Financial Accounting Notes 3b

7/29/2019 Financial Accounting Notes 3b

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Introduction to

Accounting

Presented by Azhar Rind


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Introduction to Accounting 2

Purpose

To teach the basics of accounting to thosestudents entering the MBA program at SSB

who do not have any background inaccounting.

To prepare all MBA students for the

mandatory course, ACTG 5100 FinancialAccounting for Managers, by providing thefundamental concepts on which the course

builds.


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Intended audience

All incoming MBA students at The SchulichSchool of Business.

In particular, this lecture is designed for thosethat have no previous education or training inaccounting.

The intention is for this lecture to teach at themost 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 toskim or skip sections of the lecture.


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Agenda

1. Fundamental concepts

2. The Accounting Cycle

3. Financial statements

4. Comprehensive example


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Fundamental concepts

What is accounting?

The language of business.

A means to communicate financialinformation.

A way to convey information about abusiness to users.


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Who uses accounting information?

Owners

Managers

Investors (including potential)

Analysts on their behalfCreditors (including potential)

Government (tax assessment)

RegulatorsCustomers


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Accounting has two main divisions:

Financial accounting

Primarily prepared for users external to thecompany.

Revenues, earnings, assets, etc.

Management accountingPrimarily for internal purposes

Costing, budgeting, net present value, etc.

This lecture will focus only on financialaccounting.


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There are several ways that cash gets into acompany:

Investment by owners

Investment by creditors (loans)

Payments from customers.Repayment of amounts loaned to otherentities.

Return on investments (interest anddividend)

Proceeds from selling assets.


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Fundamental conceptsThese can be organized into three categories:

Operations

Payments from customers

Refunds from suppliers

Financing

Investment by ownersInvestment by creditors (loans)

Investing

Return on investments (interest and dividend)Proceeds from selling assets

Repayment of amounts loaned to other entities


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Fundamental conceptsSimilarly, money going out of an entity can be

categorized:

OperationsPayments to suppliers

Refunds to customers

FinancingPayment of dividends or capital to owners

Repayment of creditors

InvestingPurchase of assets

Amounts invested in other entities (debt or equity)


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Fundamental conceptsFinancial accounting categorizes all

transactions and events based on their

substance.It is very important that the substance of atransaction be accurately reflected by financialaccounting because the users of the information

are using it with the assumption that thesecategorizations are being made accurately.

If money invested by owners was reported asrevenue, this would be counter to the fundamental

definition of revenue (i.e. that it results from theoperations of the company).

The separation of income and capital is afundamental concept of financial accounting.


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Entity concept

Going concern

Unit of measure

Periodic reporting


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Fundamental conceptsEntity 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

ownerA partnership is not a legal entity separate from its owners

These are both sub-components of their owners/partners for legalpurposes

A corporation is a separate legal entity

The entity concept for accounting does not simplyfollow the legal guidelines

A business can be a separate entity for accounting even if it isnot one from a legal perspective

F d l


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Entity concept

It is essential that we know for which entitywe are accounting because it will determineif 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 toaccount for that are non-events from a legal

perspectivee.g. When Ms. Prop puts money into a separate accountfor the company. This is a non-event legally, but is anevent to be accounted for from an accounting perspective.

F d t l t


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Going concern

It is assumed that an entity will complete itscurrent plans, use its existing assets, andmeet its obligations in the normal course ofbusiness.

This is an underlying concept necessary formany of the fundamental recording andreporting decisions that are made in

accounting.

F d t l t


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Fundamental conceptsUnit of measure

In order for accounting to present

information that is useful, it must be able toexpress things in a common unit ofmeasure.

The unit of measure in Canada is usuallythe Canadian dollar (or U.S. dollar).It is not useful to tell users that an entity has 30cars, a building, some land, some equipment,

and that it sold 35,000 widgets in the year.The unit of measure concept allows us toexpress all of these things in dollars.

F d t l t


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Fundamental conceptsPeriodic reporting

Meaningful financial information about an

entity can be provided for periods of timethat are shorter than the life of an entity.

Because financial statements tell the userswhat the entity has and what they did to get it,the users want that information at differentpoints in the entitys life.

Most commonly, the reporting period is annual.All companies are required to file annualfinancial statements with their tax returns.

