386709

NETA POWERPOINT PRESENTATIONS TO
ACCOMPANY
VOLUME 1
Accounting
Second Canadian Edition
BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER
Adapted by Sheila Elworthy

and Tana Kristjanson
Copyright © 2014 by Nelson Education Ltd. 1

CHAPTER 1
Introduction to
Accounting and Business

Introduction to
After studying this chapter, you should be able to:
1. Describe the nature of a business,

the role of accounting, and the role
of ethics in business.
2. Summarize the development of
accounting principles and relate
them to practice.
3. State the accounting equation and
define each element of the
equation.
Introduction to
After studying this chapter, you should be able to:
4. Describe and illustrate how

business transactions can be
recorded in terms of the resulting
change in the elements of the
accounting equation.
5. Describe the financial statements
of a proprietorship and explain
how they interrelate.
1
Describe the nature of a
business, the role of
accounting, and the role of
ethics in business.

1
Types of Businesses:
Service Businesses
Provide services rather than products

to customers.
Service Business Service
Air Canada Transportation services
Astral Media Entertainment services

1
Merchandising Business
Sell products they purchase from

other businesses to customers.
Merchandising Business Product
Walmart General merchandise
Amazon.ca Books, music, videos

1
Manufacturing Business
Change basic inputs into products

that are sold to customers.
Manufacturing Business Product
General Motors Corp. Cars, trucks, vans
Dell Inc. Personal computers

The Role of Accounting in Business
Accounting can be defined as an

information system that provides
reports to users about the economic
activities and condition of a business.

The process by which accounting provides
information to users is as follows:
• Identify users.
• Assess users’ informational needs.
• Design the accounting information
system to meet users’ needs.
• Record economic data about business
activities and events.
• Prepare accounting reports for users.
1

Managerial Accounting
The area of accounting that provides

internal users with information is
called managerial accounting.
The objective of managerial
accounting is to provide relevant and
timely information for managers’ and
employees’ decision-making needs.
Financial Accounting
The area of accounting that provides

external users with information is
called financial accounting.
The objective of financial accounting
is to provide relevant and timely
information for the decision-making
needs of users outside of the
business.
Role of Ethics in Accounting and Business
Ethics are moral principles that guide

the conduct of individuals.

Opportunities for Accountants
Currently, Canada has four main

accounting designations:
• Chartered Accountant (CA)
• Certified General Accountant (CGA)
• Certified Management Accountant
(CMA)
• Chartered Professional Accountant
(CPA)

Opportunities for Accountants
• Accountants employed by a business

firm or a not-for-profit organization
are said to be employed in private
accounting or “in industry.”
• Accountants and their staff who
provide services on a fee basis are
said to be employed in public
accounting.

2
Summarize the development
of accounting principles and
relate them to practice.

Generally Accepted Accounting Principles
• Financial accountants follow

generally accepted accounting
principles (GAAP) in preparing
financial statements.

Generally Accepted Accounting Principles
• Since 2011, all Canadian publicly accountable

enterprises use International Financial
Reporting Standards (IFRS) to prepare their
financial statements—Part I of the CICA
Handbook.
• Private enterprises may use IFRS or Accounting
Standards for Private Enterprises (ASPE) to
prepare their financial statements—Part II of
the CICA Handbook.

Underlying Assumptions, Principles, and
Constraints:
• Going concern assumption

• Business entity assumption
• Recognition of the elements
• Measurement of the elements
• Benefit versus cost constraint
Other principles will be discussed in later

chapters.

Going Concern Assumption
If a business is a going concern, it is

appropriate to prepare financial
statements using the accounting
principles in the CICA Handbook.

Business Entity Assumption
Under the business entity

assumption, the activities of a
business are recorded separately
from the activities of its owners,
creditors, or other businesses.

Form of Business Entity:
Proprietorship
A proprietorship is owned by one

individual.
• 35% of business entities in Canada.
• Easy and cheap to organize.
• Resources are limited to those of
the owner.
• Used by small businesses.

Partnership
A partnership is owned by two or

more individuals.
• Less than 10% of business
organizations in Canada.
• Combines the skills and resources
of more than one person.

Corporation
A corporation is organized under a

provincial or federal charter as a separate
legal entity.
• More than 50% of the business
organizations in Canada, generates 70% of
total revenues.
• Ownership is divided into shares.
• Can obtain large amounts of resources by
issuing shares.
• Used by large businesses.
Recognition of the Elements
A transaction is “recognized” when:

• It is likely to generate a future
economic benefit to the business.
• A cost for the item can be
measured reliably.

Measurement of the Elements
An item can be measured according

to many bases. Financial statements
primarily use the historical cost
basis, being the amount of cash
received or paid for an item.

