Introduction To Accounting

Introduction to Accounting
Presented by Kevin Markle August, 2004
Purpose To teach the basics of accounting to those students entering the MBA program at SSB who do not have any background in accounting. To prepare all MBA students for the mandatory course, ACTG 5100 Financial Accounting for Managers, by providing the fundamental concepts on which the course builds.
Intended audience 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.
Introduction to Accounting 3
Agenda
1. 2. 3. 4.
Fundamental concepts The Accounting Cycle Financial statements 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.
Fundamental concepts Who uses accounting information? Owners Managers Investors (including potential)
Analysts on their behalf
Creditors (including potential) Government (tax assessment) Regulators Customers

Fundamental concepts Accounting has two main divisions: Financial accounting

Primarily prepared for users external to the company.
Revenues, earnings, assets, etc.
Management accounting
Primarily for internal purposes
Costing, budgeting, net present value, etc.
This lecture will focus only on financial accounting.

Fundamental concepts There are several ways that cash gets into a company: Investment by owners Investment by creditors (loans) Payments from customers. Repayment of amounts loaned to other entities. Return on investments (interest and dividend) Proceeds from selling assets.
Fundamental concepts
These can be organized into three categories: Operations Payments from customers Refunds from suppliers Financing Investment by owners Investment by creditors (loans) Investing Return on investments (interest and dividend) Proceeds from selling assets Repayment of amounts loaned to other entities
Similarly, money going out of an entity can be categorized: Operations Payments to suppliers Refunds to customers Financing Payment of dividends or capital to owners Repayment of creditors Investing Purchase of assets Amounts invested in other entities (debt or equity)
Fundamental concepts Financial accounting categorizes all transactions and events based on their substance.
It is very important that the substance of a transaction be accurately reflected by financial accounting because the users of the information are using it with the assumption that these categorizations are being made accurately.
If money invested by owners was reported as revenue, this would be counter to the fundamental definition of revenue (i.e. that it results from the operations of the company).
The separation of income and capital is a fundamental concept of financial accounting.

Fundamental concepts Entity concept Going concern Unit of measure Periodic reporting
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Entity concept There are three basic structures that a company can have in Canada:
1. 2. 3.
Sole proprietorship Partnership Corporation A sole proprietorship is not a legal entity separate from its owner A partnership is not a legal entity separate from its owners
These are both sub-components of their owners/partners for legal purposes
A corporation is a separate legal entity
The entity concept for accounting does not simply follow the legal guidelines
A business can be a separate entity for accounting even if it is not one from a legal perspective
Fundamental concepts Entity concept It is essential that we know for which entity we are accounting because it will determine if and how events are recorded.
e.g. If Ms. Prop is the sole proprietor of a business called SP, there is one legal entity, Ms. Prop (SP is not a separate legal entity).
If we wish to account for SP, there will be events to account for that are non-events from a legal perspective
e.g. When Ms. Prop puts money into a separate account for the company. This is a non-event legally, but is an event to be accounted for from an accounting perspective.
Fundamental concepts 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.
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Fundamental concepts Unit of measure In order for accounting to present information that is useful, it must be able to express things in a common unit of measure. The unit of measure in Canada is usually the Canadian dollar (or U.S. dollar).
It is not useful to tell users that an entity has 30 cars, a building, some land, some equipment, and that it sold 35,000 widgets in the year. The unit of measure concept allows us to express all of these things in dollars.
Fundamental concepts 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 common reporting periods are monthly or quarterly.
Fundamental concepts To review: Entity concept Going concern Unit of measure Periodic reporting
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1.
The Accounting Cycle Transaction or event occurs

Could simply be the passage of time.
1.
Recorded in the Journal using a Journal Entry.

event is translated into accounting language.
1.
Journal is posted to Ledger

the information from all the journal entries in the period is aggregated.
1. 2.
Ledger accounts are totalled. Financial statements are prepared.

The Accounting Cycle

1. 2. 3. 4. 5.
Transaction or event occurs Recorded in the Journal using a Journal Entry. Journal is posted to Ledger Ledger accounts are totalled. Financial statements are prepared.
It is important to note that the decision-making of accounting occurs at step 2 Journal entry.
Steps 3 5 are mechanical exercises.
Therefore, the decisions made when making the journal entry (i.e. translating to accounting language) are very important as they determine what will ultimately be presented on the financial statements. contd on next slide

The making of decisions about what journal entry should be made when a transaction or event occurs is the prominent theme of ACTG 5100.
It is commonly believed that these decisions are bound by strict rules that dictate what the journal entry should be.
In reality, this is not true. There are principles that can guide the decisions, but there are many circumstances for which there are not specific treatments prescribed and, therefore, the judgment of the preparers determines the treatment.
For the purposes of this lecture, we will look mostly at non-ambiguous situations.
Students will become very aware of the ambiguity in the real world in ACTG 5100 (and from reading the newspaper).
Accounting Equation Fundamental Accounting Equation:
Assets = Liabilities + Owners Equity

