash 70,000
Long-term assets
Utilities 9,600
Current liabilities
Dividends - 43,100

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.
Summary amount 6
Tasman catered 3 of the remaining events for the
company upstairs. The last one will be held on
January 7, 2004.

Debit 2,400
Credit 2,400
To record the earning of revenue for 3 of remaining 4 events that had been pre-paid.

Income statement
As at
Revenue Assets
Store sales 221,200 225,900 Cash 70,000
Long-term assets
Utilities 9,600
Current liabilities
Unearned revenue 800 43,000
Dividends - 45,500

Tasman Inc.
Adjusting entry 1
Costs related to the oven, the office equipment, and
the Camaro must be recorded.

Tasman Inc.
Adjusting entry 1
Costs related to the oven, the office equipment, and
the Camaro must be recorded.
Depreciation expense Expense
Debit 3,000
Accumulated Depreciation Contra-asset
Credit 3,000
Oven
Debit
To record annual depreciation of Oven (15,000/5 = 3,000 (assume 5-year life)). 1,000
Credit 1,000
Office equipment
To record annual depreciation of office equipment (4,000/4 = 1,000 (assume 4-year life)).

Debit 2,000
Credit 2,000
Vehicle
To record annual depreciation of delivery vehicle (10,000/5 = 2,000).

Tasman Inc.
Revenue Assets
Store sales 221,200 225,900 Cash 70,000
Long-term assets
Salaries 96,200 Vehicle 10,000
Bad debts 600 Accum Depn (total) - 6,000 23,000
Utilities 9,600 Total Assets 132,500
Depreciation 6,000 - 113,400
Liabilities
Net Income 29,500 Current liabilities
Tasman Inc. Unearned revenue 800 43,000
Statement of Retained Earnings Long-term liabilities 50,000
Owners' Equity
Net Income (Loss) 29,500 Retained Earnings 29,500
Dividends -
39,500

Tasman Inc.
Adjusting entry 2
Interest has accrued on the bank loan and the
amount due to the oven supplier.

Tasman Inc.
Adjusting entry 2
Interest has accrued on the bank loan and the
amount due to the oven supplier.
Interest expense Expense

Debit 3,000
Interest payable Liability
Credit 3,000
To record the interest which has accrued in the year (50,000*6% = 3,000)
Interest expense Expense

Debit 350
Interest payable Liability
Credit 350
To record the interest which has accrued on amount payable on oven (10,000*3.5% = 350)

Tasman Inc.
Revenue Assets
Store sales 221,200 225,900 Cash 70,000
Long-term assets
Depreciation 6,000
Interest 3,350 - 116,750 Liabilities
Net Income 26,150 Current liabilities
Tasman Inc. Interest payable 3,350
Statement of Retained Earnings Unearned revenue 800 46,350
For year ended December 31, 2003 Long-term liabilities 50,000
96,350
Opening Retained Earnings - Owners' Equity
Net Income (Loss) 26,150 Capital stock 10,000
Dividends - Retained Earnings 26,150
36,150
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.
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.
Rent expense Expense
Debit 36,000
Prepaid rent expense Asset
Credit 36,000
To record the rent expense which had been prepaid at the beginning of the year.

Income statement
As at December 31, 2003
Revenue Assets
Store sales 221,200 225,900 Cash 70,000
Prepaid rent expense -
Long-term assets
Rent 36,000
Depreciation 6,000 Liabilities
Interest 3,350 - 152,750 Current liabilities
Net Income - 9,850 Accounts payable 10,000
Interest payable 3,350
Unearned revenue 800 46,350
Opening Retained Earnings - Retained Earnings - 9,850
Net Income (Loss) - 9,850 150
Dividends -
Closing Retained Earnings - 9,850 Total Liabilities and OE 96,500

2. Recorded in the Journal using a Journal Entry.
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 Introduction
made this practice virtually obsolete, but it is 154
to Accounting
informative to do it to help understand the fundamentals.
Before the closing entry:
T-Accounts (posting to ledgers)
Cash
10,000 36,000
Accounts Receivable
600 600
Due to shareholder
1,000
Catering revenue
1,500
Store sales
1,200
50,000 5,000 - 2,400 800 220,000
900 1,500 28,800 2,400 221,200
1,200 1,300 Prepaid rent expense 32,200 4,700
4,000 10,000 36,000 36,000
220,000 9,000 - Accounts payable
32,500 9,000 10,000
31,200 Food inventory 4,000
80,000 1,500 83,000 5,000 Cost of goods sold Rent
9,600 5,000 10,000 83,000 36,000
70,000 80,000 83,000 36,000
3,500 Interest payable
3,000 Incorporation costs Depreciation
Cooking equipment 350 1,000 3,000
15,000 3,350 1,000 1,000
15,000 Office equipment 2,000
4,000 Unearned revenue Salaries 6,000
Accumulated depn 4,000 800 4,000 3,700
3,000 2,400 92,500 Interest
1,000 Vehicle 800 96,200 3,000
2,000 10,000 350
6,000 10,000 Bank loan Bad debts 3,350
50,000 600
50,000 600 Utilities
9,600
Capital stock Retained earnings 9,600
10,000
10,000