Other common reporting periods are monthly orquarterly.

F d t l t


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To review:

Entity concept

Going concern

Unit of measure

Periodic reporting

Th A ti C l


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The Accounting Cycle

1. Transaction or event occurs

Could simply be the passage of time.

2. Recorded in the Journal using a JournalEntry.

event is translated into accounting language.

3. Journal is posted to Ledger

the information from all the journal entries inthe period is aggregated.

4. Ledger accounts are totalled.

5. Financial statements are prepared.

Th A ti C l


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The Accounting Cycle1. Transaction or event occurs

2. Recorded in the Journal using a Journal Entry.


4. Ledger accounts are totalled.5. Financial statements are prepared.

It is important to note that the decision-making ofaccounting occurs at step 2 Journal entry.

Steps 3 5 are mechanical exercises.

Therefore, the decisions made when making the journalentry (i.e. translating to accounting language) are veryimportant as they determine what will ultimately bepresented on the financial statements.

contd on next slide

Th A ti C l


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The Accounting CycleThe making of decisions about what journal entryshould be made when a transaction or event

occurs is the prominent theme of ACTG 5100.It is commonly believed that these decisions are boundby strict rules that dictate what the journal entry shouldbe.

In reality, this is not true. There are principles that can guide

the decisions, but there are many circumstances for whichthere are not specific treatments prescribed and, therefore, thejudgment of the preparers determines the treatment.

For the purposes of this lecture, we will lookmostly at non-ambiguous situations.

Students will become very aware of the ambiguity inthe real world in ACTG 5100 (and from reading thenewspaper).

A ti E ti


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Accounting Equation

Fundamental Accounting Equation:

Assets = Liabilities + Owners EquityThis 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 eventmust have at least two parts

Either an equal impact (increase or decrease) to both sidesof the equation or equal and opposite impact to one side.

The recording of every transaction must keep thisequation in balance

Jo rnal Entries


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Journal Entries

All journal entries have two sides:

Debit and Credit

For every journal entry, the total debits mustequal the total credits

This ensures that the fundamental accounting

equation (A = L + OE) is always in balance.

The basic journal entry:

Debit Account name1 $amountCredit Account name2 $amount

To record

Journal Entries


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Journal EntriesDebit and Credit are just accounting-speak for increase and decrease

Debit means increase for some elements anddecrease for other elements. Likewise forcredit.

For example, a company pays its $500 utility bill:

In English: the company has incurred an expense (theamount of expense has increased) and the amount of cash inthe 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


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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 fundamentalequation (A = L + OE) is always kept in balance.

Journal Entries


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Journal Entries

Asset Expense

Liability RevenueOwners

Equity

The Basic Accounting Elements:

Journal Entries


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Journal EntriesThe Basic Accounting Elements:

Asset

Has future benefit to the entityLiability

Obligation to transfer assets in the future

Owners Equity

Owners interest in the company

RevenueIncrease in economic resources resulting from normaloperations of the company

ExpenseDecrease in economic resources resulting from normaloperations of the company

Journal Entries


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Journal Entries

Balance SheetIncomeStatement

Balance Sheet/Stmt of RetainedEarnings

Debit Asset Expense

Credit Liability RevenueOwners

Equity

The Basic Accounting Elements:

Journal Entries


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Journal Entries

BalanceSheet

IncomeStatement

BalanceSheet/

Stmt ofRetained

Earnings

Debit Asset Expense

Credit Liability RevenueOwners

Equity

To increase an Asset or Expense: DebitTo increase a Liability, Revenue, or OwnersEquity: CreditTo decrease an Asset or Expense: CreditTo decrease a Liability, Revenue, or OwnersEquity: Debit

Journal Entries


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Journal Entries

Going back to the Fundamental AccountingEquation:

Assets = Liabilities + Owners Equity

Debit Credit Credit

Journal Entries


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Journal EntriesWhat about the Income Statement elements(Revenue and Expense)?

They dont appear in the fundamental accountingequation, so how does it stay in balance whenthey are debited or credited?e.g. consultant sells services for $300 cash

In English: Cash (asset) increases $300

Revenue increases $300In Accounting:Debit Cash (Asset) $300

Credit Consulting Revenue $300To record payment for consulting services rendered

Assets have increased. Liabilities and Owners Equityappear to be unchanged.Is A = L + OE not true (i.e. out of balance)?