This equation is always in balance In order for this equation to remain in balance, double-entry bookkeeping is employed.
That is, the recording of every transaction or event must have at least two parts
Either an equal impact (increase or decrease) to both sides of the equation or equal and opposite impact to one side.
The recording of every transaction must keep this equation in balance

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Journal Entries All journal entries have two sides: Debit and Credit
For every journal entry, the total debits must equal the total credits
This ensures that the fundamental accounting equation (A = L + OE) is always in balance.
The basic journal entry: Debit Account name1 Credit Account name2 To record
$amount $amount
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Journal Entries Debit and Credit are just accountingspeak for increase and decrease
Debit means increase for some elements and decrease for other elements. Likewise for credit.
For example, a company pays its $500 utility bill:
In English: the company has incurred an expense (the amount of expense has increased) and the amount of cash in the company has decreased. An expense (Utilities) has increased An asset (Cash) has decreased In Journal entry:
Debit Utility expense $500 Credit Cash $500 To record the payment of utility bill
Journal Entries 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.
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Journal Entries
The Basic Accounting Elements:
Asset Expense
Liability
Revenue Owners Equity
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The Basic Accounting Elements: Asset

Has future benefit to the entity
Journal Entries
Liability
Obligation to transfer assets in the future
Owners Equity
Owners interest in the company
Revenue
Increase in economic resources resulting from normal operations of the company
Expense
Decrease in economic resources resulting from normal operations of the company
Journal Entries
The Basic Accounting Elements:
Balance Sheet Income Statement
Balance Sheet/ Stmt of Retained Earnings
Debit
Asset
Expense
Credit
Liability
Revenue Owners Equity
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Journal Entries
Balance Sheet Income Statement Balance Sheet/ Stmt of Retained Earnings
Debit
Asset
Expense
Credit
Liability
Revenue
Owners Equity
To increase an Asset or Expense: Debit To increase a Liability, Revenue, or Owners Equity: Credit To decrease an Asset or Expense: Credit To decrease a Liability, Revenue, or Owners Equity: Debit
Journal Entries Going back to the Fundamental Accounting Equation:
Assets = Liabilities + Owners Equity Debit Credit Credit
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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 In Accounting:
Journal Entries
Revenue increases $300 $300 $300
Debit Cash (Asset) Credit Consulting Revenue
To record payment for consulting services rendered
Assets have increased. Liabilities and Owners Equity appear to be unchanged. Is A = L + OE not true (i.e. out of balance)?
Element structures
Assets Liabilities Owners equity
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Element structures
Assets
Current assets
Cash
Cash on hand Bank accounts CIBC BMO Accounts receivable customer 1 Accounts receivable customer 2 Raw materials Work in process Finished goods Product 1 Product 2
Accounts receivable

Inventory
Element structures
Assets
Current assets Long-term assets
Buildings
Ontario buildings Quebec buildings Montreal building Sherbrooke building
Vehicles
Cars Trucks Truck 1 Truck 2
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Element structures
Liabilities
Current liabilities
Accounts payable Accrued liabilities
Long-term liabilities
Bank loans

Loan from RBC Loan from Scotiabank
Notes payable Bonds payable
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Element structures
Owners equity
Capital stock (direct investment) Retained earnings (indirect investment)
Revenue Expenses (Dividends)
Although revenue and expenses are not subpieces of Retained earnings the way Current assets are a sub-piece of Total assets, for the purposes of understanding how they fit in to the equation, this representation is helpful.
Element structures
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.
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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.
Element structures
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.
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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.
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Journal Entries
Going back to the Fundamental Accounting Equation:
Assets Debit
Assets Current assets Long-term assets
= Liabilities Owners + Equity Credit Credit

Liabilities Current liabilities Long-term liabilities Direct investment Capital stock Indirect investment Dividends (debit) Retained earnings Revenue (credit) Expense (debit)
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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)
1.
Income Statement
The what did we do? statement Shows the activity the entity undertook in its normal course of operations.
1.
Statement of Retained Earnings

Shows the changes in Retained earnings in the year
Often shown at the bottom of the Income Statement
1.
Statement of Cash Flows