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 Introduction to Accounting 9,850 156
After the closing entry:
T-Accounts (posting to ledgers)
Cash
10,000 36,000
Accounts Receivable
600 600
Due to shareholder
1,000
Catering revenue
1,500
Store sales
1,200
50,000 5,000 - 2,400 800 220,000
900 1,500 28,800 2,400 221,200 221,200
1,200 1,300 Prepaid rent expense 32,200 4,700 4,700 -
4,000 10,000 36,000 36,000 -
32,500 9,000 10,000 Cost of goods sold Rent
31,200 Food inventory 4,000 83,000 36,000
80,000 1,500 83,000 5,000 83,000 83,000 36,000 36,000
9,600 5,000 10,000 - -
70,000 80,000
3,500 Interest payable Incorporation costs Depreciation
3,000 1,000 3,000
Cooking equipment 350 1,000 1,000 1,000
15,000 3,350 - 2,000
15,000 Office equipment 6,000 6,000
4,000 Unearned revenue Salaries -
3,000 2,400 92,500 Interest
1,000 Vehicle 800 96,200 96,200 3,000
2,000 10,000 - 350
6,000 10,000 Bank loan 3,350 3,350
50,000 Bad debts -
50,000 600
600 600 Utilities
Capital stock - 9,600
10,000 9,600 9,600
10,000 Retained earnings -
9,850
9,850

Numbers to go to the financial statements
Cash
10,000 36,000
Financial statements
Accounts Receivable
600 600
Due to shareholder
1,000
Catering revenue
1,500
Store sales
1,200
50,000 5,000 - 2,400 800 220,000
900 1,500 28,800 2,400 221,200 221,200
1,200 1,300 Prepaid rent expense 32,200 4,700 4,700 -
4,000 10,000 36,000 36,000 -
32,500 9,000 10,000 Cost of goods sold Rent
31,200 Food inventory 4,000 83,000 36,000
80,000 1,500 83,000 5,000 83,000 83,000 36,000 36,000
9,600 5,000 10,000 - -
70,000 80,000
3,500 Interest payable Incorporation costs Depreciation
3,000 1,000 3,000
Cooking equipment 350 1,000 1,000 1,000
15,000 3,350 - 2,000
15,000 Office equipment 6,000 6,000
4,000 Unearned revenue Salaries -
3,000 2,400 92,500 Interest
1,000 Vehicle 800 96,200 96,200 3,000
2,000 10,000 - 350
6,000 10,000 Bank loan 3,350 3,350
50,000 Bad debts -
50,000 600
600 600 Utilities
Capital stock - 9,600
10,000 9,600 9,600
10,000 Retained earnings -
9,850
9,850

Income statement
As at December 31, 2003
Revenue Assets
Store sales 221,200 225,900 Cash 70,000
Food inventory 3,500 73,500
Cost of goods sold - 83,000 Long-term assets
Gross margin 142,900 Cooking equipment 15,000
Expenses Vehicle 10,000
Incorp costs 1,000 Accum Depn (total) - 6,000 23,000
Salaries 96,200 Total Assets 96,500
Bad debts 600
Utilities 9,600 Liabilities
Rent 36,000 Current liabilities
Depreciation 6,000 Due to shareholder 32,200
Interest 3,350 - 152,750 Accounts payable 10,000
Interest payable 3,350
Net Income - 9,850 Unearned revenue 800 46,350
96,350
Tasman Inc. Owners' Equity
For year ended December 31, 2003 Retained Earnings - 9,850
150
Opening Retained Earnings -
Net Income (Loss) - 9,850 Total Liabilities and OE 96,500
Dividends -

Introduction To Accounting - Unknown

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Introduction To Accounting - Unknown

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Introduction to

This lecture will focus only on financial

It is important to note that the decision-making of accounting

Therefore, the decisions made when making the journal entry

In order for this equation to remain in balance,

The basic journal entry:

The convention works such that the fundamental

The Basic Accounting Elements:

Debit Asset Expense

Debit Asset Expense

To increase a Liability, Revenue, or Owners Equity: Credit

Assets have increased. Liabilities and Owners Equity

The income statement is a temporary statement

Going back to the Fundamental Accounting Equation:

Assets = Liabilities Owners Equity

The SCF will not be covered in this lecture. It is

Company Name Company Name

Revenue 100,000 Assets

Opening Retained Earnings 3,500 8,000

Closing Retained Earnings 7,000

Company Name Company Name

Revenue 100,000 Assets

Opening Retained Earnings 3,500 8,000

Closing Retained Earnings 7,000

Introduction to Accounting To Balance Sheet 48

We will account for a company, Tasman Inc., for its first

We will then go back and do the mechanical

Opening Retained Earnings - -

Closing Retained Earnings -

Tasman Inc. Total current liabilities 1,000

Tasman Inc. Total current liabilities 1,000

Tasman Inc. Total current liabilities 1,000

Prepaid rent expense Asset

Total Liabilities and OE 60,000

Cooking equipment Asset

Net Income - 1,000 15,000

Tasman Inc. Liabilities

Total Liabilities and OE 70,000

Food inventory Asset

Net Income - 1,000 15,000

Tasman Inc. Liabilities

Total Liabilities and OE 70,000

Office equipment Asset

Tasman Inc. Liabilities

Total Liabilities and OE 74,000

Salary expense Expense

Salary expense Expense

Introduction to Accounting 100

Tasman Inc. Liabilities

Total Liabilities and OE 72,700

Introduction to Accounting 101

Introduction to Accounting 102

Introduction to Accounting 103

Tasman Inc. Liabilities

Total Liabilities and OE 72,700

Introduction to Accounting 104

Introduction to Accounting 105

Introduction to Accounting 106

Tasman Inc. Liabilities

Total Liabilities and OE 74,200

Introduction to Accounting 107

Introduction to Accounting 108

Introduction to Accounting 109