Element structures


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Element structuresAssets

Liabilities

Owners equity

Element structures


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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


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Current assets

Long-term assets

BuildingsOntario buildings

Quebec buildings

Montreal building

Sherbrooke building

VehiclesCars

Trucks

Truck 1

Truck 2

Element structures


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Element structuresLiabilities

Current liabilities

Accounts payable

Accrued liabilities

Long-term liabilities

Bank loans Loan from RBC

Loan from Scotiabank

Notes payable

Bonds payable

Element structures


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Element structuresOwners 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, forthe purposes of understanding how they fit into the equation, this representation is helpful.

Element structures


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Element structuresThe balance sheet is a permanent statement

Its accounts accumulate information from the entitys

beginning.The amounts presented on the balance sheet are aggregatedfrom the entitys beginning to the balance sheet date.

The income statement is a temporary statementIts accounts are temporary accountsThey accumulate information for a period and then are reset tozero 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


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Element structuresThe Closing Entry

Whenever financial statements are to be

prepared, the temporary (income statement)accounts must be closed to zero so thatthey can begin tracking data for the nextperiod.

The amounts in the accounts at closing aretransferred to Retained Earnings (so namedbecause it is the earnings (net income) of thecompany that is retained in the company and notdistributed to the owners).

We will see an example in the comprehensiveexample.

Element structures


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Element structuresThe Closing Entry

The result of the closing entry is that allimpacts on Revenue and Expenses (thetemporary accounts) are indirectly impactson Retained earnings (a permanent

account).That is how A = L + OE stays in balance.

The temporary accounts are sub-pieces of OE.

Journal Entries


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Journal Entries

Going back to the Fundamental Accounting Equation:

Assets = Liabilities + Owners Equity

Debit Credit CreditAssets

Current assets

Long-term assets

Liabilities

Current liabilities


Direct investment

Capital stock

Indirect investment

Dividends (debit)

Retained earnings

Revenue (credit)

Expense (debit)

Financial Statements


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Financial StatementsThere are 4 statements in a standard set of financial

statements

1. Balance SheetThe what do we have? statementShows what the entity owns and owes (the difference being theowners residual interest)

2. Income Statement

The what did we do? statementShows the activity the entity undertook in its normal course ofoperations.

3. Statement of Retained EarningsShows the changes in Retained earnings in the year

Often shown at the bottom of the Income Statement

4. Statement of Cash FlowsShows the sources and uses of cash in the year

Information is derived from the B/S and I/S and other



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Statement of Cash Flows

Contains information about how cash cameinto 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 supplementaryinformation)

The SCF will not be covered in this lecture.

It is covered in ACTG 5100.



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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 15,000Long-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



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Company Name Company Name



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 15,000Long-term liabilities 20,000

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

Closing Retained Earnings 7,000

Loblaw


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Loblaw

Loblaw


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Loblaw

Loblaw


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Loblaw

Loblaw


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Loblaw

To Balance Sheet

Loblaw


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Loblaw

From Statement ofRetained Earnings

Canadian Tire


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Canadian Tire

Canadian Tire


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Ca ad a e

Canadian Tire


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Canadian Tire


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Introduction to Accounting 53To Balance Sheet

Canadian Tire


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Introduction to Accounting 54From Statement ofRetained Earnings

Research In Motion


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Research In Motion


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Research In Motion


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Research In Motion


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Research In Motion


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To Statement ofShareholders Equity

Research In Motion


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To Balance Sheet

From IncomeStatement

Research In Motion


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From Statement ofShareholders Equity

Accounting Methods


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gCash Accounting

Revenue is recorded when cash is received.

Expense is recorded when cash is disbursed.Very straightforward. Facts determine the timing ofentries. Less room for judgment.

Accrual Accounting

Revenue is recorded (recognized) when therevenue has been earned.

When the product or service has been provided to thecustomer, regardless of when payment is received.

Expenses are matched to the revenue that theyhelped to earn, regardless of when payment ismade.