Shows the sources and uses of cash in the year
Information is derived from the B/S and I/S and other
Financial Statements 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.
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Company Name Income statement For year ended December 33 , 3333 Revenue Expenses Salaries Utilities Rent Other 3 33 3 3, 3 Company Name Balance Steet As at December 33 , 3333 Assets Current assets Long-term assets
33 3 , 3 3 ,3 3 33
4, 4 44 4 3, 3 33 3 3, 3 33 3 33 ,3 3 3, 3 33 3 33 3 , 3
Total Assets Liabilities Current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 33 3 , 3 33 3 33 3 , 3
3 ,3 3 33
Net Income
3 ,3 3 33 3 ,3 3 33 3 ,3 3 33 33 3 , 3 33 3 , 3 33 3 , 3
Company Name Statement of Retained Earnings For year ended December 33 , 3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings
Total Liabilities and OE
3 ,3 3 33
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Company Name Income statement For year ended December 33 , 3333 Revenue Expenses Salaries Utilities Rent Other 3 33 3 3, 3 Company Name Balance Steet As at December 33 , 3333 Assets Current assets Long-term assets
33 3 , 3 3 ,3 3 33
3, 3 33 3 3, 3 33 3 3, 3 33 3 33 ,3 3 3, 3 33 3 33 3 , 3
Total Assets Liabilities Current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 33 3 , 3 33 3 33 3 , 3
3 ,3 3 33
Net Income
3 ,3 3 33 3 ,3 3 33 3 ,3 3 33 33 3 , 3 33 3 , 3 33 3 , 3
Company Name Statement of Retained Earnings For year ended December 33 , 3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings
3 ,3 3 33
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Loblaw
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Loblaw
46
Loblaw
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Loblaw
To Balance Sheet
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Loblaw
From Statement of Retained Earnings
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Canadian Tire
50
Canadian Tire
51
Canadian Tire
52
Canadian Tire
To Balance Sheet
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Canadian Tire
From Statement of Retained Earnings
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Research In Motion
55
Research In Motion
56
Research In Motion
57
Research In Motion
58
Research In Motion
To Statement of Shareholders Equity
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Research In Motion
From Income Statement
To Balance Sheet
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Research In Motion
From Statement of Shareholders Equity
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Accounting Methods
Cash Accounting Revenue is recorded when cash is received. Expense is recorded when cash is disbursed.
Very straightforward. Facts determine the timing of entries. Less room for judgment.
Accrual Accounting Revenue is recorded (recognized) when the revenue has been earned.
When the product or service has been provided to the customer, regardless of when payment is received.
Expenses are matched to the revenue that they helped to earn, regardless of when payment is made.
Accounting Methods It is possible for cash receipt to coincide with revenue recognition and cash payment to coincide with expense recognition. However, in business in North America (and, indeed globally), it is the norm for the exchange of cash to either precede or follow the actual economic event. Except in the simplest of entities (e.g. an individual person) or in unique circumstances, cash accounting will not yield useful information.
Accrual accounting is the standard method.
Accrual Accounting
2 kinds of entries
1. Transactional
The recording of an exchange with another entity 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.
1. Adjusting
e.g. Depreciation of capital assets, earning of interest revenue.
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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.
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Journal Entries
It is best to reason logically:
1. 1.
Which financial statement should be impacted?
Balance sheet, Income statement, or Stmt of Retained Earnings?
Which element on that statement should be impacted? 2. Which specific account should be impacted?
Assets Current assets Cash Accts receivable Long-term assets Building Land Liabilities Current liabilities Accts payable Long-term liabilities Bank loan Owners Equity Direct investment Capital stock Indirect investment Dividends (debit) Retained earnings Revenue (credit) Expense (debit)
Account
Element
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.
Example
Tasman
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Example Tasman Inc. Our approach We will be given several transactions and events and will process them one at a time, carrying them all the way to the financial statements.
This approach will reinforce the impact of each event on the financial statements as a whole.
We will then go back and do the mechanical steps that get us from journal entries to financial statements.
This will show the accounting cycle in its entirety.
Tasman
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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. Income statement For year ended December 33 , 3333 Revenue Expenses Net Income Liabilities Current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings Total Liabilities and OE Tasman Inc. Balance Steet As at January 33333 , Assets Current assets Long-term assets
Total Assets
Tasman Inc. Statement of Retained Earnings For year ended December 33 , 3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings
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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.
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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:
Debit
Incorporation costs
Expense
1,000 1,000
Credit
Due to shareholder
Liability
To record payment of incorporation costs by shareholder.
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Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Long-term assets -
33 3 , 3 33 3 , 3 33 3 , 3
Total Assets Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
Net Income
33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 -
Tasman Inc. Statement of Retained Earnings For year ended December33 ,3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 33 3 , 3 33 3 , 3
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Tasman Inc.
2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return.
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Tasman Inc.
2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return.
Debit
Cash
Asset
10,000 10,000
Credit
To record sale of common shares.
Capital stock Owners Equity
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Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Total current assets Long-term assets Total Assets Net Income 33 3 , 3 33 3 , 3 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
3, 3 33 3
33 3 , 3 -
3, 3 33 3
3, 3 33 3
33 3 , 3 33 3 , 3 33 3 , 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
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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.
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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.
Debit
Cash
Asset
50,000
Liability
Credit
To record the receipt of bank loan.
Bank loan
50,000
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Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Total current assets Long-term assets Total Assets Net Income 33 3 , 3 33 3 , 3 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
3, 3 33 3
33 3 , 3 -
3, 3 33 3
3, 3 33 3
33 3 , 3 33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
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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.