EXAMPLE EXERCISE 1-1

On August 25, Gallatin Repair Service extended an
offer of $125,000 for land that had been priced for
sale at $150,000. On September 3, Gallatin Repair
Service accepted the seller’s counteroffer of $137,000.
On October 20, the land was assessed at a value of
$98,000 for property tax purposes. On December 4,
Gallatin Repair Service was offered $160,000 for the
land by a national retail chain.
At what value should the land be recorded in Gallatin

Repair Service’s records?

FOLLOW MY EXAMPLE 1-1
$137,000. The land should be recorded at the

historical cost to Gallatin Repair Service.
For Practice: PE 1-1

Benefit versus Cost Constraint
A trade-off exists between the

accuracy of the financial information
being produced and the cost to
produce that information.
Should a wastepaper basket be

classified as an expense or an asset?
Qualitative Characteristics of Accounting
Principles
The fundamental qualitative

characteristics that should define the
information in the financial
statements are relevance, faithful
representation, and materiality.

Principles
• Information is considered relevant

when it helps investors and others
make financial decisions.
• Faithful representation suggests a
transaction should be recorded so as
to reflect the substance of the event.
• Information is considered material if
omitting or misstating it could
influence decisions.

Principles
Enhancing characteristics are:

• Comparability Information that is comparable to another
company or to another year is more useful.
• Verifiability The information can be verified, for
example, by confirming with source
documents.
• Timeliness Information is more useful when produced
on a timely basis.
• Understandability Financial statements should be
understandable.
3
State the accounting equation
and define each element of
the equation.

The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources Rights or claims

owned by a to the assets
business

The rights of the creditors

are the debts of the
business.
Liabilities are shown before owner’s equity
because creditors have first rights to the assets
The rights of
the owners
Owner’s equity is what remains after paying off
the liabilities. A – L = E

Accounting Equation
John Joos is the owner and operator of You’re A Star,
a motivational consulting business. At the end of its
accounting period, December 31, 2014, You’re A
Star has assets of $800,000 and liabilities of
$350,000. Using the accounting equation,
determine the following amounts:
a. Owner’s equity, as of December 31, 2014.
b. Owner’s equity, as of December 31, 2015,
assuming that assets increased by $130,000 and
liabilities decreased by $25,000 during 2015.
Accounting Equation
a. Assets = Liabilities + Owner’s Equity
$800,000 = $350,000 + Owner’s Equity
Owner’s Equity = $450,000
b. First, determine the change in Owner’s
Equity during 2015 as follows:
$130,000 = –$25,000 + Owner’s Equity
Owner’s Equity = $155,000
Accounting Equation
b. (continued)
Next, add the change in Owner’s Equity on
December 31, 2014, to arrive at Owner’s
Equity on December 31, 2015, as shown
below:
$605,000 = $450,000 + $155,000

4
Describe and illustrate how
business transactions can be
recorded in terms of the
resulting change in the elements
of the accounting equation.

Business Transaction
A business transaction is an
economic event or condition that
directly changes an entity’s financial
condition or its results of operations.

Transaction A
On November 1, 2014, Chris Clark

deposits $25,000 in a bank account in
the name of NetSolutions.
Investment by Chris Clark

Transaction B
On November 5, 2014, NetSolutions

paid $20,000 for the purchase of land
as a future building site.

Transaction C

purchased supplies for $1,350 and agreed
to pay the supplier in the near future.

Beginning with Transaction D, the
asset section will be shown first, then
the liabilities and owner’s equity will
be shown in the following slide.

Transaction D

received cash of $7,500 for providing
services to customers. A business
earns money by selling goods or
services to its customers. This
amount is called Revenue.

Transaction D

Transaction D

Expenses
During the month, NetSolutions

spent cash or used up other assets in
earning revenue. Assets used in this
process of earning revenue are called
expenses.

Transaction E

paid the following expenses during
the month: wages, $2,125; rent,
$800; utilities, $450; and
miscellaneous, $275.

Transaction E

Transaction E

Transaction F

paid creditors on account, $950.

Transaction F

Transaction F

Transaction G
On November 30, 2015, Chris Clark

withdrew $2,000 from NetSolutions
for personal use.

Transaction G

Transaction G

Summary

5
Describe the financial
statements of a proprietorship
and explain how they
interrelate.

Financial Statements
After transactions have been

recorded and summarized, reports
are prepared for users. The
accounting reports providing this
information are called financial
statements.

Order of Preparation
• Income statement
• Statement of owner’s equity
• Balance sheet
• Cash flow statement

Income Statement
A summary of the revenue and

expenses for a specific period of time,
such as a month or a year.
The excess of revenue over the
expenses is called net income or net
profit.
If the expenses exceed the revenue, the
excess is a net loss.