Accounting Methods


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gIt is possible for cash receipt to coincide withrevenue recognition and cash payment to

coincide with expense recognition.However, in business in North America (and,indeed globally), it is the norm for theexchange of cash to either precede or followthe actual economic event.Except in the simplest of entities (e.g. anindividual person) or in unique

circumstances, cash accounting will not yielduseful information.Accrual accounting is the standard method.

Accrual Accounting


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g2 kinds of entries

1.Transactional

The recording of an exchange with another entity

2.Adjusting

Required only when financial statements are preparedto adjust accounts to where they should be

Always include at least one Balance Sheet accountand one Income Statement account.

e.g. Depreciation of capital assets, earning of interestrevenue.

Journal Entries


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Journal Entries

Usually one side (the Debit or the Credit) will

be obvious from the transaction (e.g. whencash is received, cash (an asset) increases.The Debit has to be to cash).

It is the determination of the other side of theentry that requires thought and judgment.

Journal Entries


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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?

AssetsCurrent assets

Cash

Acctsreceivable

Long-term assets

Building

Land

LiabilitiesCurrent liabilities

Accts payable


Bank loan

Owners EquityDirect investment

Capital stock

Indirect investment

Dividends (debit)

Retained earnings

Revenue (credit)

Expense (debit)

ElementAccount

ExampleW ill t f T I f it


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We will account for a company, Tasman Inc., for itsfirst 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 thebusiness as its manager.Tasman Inc. is a corporation (a legal entity

separate from Dave).The company begins on January 1, 2003. Its fiscalyear end is December 31.We will prepare a Balance Sheet as at December

31, 2003 and an Income Statement and Statementof Retained Earnings for the year ended December31, 2003.

Tasman


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Example Tasman Inc.O


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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 financialstatements.

This approach will reinforce the impact of eachevent on the financial statements as a whole.

We will then go back and do the mechanical

steps that get us from journal entries tofinancial statements.This will show the accounting cycle in its entirety.

Tasman


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Tasman Inc.O J 1 2003 th fi i l t t t f th ll il


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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 -

On January 1, 2003, the financial statements of the company are all nil

A = L + OE is true because 0 = 0 + 0

Tasman Inc.


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1

Tasman Inc. (Tasman) is incorporated on

January 1, 2003. Dave pays $1,000 of his ownmoney to pay for the incorporation.

Tasman Inc.


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1

Tasman Inc. (Tasman) is incorporated on

January 1, 2003. Dave pays $1,000 of his ownmoney to pay for the incorporation.

If we assume that Dave is going to want to bereimbursed by Tasman:

Debit Incorporation costs Expense 1,000

Credit Due to shareholder Liability 1,000

To record payment of incorporation costs by shareholder.

Tasman Inc.T I T I


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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 liabi lities

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


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2

Dave opens a bank account for Tasman and

deposits $10,000. He receives 1,000 commonshares in return.

Tasman Inc.2


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2

Dave opens a bank account for Tasman and

deposits $10,000. He receives 1,000 commonshares in return.

Debit Cash Asset 10,000

Credit Capital stock OwnersEquity

10,000

To record sale of common shares.

Tasman Inc.Tasman Inc. Tasman Inc.


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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

Net Income 1,000- Current liabilities



Statement of Retained Earnings Long-term liabilities -


Owners' Equity

Opening Retained Earnings - Capital stock 10,000


Dividends -

9,000Closing Retained Earnings 1,000-

Total Liabilities and OE 10,000

Tasman Inc.3


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3

Tasman Inc. gets a $50,000 loan from the bank.

Interest rate is 6% per year. Interest on theoutstanding amount must be paid each year onthe anniversary. Principal can be repaid at anytime.

Tasman Inc.3


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3

Tasman Inc. gets a $50,000 loan from the bank.

Interest rate is 6% per year. Interest on theoutstanding amount must be paid each year onthe anniversary. Principal can be repaid at anytime.


Credit Bank loan Liability 50,000

To record the receipt of bank loan.

Tasman Inc.Tasman Inc Tasman Inc


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Revenue - Assets

Current assets

Expenses Cash 60,000 -Incorp costs 1,000 Total current assets 60,000

- Long-term assets

-

- Total Assets 60,000

1,000-

Liabilities

Net Income 1,000- Current liabi lities



Statement of Retained Earnings Long-term liabilities 50,000


Owners' Equity

Opening Retained Earnings - Capital stock 10,000


Dividends -

9,000Closing Retained Earnings 1,000-


Tasman Inc.4


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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 theanniversary of the lease.