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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.
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Tasman Inc.
5 Make the rent payment for 2003 ($36,000).
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Tasman Inc.
5 Make the rent payment for 2003 ($36,000).
Debit
Prepaid rent expense
Asset
36,000
Asset
Credit
To record the payment of 2003 rent in advance.
Cash
36,000
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Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Total current assets Long-term assets Net Income 33 3 , 3 Total Assets 33 3 , 3 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities 33 3 , 3 33 3 , 3 33 3 , 3 Total Liabilities and OE 3, 3 33 3 Owners' Equity Capital stock Retained Earnings 3, 3 33 3
33 3 , 3 -
3, 3 33 3 3, 3 33 3
3, 3 33 3
Tasman Inc. Statement of Retained Earnings For year ended December33 ,3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings
33 3 , 3 33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3
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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.
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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.
Debit
Cooking equipment
Asset
15,000
Asset Liability
Credit Credit
To record the purchase of oven partially on credit.
Cash Accounts payable
5,000 10,000
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Tasman Inc. Income statement For year ended December 33 , 3333 Revenue Expenses Incorp costs -
Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Total current assets Long-term assets Cooking equipment
Tasman Inc.
33 3 , 3 33 3 , 3 33 3 , 3
3, 3 33 3 3, 3 33 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3
Net Income
Total Assets Tasman Inc. Statement of Retained Earnings For year ended December 33 , 3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 33 3 , 3 33 3 , 3 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
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Tasman Inc.
7 Buy $1,500 of food supplies (ingredients to make pizzas).
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Tasman Inc.
7 Buy $1,500 of food supplies (ingredients to make pizzas).
Debit
Food inventory
Asset
1,500
Asset
Credit
Cash
1,500
To record the purchase of supplies to be used in making pizzas for sale.
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Tasman Inc. Income statement For year ended December33 ,3333 Revenue Expenses Incorp costs -
Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment
Tasman Inc.
33 3 , 3 33 3 , 3 33 3 , 3
4, 4 44 4 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3
Net Income
Total Assets Tasman Inc. Statement of Retained Earnings For year ended December33 ,3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 33 3 , 3 33 3 , 3 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
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Tasman Inc.
8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days.
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Tasman Inc.
8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days.
Debit
Office equipment
Asset
4,000
Liability
Credit
Accounts payable
4,000
To record the purchase of office equipment on credit.
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Tasman Inc. Income statement For year ended December33 ,3333 Revenue Expenses Incorp costs -
Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment Office equipment Total Assets
Tasman Inc.
33 3 , 3 33 3 , 3 33 3 , 3
3, 3 33 3 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3 3, 3 33 3
Net Income
Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
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Tasman Inc.
9 Hired a chef. Salary of $33,800 per year paid biweekly (26 times a year).
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Tasman Inc.
9 Hired a chef. Salary of $33,800 per year paid biweekly (26 times a year).
No entry.
Hiring of an employee is not considered a transaction for accounting purposes.
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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.
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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.
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Tasman Inc.
11 First salary payments are made.
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Tasman Inc.
11 First salary payments are made.
Debit
Salary expense
Expense
1,300
Asset
Credit
To record payment of chef (33,800/26 = 1,300).
Cash
1,300
Debit
Salary expense
Expense
2,400
Liability
Credit
Due to shareholder
2,400
To record salary expense for Manager, not paid in cash (62,400/26 = 2,400)
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Tasman Inc. Income statement For year ended December33 ,3333 Revenue Expenses Incorp costs Salaries -
Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment Office equipment Total Assets
Tasman Inc.
33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3
3, 3 33 3 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3 3, 3 33 3
Net Income
Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
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Tasman Inc.
12 Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms.
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Tasman Inc.
12 Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms.
Debit
Vehicle
Asset
10,000
Asset
Credit
Cash
10,000
To record purchase of used vehicle to be used as delivery vehicle.
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Tasman Inc. Income statement For year ended December33 ,3333 Revenue Expenses Incorp costs Salaries -
Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
Tasman Inc.
33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3
33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3
Net Income
3, 3 33 3 3, 3 33 3
33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
104
Tasman Inc.
13 Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days.
105
Tasman Inc.
13 Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days.
Debit Debit
Cash Accounts receivable
Asset Asset
900 600
Revenue
Credit
Catering revenue
1,500
To record the earning of catering revenue.
106
Tasman Inc. Income statement For year ended December 33 , 3333 Revenue Catering Expenses Incorp costs Salaries
Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Total current assets Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
Tasman Inc.
33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3
33 3 , 3 3, 3 33 3 33 3 , 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3
Net Income
4, 4 44 4 3, 3 33 3
Tasman Inc. Statement of Retained Earnings For year ended December 33 , 3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 33 3 , 3 33 3 , 3
33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 44 4 , 4
3, 3 33 3
107
Tasman Inc.
14 Store is open for business. Cash register reports revenue of $1,200 for the day.
108
Tasman Inc.
14 Store is open for business. Cash register reports revenue of $1,200 for the day.
Debit
Cash
Asset
1,200
Revenue
Credit
Store revenue
1,200
To record the aggregate sales for the first day of business.
109
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Catering Store sales Expenses Incorp costs Salaries
Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Total current assets Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
Tasman Inc.
33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 -
33 3 , 3
33 3 , 3 3, 3 33 3 33 3 , 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3
33 3 , 3 33 3 , 3
Net Income
3, 3 33 3 3, 3 33 3
33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3