Income Statement
The assets and liabilities of Chickadee Travel Service
at December 31, 2015, the end of the current year,
and its revenue and expenses for the year are listed
below.
Prepare an income statement for the current year

ended December 31, 2015.

Income Statement

Statement of Owner’s Equity
The statement of owner’s equity

reports the changes in the owner’s
equity for a period of time.


Using the data for Chickadee Travel Service
shown in Example Exercise 1-3, prepare a
statement of owner’s equity for the current
year ended December 31, 2015. The capital
of the owner, Adam Cellini, was $80,000 at
January 1, 2015. Adam invested an additional
$50,000 in the business during the year and
withdrew cash of $30,000 for personal use.


Net income is carried to the
statement of owner’s equity.

From the income statement.
To the balance sheet.

From the statement of
owner’s equity.
This amount is compared to

the net cash flow on the cash
flow statement.

This amount should match Cash on
the balance sheet.

Balance Sheet
A balance sheet is a list of the assets,

liabilities, and owner’s equity as of a
specific date, usually at the close of
the last day of a month or a year.

Balance Sheet
Using the data for Chickadee Travel Service
shown in Example Exercises 1-3 and 1-4,
prepare the balance sheet as of December
31, 2015.

Balance Sheet

Account Form
The account form of a balance sheet

lists the assets on the left and the
liabilities and owner’s equity on the
right—similar to the format of the
accounting equation.

Cash Flow Statement
A cash flow statement is a summary

of the cash receipts and payments for
a specific period of time.

Interrelationships Among Financial
Statements
• The income statement and the

statement of owner’s equity are
interrelated.
Net income or net loss appears on

both statements.

Statements
• The statement of owner’s equity

and the balance sheet are
interrelated.
The owner’s capital at the end of
the period on the statement of
owner’s equity also appears on the
balance sheet as owner’s capital.

Statements
• The balance sheet and the cash

flow statement are interrelated.
The cash reported on the balance
sheet is also reported as the end-of-
period cash on the cash flow
statement.

The End

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NETA POWERPOINT PRESENTATIONS TO

Adapted by Sheila Elworthy

Copyright © 2014 by Nelson Education Ltd. 1

Copyright © 2014 by Nelson Education Ltd. 2

1. Describe the nature of a business,

4. Describe and illustrate how

Copyright © 2014 by Nelson Education Ltd. 5

Provide services rather than products

Copyright © 2014 by Nelson Education Ltd. 6

Sell products they purchase from

Copyright © 2014 by Nelson Education Ltd. 7

Change basic inputs into products

Copyright © 2014 by Nelson Education Ltd. 8

Accounting can be defined as an

Copyright © 2014 by Nelson Education Ltd. 9

Copyright © 2014 by Nelson Education Ltd. 11

The area of accounting that provides

The area of accounting that provides

Ethics are moral principles that guide

Copyright © 2014 by Nelson Education Ltd. 14

Currently, Canada has four main

Copyright © 2014 by Nelson Education Ltd. 16

• Accountants employed by a business

Copyright © 2014 by Nelson Education Ltd. 17

Copyright © 2014 by Nelson Education Ltd. 18

• Financial accountants follow

Copyright © 2014 by Nelson Education Ltd. 19

• Since 2011, all Canadian publicly accountable

Copyright © 2014 by Nelson Education Ltd. 20

• Going concern assumption

Other principles will be discussed in later

Copyright © 2014 by Nelson Education Ltd. 22

If a business is a going concern, it is

Copyright © 2014 by Nelson Education Ltd. 23

Under the business entity

Copyright © 2014 by Nelson Education Ltd. 24

A proprietorship is owned by one

Copyright © 2014 by Nelson Education Ltd. 25

A partnership is owned by two or

Copyright © 2014 by Nelson Education Ltd. 26

A corporation is organized under a

A transaction is “recognized” when:

Copyright © 2014 by Nelson Education Ltd. 28

An item can be measured according

Copyright © 2014 by Nelson Education Ltd. 29

Measurement of the Elements

At what value should the land be recorded in Gallatin

Copyright © 2014 by Nelson Education Ltd. 30

Measurement of the Elements

$137,000. The land should be recorded at the

For Practice: PE 1-1

Copyright © 2014 by Nelson Education Ltd. 31

A trade-off exists between the

Should a wastepaper basket be

The fundamental qualitative

Copyright © 2014 by Nelson Education Ltd. 33

• Information is considered relevant

Copyright © 2014 by Nelson Education Ltd. 34

Enhancing characteristics are:

Copyright © 2014 by Nelson Education Ltd. 36

Assets = Liabilities + Owner’s Equity

The resources Rights or claims

Copyright © 2014 by Nelson Education Ltd. 37