Tasman Inc.4


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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 theanniversary of the lease.

There is no entry.Signing of a lease (or any contract) is not considered atransaction for accounting purposes.

Tasman Inc.5


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5

Make the rent payment for 2003 ($36,000).

Tasman Inc.5


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5

Make the rent payment for 2003 ($36,000).

Debit Prepaid rent expense Asset 36,000

Credit Cash Asset 36,000

To record the payment of 2003 rent in advance.



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Revenue - Assets

Current assets

Expenses Cash 24,000 -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

Long-term liabilities 50,000

Opening Retained Earnings - 51,000

Net Income (Loss) 1,000- Owners' Equity

Dividends - Capital stock 10,000

Retained Earnings 1,000-Closing Retained Earnings 1,000-

9,000


Tasman Inc.6


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6

Buy an oven which costs $15,000. Pay $5,000

cash, balance is due in one year. Interest rateon the outstanding balance is 3.5% per year.

Tasman Inc.6


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6

Buy an oven which costs $15,000. Pay $5,000

cash, balance is due in one year. Interest rateon the outstanding balance is 3.5% per year.

Debit Cooking equipment Asset 15,000


Credit Accounts payable Liability 10,000

To record the purchase of oven partially on credit.




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Revenue - Assets

Current assets

Expenses Cash 19,000 -

Incorp costs 1,000 Prepaid rent expense 36,000-


- 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 10,000Retained Earnings 1,000-

9,000


Tasman Inc.7


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7

Buy $1,500 of food supplies (ingredients to make

pizzas).

Tasman Inc.7


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7

Buy $1,500 of food supplies (ingredients to make

pizzas).

Debit Food inventory Asset 1,500


To record the purchase of supplies to be used in making pizzas for sale.




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Revenue - Assets

Current assets


Incorp costs 1,000 Prepaid rent expense 36,000

- Food inventory 1,500


- Long-term assets


Net Income 1,000- 15,000

Total Assets 70,000







Dividends - 61,000

Owners' Equity

Closing Retained Earnings 1,000- Capital stock 10,000

Retained Earnings 1,000-

9,000


Tasman Inc.8


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8

Purchase office equipment costing $4,000 on

credit. Full amount to be paid within 30 days.

Tasman Inc.8


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8

Purchase office equipment costing $4,000 on

credit. Full amount to be paid within 30 days.

Debit Office equipment Asset 4,000


To record the purchase of office equipment on credit.




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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


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9

Hired a chef. Salary of $33,800 per year paid bi-

weekly (26 times a year).

Tasman Inc.9


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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 foraccounting purposes.

Tasman Inc.10


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10

In addition to being the manager, Dave will be the

delivery man until there is revenue enough to hireone. Dave decides to pay himself a salary of$62,400 per year paid bi-weekly. To avoiddraining cash from the company, Dave will not

take cash salary until further notice.

Tasman Inc.10


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10

In addition to being the manager, Dave will be the

delivery man until there is revenue enough to hireone. Dave decides to pay himself a salary of$62,400 per year paid bi-weekly. To avoiddraining 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


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11

First salary payments are made.

Tasman Inc.11


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11

First salary payments are made.

Debit Salary expense Expense 2,400


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



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




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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


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12

Buy a delivery car, a used 1989 Camaro, for

$10,000. Expected remaining life is 5 years or100,000 kms.

Tasman Inc.12


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Buy a delivery car, a used 1989 Camaro, for

$10,000. Expected remaining life is 5 years or100,000 kms.

Debit Vehicle Asset 10,000


To record purchase of used vehicle to be used as delivery vehicle.

Tasman Inc.Tasman Inc. Tasman Inc.Income statement Balance Steet

F d d D b 31 2003 A t


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Revenue - Assets

Current assets

Expenses Cash 6,200

Incorp costs 1,000 Prepaid rent expense 36,000Salaries 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


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Tasman caters an event for $1,500. Receives

$900 in cash. The balance is due in 30 days.

Tasman Inc.13


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Introduction to Accounting106

Tasman caters an event for $1,500. Receives

$900 in cash. The balance is due in 30 days.