3, 3 33 3
110
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.
111
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.
Debit
Cash
Asset
4,000
Liability
Credit
Unearned revenue
4,000
To record the receipt of cash for work to be performed in the future.
112
Tasman Inc.
Tasman Inc. Income statement For year ended December 33 , 3333 Revenue Catering Store sales Expenses Incorp costs Salaries Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 Net Income 33 3 , 3 33 3 , 3
33 3 , 3
3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3
3, 3 33 3
3, 3 33 3 3, 3 33 3
33 3 , 3 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
113
Tasman Inc.
16 Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days.
114
Tasman Inc.
16 Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days.
Debit
Food inventory
Asset
5,000
Liability
Credit
Accounts payable
5,000
To record the purchase of food inventory on credit.
115
Tasman Inc.
33 3 , 3
3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3
3, 3 33 3
3, 3 33 3 3, 3 33 3
33 3 , 3 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
116
Tasman Inc.
17 Pay off the balances owing on the office equipment and the food supplies.
117
Tasman Inc.
17 Pay off the balances owing on the office equipment and the food supplies.
Debit
Accounts payable
Liability
4,000
Asset
Credit Debit
Accounts payable
Cash
4,000
To record the payment of amounts owing to supplier of office equipment.

Liability
5,000
Asset
Credit
Cash
5,000
To record the payment of amount owing to supplier of food inventory.
118
Tasman Inc.
33 3 , 3
33 3 , 3 3, 3 33 3 33 3 , 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3
3, 3 33 3
3, 3 33 3 3, 3 33 3
33 3 , 3 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
119
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.
120
Tasman Inc.
18 Dave finds out that the company that owes Tasman $600 for the catering job has gone bankrupt and Tasman will not be receiving payment.
Debit
Bad debt expense
Expense
600
Asset
Credit
Accounts receivable
600
To record the write-off of amount owing from customer.
121
Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 33 3 Net Income 33 3 , 3 33 3 , 3
33 3 , 3
33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3
3, 3 33 3
3, 3 33 3 3, 3 33 3
33 3 , 3 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
122
Tasman Inc.
19 Tasman provides the catering for an event for the company upstairs. Everything goes fine.
123
Tasman Inc.
19 Tasman provides the catering for an event for the company upstairs. Everything goes fine.
Debit
Unearned revenue
Liability
800 800
Credit
Catering revenue
Revenue
To record the earning of catering revenue (assume $4,000 is earned evenly over 5 events)
124
Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 33 3 Net Income 33 3 , 3 33 3 , 3
33 3 , 3
33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3
3, 3 33 3
3, 3 33 3 3, 3 33 3
33 3 , 3 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3
125
Tasman Inc.
Summary amount 1 Store revenues have been $220,000.
126
Tasman Inc.
Summary amount 1 Store revenues have been $220,000.
Debit
Cash
Asset
220,000
Revenue
Credit
Store revenue
220,000
To record aggregate store revenue for the year.
127
Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 3 33 3 3, 3 33 3 , 3 33 3 , 3 33 3 Net Income 33 3 , 3 3 33 3 3, 3
3 33 3 3, 3
3 33 3 3, 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3
3 33 3 3, 3
3, 3 33 3 3 33 3 3, 3
Tasman Inc. Statement of Retained Earnings For year ended December33 ,3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 3 33 3 3, 3 3 33 3 3, 3
33 3 , 3 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3 33 3 3, 3 3 33 3 3, 3
3 33 3 3, 3
128
Tasman Inc.
Summary amount 2 All salaries have been paid. Dave has taken half of his salary in cash.
129
Tasman Inc.
Summary amount 2 All salaries have been paid. Dave has taken half of his salary in cash.
Debit
Salary expense
Expense
32,500
Asset
Credit
Cash
32,500
To record payment of chefs salary (33,800 - 1,300 (previously recorded) = 32,500).
Debit
Salary expense
Expense
60,000
Asset Liability
Credit Credit
Cash Due to shareholder
31,200 28,800
To record salary expense for Manager (62,400 2,400 (previously recorded) = 60,000)
130
Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 3 33 3 3, 3 33 3 , 3 3, 3 33 3 33 3 Net Income 3, 3 33 3 3 33 3 3, 3
3 33 3 3, 3
3 33 3 3, 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3
3 33 3 3, 3
3, 3 33 3 3 33 3 3, 3
3, 3 33 3 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3 33 3 3, 3 3 33 3 3, 3
3 33 3 3, 3
131
Tasman Inc.
Summary amount 3 Additional food supply purchases were $80,000.
132
Tasman Inc.
Summary amount 3 Additional food supply purchases were $80,000.
Debit
Food inventory
Asset
80,000
Asset
Credit
Cash
80,000
To record aggregate food supply purchases for the year.
133
Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 3 33 3 3, 3 33 3 , 3 3, 3 33 3 33 3 Net Income 3, 3 33 3 3 33 3 3, 3
3 33 3 3, 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3
3 33 3 3, 3
3, 3 33 3 3 33 3 3, 3
3, 3 33 3 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3 33 3 3, 3 3 33 3 3, 3
3 33 3 3, 3
134
Tasman Inc.
Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003.
135
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
136
Tasman Inc.
Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003. Total purchased in the year
= 1,500 + 5,000 + 80,000 = 86,500 86,500 3,500 = 83,000 = Cost of the inventory used = Cost of goods sold
Debit
Cost of goods sold
Expense
83,000 83,000
Credit
Food inventory
Liability
To record the cost of food inventory used in the year.
137
Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 3 33 3 3, 3 -
3 33 3 3, 3 3, 3 33 3 3 33 3 3, 3
3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3
3 33 3 3, 3
33 3 , 3 3, 3 33 3 33 3 3, 3 33 3 3, 3 33 3
3, 3 33 3 3 33 3 3, 3
Net Income
3, 3 33 3 3, 3 33 3 33 3 , 3
Tasman Inc. Statement of Retained Earnings For year ended December33 ,3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 3, 3 33 3 3, 3 33 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3
3 33 3 3, 3
138
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.
139
Tasman Inc.
Summary amount 5 Utilities expenses were all paid in cash on the last day of each month. Total for the year was $9,600.
Debit
Utilities expense
Expense
9,600
Asset
Credit
Cash
9,600
To record aggregate payment of utilities expense for the year.
140
Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 3 33 3 3, 3 -
3 33 3 3, 3 3, 3 33 3 3 33 3 3, 3
3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3
3 33 3 3, 3
33 3 , 3 3, 3 33 3 33 3 33 3 , 3 3 33 3 3, 3 3, 3 33 3
3, 3 33 3 3 33 3 3, 3
Net Income
3, 3 33 3 3, 3 33 3 33 3 , 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3
3 33 3 3, 3
141
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.
142
Tasman Inc.
Summary amount 6 Tasman catered 3 of the remaining events for the company upstairs. The last one will be held on January 7, 2004.
Debit
Unearned revenue
Liability
2,400 2,400
Credit
Catering revenue
Revenue
To record the earning of revenue for 3 of remaining 4 events that had been pre-paid.
143
Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 3 33 3 3, 3 -
3 33 3 3, 3 3, 3 33 3 3 33 3 3, 3
3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3
3 33 3 3, 3
33 3 , 3 3, 3 33 3 33 3 33 3 , 3 3 33 3 3, 3 3, 3 33 3
3, 3 33 3 3 33 3 3, 3
Net Income
3, 3 33 3 3, 3 33 3 33 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3
3 33 3 3, 3
144
Tasman Inc.
Adjusting entry 1 Costs related to the oven, the office equipment, and the Camaro must be recorded.
145
Tasman Inc.
Adjusting entry 1 Costs related to the oven, the office equipment, and the Camaro must be recorded.
Debit
Depreciation expense
Expense
3,000 3,000
Credit
Accumulated Depreciation Oven
Contra-asset
To record annual depreciation of Oven (15,000/5 = 3,000 (assume 5-year life)).
Debit
Expense
1,000 1,000
Credit
Accumulated Depreciation Office equipment
Contra-asset
To record annual depreciation of office equipment (4,000/4 = 1,000 (assume 4-year life)).
Debit
Expense
2,000 2,000
Credit
Accumulated Depreciation Vehicle
Contra-asset
To record annual depreciation of delivery vehicle (10,000/5 = 2,000).

146
Tasman Inc.
Tasman Inc. Income statement For year ended December 33 , 3333 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Depreciation Net Income Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 3 33 3 3, 3 -
3 33 3 3, 3 3, 3 33 3 3 33 3 3, 3
3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3
3 33 3 3, 3
33 3 , 3 3, 3 33 3 33 3 33 3 , 3 33 3 , 3
3, 3 33 3 3 33 3 3, 3
3 33 3 3, 3 3, 3 33 3
Tasman Inc. Statement of Retained Earnings For year ended December 33 , 3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 3, 3 33 3 3, 3 33 3
3, 3 33 3 3, 3 33 3 33 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3

3 33 3 3, 3
147
Tasman Inc.
Adjusting entry 2 Interest has accrued on the bank loan and the amount due to the oven supplier.
148
Tasman Inc.
Adjusting entry 2 Interest has accrued on the bank loan and the amount due to the oven supplier.
Debit
Interest expense
Expense
3,000 3,000
Credit
Interest payable
Liability
To record the interest which has accrued in the year (50,000*6% = 3,000)
Debit
Interest expense
Expense
350 350
Credit
Interest payable
Liability
To record the interest which has accrued on amount payable on oven (10,000*3.5% = 350)
149
Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Depreciation Interest Net Income Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Interest payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 3 33 3 3, 3 -
3 33 3 3, 3 3, 3 33 3 3 33 3 3, 3
3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3
3 33 3 3, 3
33 3 , 3 3, 3 33 3 33 3 33 3 , 3 33 3 , 3 33 3 , 3
3, 3 33 3 3 33 3 3, 3
3 33 3 3, 3 3, 3 33 3
3, 3 33 3 3, 3 33 3 33 3 , 3 33 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 3 33 3 3, 3
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.
151
Tasman Inc.
Adjusting entry 3 Rent expense must be recorded. Recall that $36,000 was paid at the beginning of the year for the full year and was recorded as an asset, Prepaid rent expense.
Debit
Rent expense
Expense
36,000
Asset
Credit
Prepaid rent expense
36,000
To record the rent expense which had been prepaid at the beginning of the year.
152
Tasman Inc.
Tasman Inc. Income statement For year ended December33 ,3333 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Rent Depreciation Interest Net Income Tasman Inc. Balance Steet As at December 33 , 3333 Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Interest payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 3 33 3 3, 3 -
3 33 3 3, 3 3, 3 33 3 3 33 3 3, 3
3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3
3, 3 33 3
33 3 , 3 3, 3 33 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 33 3 , 3 -
3, 3 33 3 3, 3 33 3
3 33 3 3, 3 33 3 , 3
3, 3 33 3 3, 3 33 3 33 3 , 3 33 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 3, 3 33 3
153