Debit Cash Asset 900

Debit Accounts receivable Asset 600

Credit Catering revenue Revenue 1,500

To record the earning of catering revenue.


For year ended December 31 2003 As at


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Revenue Assets

Catering 1,500 Current assets

1,500 Cash 7,100

Expenses Prepaid rent expense 36,000Incorp 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


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Store is open for business. Cash register reports

revenue of $1,200 for the day.

Tasman Inc.14


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Store is open for business. Cash register reports

revenue of $1,200 for the day.


Credit Store revenue Revenue 1,200

To record the aggregate sales for the first day of business.




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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' EquityClosing Retained Earnings 2,000- Capital stock 10,000


8,000


Tasman Inc.15


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The company upstairs in Tasmans building

approaches Dave about an exclusive cateringarrangement whereby the company will payTasman $4,000 up front to cater 5 functionsthroughout the year. Dave accepts the deal and

$4,000 cash.

Tasman Inc.15


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The company upstairs in Tasmans building

approaches Dave about an exclusive cateringarrangement whereby the company will payTasman $4,000 up front to cater 5 functionsthroughout the year. Dave accepts the deal and

$4,000 cash.


Credit Unearned revenue Liability 4,000

To record the receipt of cash for work to be performed in the future.





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Revenue Assets



Expenses Prepaid rent expense 36,000

Incorp costs 1,000 Food inventory 1,500

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 10,000Closing Retained Earnings 2,000- Retained Earnings 2,000-

8,000


Tasman Inc.16


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Purchase $5,000 more of food supplies on credit

with the supplier. To be paid within 30 days.

Tasman Inc.16


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Purchase $5,000 more of food supplies on credit

with the supplier. To be paid within 30 days.



To record the purchase of food inventory on credit.





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Revenue Assets





- Long-term assets



Vehicle 10,000 29,000


Liabilities









8,000


Tasman Inc.17


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Pay off the balances owing on the office

equipment and the food supplies.


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y ,

Revenue Assets





- Long-term assets



Vehicle 10,000 29,000


Liabilities









8,000


Tasman Inc.18


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Dave finds out that the company that owes

Tasman $600 for the catering job has gonebankrupt and Tasman will not be receivingpayment.

Tasman Inc.18


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Dave finds out that the company that owes

Tasman $600 for the catering job has gonebankrupt and Tasman will not be receivingpayment.

Debit Bad debt expense Expense 600

Credit Accounts receivable Asset 600

To record the write-off of amount owing from customer.





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y ,

Revenue Assets





Salaries 3,700 Accounts receivable - 45,800

Bad debts 600 Long-term assets



Vehicle 10,000 29,000


Liabilities








Capital stock 10,000

Closing Retained Earnings 2,600- Retained Earnings 2,600-

7,400



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Tasman Inc.19


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Tasman provides the catering for an event for

the company upstairs. Everything goes fine.

Debit Unearned revenue Liability 800

Credit Catering revenue Revenue 800

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





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Revenue Assets









Vehicle 10,000 29,000


Liabilities









8,200


Tasman Inc.Summary amount 1


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Store revenues have been $220,000.


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All salaries have been paid. Dave has taken half

of his salary in cash.



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All salaries have been paid. Dave has taken half

of his salary in cash.




To record salary expense for Manager (62,400 2,400 (previously recorded) = 60,000)



To record payment of chefs salary (33,800- 1,300 (previously recorded) = 32,500).


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f $


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Additional food supply purchases were $80,000.


Addi i l f d l h $80 000


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Additional food supply purchases were $80,000.



To record aggregate food supply purchases for the year.




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Revenue Assets


Store sales 221,200 223,500 Cash 79,600






Vehicle 10,000 29,000

Net Income 125,700 Total Assets 231,100

Liabilities






Net Income (Loss) 125,700 95,400


Capital stock 10,000Closing Retained Earnings 125,700 Retained Earnings 125,700

135,700



F d li th t h d t $3 500 h d


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Food supplies that had cost $3,500 are on hand

on December 31, 2003.


Food supplies that had cost $3,500 are on hand on


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Food supplies that had cost $3,500 are on hand onDecember 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


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Utiliti ll id i h th


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Utilities expenses were all paid in cash on thelast day of each month. Total for the year was$9,600.