1. 2. 3. 4. 5.
Transaction or event occurs Recorded in the Journal using a Journal Entry. Journal is posted to Ledger Ledger accounts are totalled. Financial statements are prepared.
We have done step 2 (journal entries). Step 3 is most easily done using a spreadsheet (Friedlan text provides a template).
We will use the old-fashioned method known as Taccounts.
Each account is represented by a T. All debits are posted on the left, all credits are posted on the right. Spreadsheets have made this practice virtually obsolete, but it is informative to do it to help understand the fundamentals.
154
Before the closing entry:

Cash 3, 3 33 3 3 , 3 33 3 3, 3 33 3 33 3 , 3 33 3 33 3 , 3 33 3 , 3 33 3 , 3 33 3 3 , 3 , 3 33 3 3 33 3 3, 3 33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3
T-Accounts (posting to ledgers)

Due to shareholder 33 3 , 3 44 4 , 4 3, 3 33 3 3, 3 33 3 Accounts payable 33 3 3 , 3 , 3 33 3 33 3 , 3 33 3 , 3 3, 3 33 3 Interest payable 33 3 , 3 33 3 33 3 , 3 Unearned revenue 33 3 33 3 , 3 33 3 , 3 33 3 Bank loan 3, 3 33 3 3, 3 33 3 Capital stock 3, 3 33 3 3, 3 33 3 Catering revenue 44 4 , 4 33 3 33 3 , 3 44 4 , 4 Store sales 44 4 , 4 3 33 3 3, 3 3 33 3 3, 3
Accounts Receivable 33 3 33 3 Prepaid rent expense 3, 3 33 3 3, 3 33 3 Food inventory 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3
Cost of goods sold 3, 3 33 3 3, 3 33 3 Incorporation costs 33 3 , 3 33 3 , 3 Salaries 33 3 , 3 3, 3 33 3 3, 3 33 3 Bad debts 33 3 33 3 Retained earnings
Rent 3, 3 33 3 3, 3 33 3 Depreciation 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 Interest 33 3 , 3 33 3 33 3 , 3 Utilities 33 3 , 3 33 3 , 3
Cooking equipment 3, 3 33 3 3, 3 33 3 Accumulated depn 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3
Office equipment 33 3 , 3 33 3 , 3 Vehicle 3, 3 33 3 3, 3 33 3
155
The closing entry

The closing entry resets all of the temporary accounts to zero and send the residual to Retained earnings. Dr Catering revenue 4,700 Dr Store sales 221,200 Cr Cost of goods sold 83,000 Cr Incorporation costs 1,000 Cr Salaries 96,200 Cr Bad debts 600 Cr Utilities 9,600 Cr Rent 36,000 Cr Depreciation 6,000 Cr Interest 3,350 Dr Retained earnings 9,850 To close the temporary accounts for the year
After the closing entry:

Cash 3, 3 33 3 3 , 3 33 3 3, 3 33 3 33 3 , 3 33 3 33 3 , 3 33 3 , 3 33 3 , 3 33 3 3 , 3 , 3 33 3 3 33 3 3, 3 33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3
T-Accounts (posting to ledgers)

Due to shareholder 33 3 , 3 33 3 , 3 3, 3 33 3 3, 3 33 3 Accounts payable 33 3 3 , 3 , 3 33 3 33 3 , 3 33 3 , 3 3, 3 33 3 Interest payable 33 3 , 3 33 3 33 3 , 3 Unearned revenue 33 3 33 3 , 3 33 3 , 3 33 3 Bank loan 3, 3 33 3 3, 3 33 3 Capital stock 3, 3 33 3 3, 3 33 3 Catering revenue 33 3 , 3 33 3 33 3 , 3 33 3 , 3 33 3 , 3 Cost of goods sold 3, 3 33 3 3, 3 33 3 3, 3 33 3 Incorporation costs 33 3 , 3 33 3 , 3 33 3 , 3 Salaries 33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 Bad debts 33 3 33 3 Store sales 33 3 , 3 3 33 3 3, 3 3 33 3 3, 3 3 33 3 3, 3
Accounts Receivable 33 3 33 3 Prepaid rent expense 3, 3 33 3 3, 3 33 3 Food inventory 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3
Rent 3, 3 33 3 3, 3 33 3 3, 3 33 3 Depreciation 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 Interest 33 3 , 3 33 3 33 3 , 3 33 3 , 3 Utilities 33 3 , 3 33 3 , 3 33 3 , 3 -
33 3
Retained earnings 33 3 , 3 33 3 , 3
157
Numbers to go to the financial statements