Utiliti ll id i h th


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Utilities expenses were all paid in cash on thelast day of each month. Total for the year was$9,600.

Debit Utilities expense Expense 9,600


To record aggregate payment of utilities expense for the year.


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Tasman catered 3 of the remaining events for


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Tasman catered 3 of the remaining events forthe company upstairs. The last one will be heldon January 7, 2004.

Debit Unearned revenue Liability 2,400

Credit Catering revenue Revenue 2,400

To record the earning of revenue for 3 of remaining 4 events that had been pre-paid.




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Revenue Assets


Store sales 221,200 225,900 Cash 70,000

Prepaid rent expense 36,000Cost of goods sold 83,000- Food inventory 3,500

Gross margin 142,900 Accounts receivable - 109,500

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 138,500

Utilities 9,600

107,400- Liabilities

Current liabilities

Net Income 35,500 Due to shareholder 32,200


Unearned revenue 800 43,000

Tasman Inc. Long-term liabilities 50,000

Statement of Retained Earnings 93,000

For year ended December 31, 2003 Owners' Equity

Capital stock 10,000Opening Retained Earnings - Retained Earnings 35,500


Dividends - 45,500

Closing Retained Earnings 35,500 Total Liabilities and OE 138,500


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Tasman Inc.Adjusting entry 1

Costs related to the oven the office equipment


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Costs related to the oven, the office equipment,and the Camaro must be recorded.

Debit Depreciation expense Expense 3,000

Credit Accumulated Depreciation Oven

Contra-asset 3,000

To record annual depreciation of Oven (15,000/5 = 3,000 (assume 5-year life)).


Credit Accumulated Depreciation Vehicle

Contra-asset 2,000

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


Credit Accumulated Depreciation Office equipment

Contra-asset 1,000

To record annual depreciation of office equipment (4,000/4 = 1,000 (assume 4-year life)).


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Interest has accrued on the bank loan and the


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Interest has accrued on the bank loan and theamount due to the oven supplier.

Debit Interest expense Expense 3,000

Credit Interest payable Liability 3,000

To record the interest which has accrued in the year (50,000*6% = 3,000)

Debit Interest expense Expense 350

Credit Interest payable Liability 350

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


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Rent expense must be recorded


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Rent expense must be recorded.

Recall that $36,000 was paid at the beginning ofthe year for the full year and was recorded as anasset, Prepaid rent expense.


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The Accounting Cycle1. Transaction or event occurs2. Recorded in the Journal using a Journal Entry.

3 Journal is posted to Ledger


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4. Ledger accounts are totalled.

5. 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 itis informative to do it to help understand the fundamentals.


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Financial statements

10,000 36,000 600 600 1,000 1,500 1,200

50 000 5 000 2 400 800 220 000

Due to shareholderCash Accounts Receivable Catering revenue Store sales

Numbers to go to the financial statements


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50,000 5,000 - 2,400 800 220,000

900 1,500 28,800 2,400 221,200 221,200

1,200 1,300 32,200 4,700 4,700 -

4,000 10,000 36,000 36,000 -220,000 9,000 -

32,500 9,000 10,000

31,200 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

3,000 1,000 3,000

350 1,000 1,000 1,00015,000 3,350 - 2,000

15,000 6,000 6,000

4,000 -

4,000 800 4,000 3,700

3,000 2,400 92,500

1,000 800 96,200 96,200 3,000

2,000 10,000 - 350

6,000 10,000 3,350 3,350

50,000 -

50,000 600

600 600

- 9,600

10,000 9,600 9,600

10,000 -

9,850

9,850

Retained earnings

Cooking equipment

Accumulated depn

Accounts payable

Interest payable

Unearned revenue

Prepaid rent expense

Capital stock

Cost of goods sold

Incorporation costs

Salaries

Bad debts

Utilities

Vehicle

Rent

Depreciation

Interest

Bank loan

Office equipment

Food inventory



Revenue Assets


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Store sales 221,200 225,900 Cash 70,000

Food inventory 3,500 73,500Cost 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 liabilitiesDepreciation 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

Long-term liabilities 50,000

96,350

Tasman Inc. Owners' Equity


For year ended December 31, 2003 Retained Earnings 9,850-150

O i R t i d E i

Documents

Financial Accounting Notes 3b