Cash 3, 3 33 3 3 , 3 33 3 3, 3 33 3 33 3 , 3 33 3 33 3 , 3 33 3 , 3 33 3 , 3 33 3 3 , 3 , 3 33 3 3 33 3 3, 3 33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 3, 3 33 3 Accounts Receivable 33 3 33 3 Prepaid rent expense 3, 3 33 3 3, 3 33 3 Food inventory 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 Due to shareholder 33 3 , 3 33 3 , 3 3, 3 33 3 3, 3 33 3 Accounts payable 33 3 3 , 3 , 3 33 3 33 3 , 3 33 3 , 3 3, 3 33 3 Interest payable 33 3 , 3 33 3 33 3 , 3 Unearned revenue 33 3 33 3 , 3 33 3 , 3 33 3 Bank loan 3, 3 33 3 3, 3 33 3 Capital stock 3, 3 33 3 3, 3 33 3
Financial statements
Catering revenue 33 3 , 3 33 3 33 3 , 3 33 3 , 3 33 3 , 3 Cost of goods sold 3, 3 33 3 3, 3 33 3 3, 3 33 3 Incorporation costs 33 3 , 3 33 3 , 3 33 3 , 3 Salaries 33 3 , 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 Bad debts 33 3 33 3 Store sales 33 3 , 3 3 33 3 3, 3 3 33 3 3, 3 3 33 3 3, 3
Rent 3, 3 33 3 3, 3 33 3 3, 3 33 3 Depreciation 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 33 3 , 3 Interest 33 3 , 3 33 3 33 3 , 3 33 3 , 3 Utilities 33 3 , 3 33 3 , 3 33 3 , 3 -
33 3
Retained earnings 33 3 , 3 33 3 , 3
158
Tasman Inc.
Tasman Inc. Income statement For year ended December 33 , 3333 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Rent Depreciation Interest Net Income Tasman Inc. Balance Steet As at December 33 , 3333 Assets Current assets Cash Food inventory Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Interest payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 33 3 , 3 33 3 , 3 33 3 , 3 3 33 3 3, 3 -
4 44 4 4, 4 3, 3 33 3 3 33 3 3, 3
3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3
3, 3 33 3
33 3 , 3 3, 3 33 3 33 3 33 3 , 3 3, 3 33 3 33 3 , 3 33 3 , 3 -
3, 3 33 3 3, 3 33 3
3 33 3 3, 3 33 3 , 3
3, 3 33 3 3, 3 33 3 33 3 , 3 33 3
3, 3 33 3 3, 3 33 3 3, 3 33 3 3, 3 33 3 33 3 , 3 33 3 3, 3 33 3
Tasman Inc. Statement of Retained Earnings For year ended December 33 , 3333 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings
159

Introduction To Accounting

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Introduction To Accounting

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Introduction to Accounting

Presented by Kevin Markle August, 2004

Fundamental concepts The Accounting Cycle Financial statements Comprehensive example

Creditors (including potential) Government (tax assessment) Regulators Customers

Fundamental concepts Accounting has two main divisions: Financial accounting

This lecture will focus only on financial accounting.

The separation of income and capital is a fundamental concept of financial accounting.

A corporation is a separate legal entity

The Accounting Cycle Transaction or event occurs

Recorded in the Journal using a Journal Entry.

Journal is posted to Ledger

Ledger accounts are totalled. Financial statements are prepared.

The Accounting Cycle

The Accounting Cycle

Accounting Equation Fundamental Accounting Equation:

Assets = Liabilities + Owners Equity

The recording of every transaction must keep this equation in balance

Journal Entries How do we know whether to debit or credit?

Revenue Owners Equity

The Basic Accounting Elements: Asset

Revenue Owners Equity

Journal Entries Going back to the Fundamental Accounting Equation:

Assets = Liabilities + Owners Equity Debit Credit Credit

Revenue increases $300 $300 $300

Debit Cash (Asset) Credit Consulting Revenue

To record payment for consulting services rendered

Loan from RBC Loan from Scotiabank

Notes payable Bonds payable

The income statement is a temporary statement

= Liabilities Owners + Equity Credit Credit

Statement of Retained Earnings

Statement of Cash Flows

Total Liabilities and OE

Total Liabilities and OE

From Statement of Retained Earnings

From Statement of Retained Earnings

To Statement of Shareholders Equity

From Income Statement

From Statement of Shareholders Equity

e.g. Depreciation of capital assets, earning of interest revenue.

Which financial statement should be impacted?

Balance sheet, Income statement, or Stmt of Retained Earnings?

To record payment of incorporation costs by shareholder.

Total Liabilities and OE

Capital stock Owners Equity

Total Liabilities and OE

Total Liabilities and OE

Prepaid rent expense

Cash Accounts payable

Total Liabilities and OE

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

Total Liabilities and OE

To record the purchase of office equipment on credit.

Total Liabilities and OE

Total Liabilities and OE

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

Total Liabilities and OE

Cash Accounts receivable

To record the earning of catering revenue.

Total Liabilities and OE

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

Total Liabilities and OE