CHAPTER·1

ACCOUNTING IN ACTION
Accounting Principles
Weygandt, Kieso, Trenholm

Prepared by Barbara Trenholm

University of New Brunswick

CHAPTER 1
ACCOUNTING IN ACTION
After studying this chapter, you should be able to:
1 Explain the meaning of accounting.
2 Identify the users and uses of accounting.
3 Understand why ethics is a fundamental
business concept.
4 Explain the meaning of generally accepted
accounting principles and the cost
principle.
5 Explain the meaning of the going
concern, monetary unit, and
economic entity assumptions.

CHAPTER 1
ACCOUNTING IN ACTION
After studying this chapter, you should be able to:

6 State the basic accounting equation and explain

the meaning of assets, liabilities, and owner’s
equity.
7 Analyse the effect of business transactions on
the basic accounting equation.
8 Distinguish between an income statement,
statement of owner’s equity, balance sheet, and
statement of cash flows.

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Chapter 1 • Accounting In Action

PREVIEW OF CHAPTER 1

Accounting In Action

What is Accounting?

¾ Who uses accounting info?

¾ Brief history of accounting
¾ Bookkeeping and accounting
¾ Accounting and you
¾ The accounting profession

PREVIEW OF CHAPTER 1

Accounting In Action

The Building Blocks

of Accounting
¾ Ethics - a fundamental
business concept
¾ Generally accepted
accounting principles
¾ Assumptions
¾ Basic accounting equation

PREVIEW OF CHAPTER 1

Accounting In Action

Using the Building Blocks

¾ Transaction analysis
¾ Summary of transactions
¾ Financial statements
¾ Using the information in
the financial statements

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 Weygandt · Kieso · Trenholm Accounting Principles, Canadian Edition

PREVIEW OF CHAPTER 1

Accounting In Action

Financial Statements

¾ Income Statement
¾ Statement of Owner’s
Equity
¾ Balance Sheet
¾ Statement of Cash Flows

STUDY OBJECTIVE 1

Explain the meaning of accounting.

WHAT IS ACCOUNTING?
Accounting is a process of three activities:
1 Identifying
2 Recording
3 Communicating

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Chapter 1 • Accounting In Action

ILLUSTRATION 1-1
THE ACCOUNTING PROCESS
Communication
Identification Recording Accounting
Reports

Ger
al
7 M d Tr
en
FredacCau holm
eric ly D
ton rive
NB

200
0

Prepare
accounting reports

SOFTBYTE
Annual Report
Select economic events Record, classify
(transactions) and summarize

Analyse and interpret

for users

STUDY OBJECTIVE 2

Identify the users and uses of accounting.

ILLUSTRATION 1-2
QUESTIONS ASKED BY INTERNAL USERS

What is the cost of manufacturing

Is cash sufficient to pay bills? each unit of product?

Can we afford to give employees Which product line is the most

pay raises this year? profitable?

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ILLUSTRATION 1-2
QUESTIONS ASKED BY EXTERNAL USERS

How does the company compare

Is the company earning in size and profitability with its
satisfactory income? competitors?
What do we
do if they
catch us?

Will the company be able to pay its debts as they come due?

BOOKKEEPING DISTINGUISHED
FROM ACCOUNTING
Accounting
1 Includes bookkeeping
2 Also includes much more
Bookkeeping
1 Involves only the recording of economic
events
2 Is just one part of accounting

THE ACCOUNTING PROFESSION

z Public accountants offer expert service to the general

public through the services they perform.
z Private accountants are employees of individual companies
and are involved in a number of activities including cost
and tax accounting, systems, and internal auditing.
z Not-for-profit accounting includes reporting and control
for government units, foundations, hospitals, labour
unions, colleges/universities, and charities.

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Chapter 1 • Accounting In Action

ACCOUNTING CAREER LADDER

Private Public
Accounting Accounting
VP Finance 10+ years
Partner
and CFO

Comptroller 6 to 8 years Senior

Manager

Manager 2 to 4+ years
Manager

Entry level
Accountant Staff
Accountant

STUDY OBJECTIVE 3

Understand why ethics is a fundamental

business concept.

ETHICS

z Ethics z To Solve Ethical

Dilemma
- standards of conduct
1 Recognize situation
and ethical issues
involved
2 Identify and analyse
elements
3 Identify alternatives
and weigh impacts on
stakeholders

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 Weygandt · Kieso · Trenholm Accounting Principles, Canadian Edition

STUDY OBJECTIVE 4

Explain the meaning of generally accepted

accounting principles and the cost principle.

GAAP
z Generally Accepted Accounting Principles -
primarily established by the Canadian Institute of
Chartered Accountants
z Cost Principle
zThe cost principle dictates that assets are recorded at
their cost.
zCost is the value exchanged at the time something is
acquired.
zCost is used because it is both relevant and reliable.

STUDY OBJECTIVE 5

Explain the meaning of the going concern, monetary

unit, and economic entity assumptions.

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Chapter 1 • Accounting In Action

ASSUMPTIONS

1 Going Concern - assumes organization

will continue into foreseeable future.
2 Monetary Unit - only transaction data
that can be expressed in terms of money
is included in the accounting records.
3 Economic Entity - includes any
organization or unit in society.

BUSINESS ENTERPRISES
z A business owned by one person is generally a
proprietorship (owner’s equity).
z A business owned by two or more persons associated as
partners is a partnership (partners’ equity).
z A business organized as a separate legal entity under
corporation law and having ownership divided into
transferable shares of stock is called a corporation
(shareholders’ equity).

ILLUSTRATION 1-7
EQUITY FORMATS

Proprietorship Partnership

Owner’s equity: Partners’ equity:

Bure, capital $50,000 Wu, capital $ 75,000
Scholten, capital 75,000
Total partners’
equity $150,000

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ILLUSTRATION 1-7
EQUITY FORMATS

Corporation

Shareholders’ equity:
Capital stock $500,000
Retained earnings 350,000
Total shareholders’ equity $850,000

STUDY OBJECTIVE 6

State the basic accounting equation and

explain the meaning of assets, liabilities,
and owner’s equity.

ILLUSTRATION 1-5
BASIC ACCOUNTING EQUATION

The Basic Accounting Equation

Assets = Liabilities + Owner’s Equity

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Chapter 1 • Accounting In Action

ASSETS AS A BUILDING BLOCK

z Assets are resources owned by a business.

z They are things of value used in carrying
out such activities as production and
exchange.

LIABILITIES AS A BUILDING BLOCK

z Liabilities are claims against assets.

z They are existing debts and
obligations.

OWNER’S EQUITY AS
A BUILDING BLOCK

z Owner’s Equity is equal to total assets

minus total liabilities.
z Owner’s Equity represents the ownership
claim on total assets.
z Subdivisions of Owner’s Equity:
1 Capital
2 Drawings
3 Revenues
4 Expenses

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 Weygandt · Kieso · Trenholm Accounting Principles, Canadian Edition

INVESTMENTS BY OWNERS
AS A BUILDING BLOCK

zInvestments by owner are the assets put in

the business by the owner.
zThese investments in the business increase
owner’s equity.

DRAWINGS AS A
BUILDING BLOCK

zDrawings are withdrawals of cash or other

assets by the owner for personal use.
zDrawings decrease total owner’s equity.

REVENUES AS A
BUILDING BLOCK

zRevenues are the gross increases in owner’s

equity resulting from business activities
entered into for the purpose of earning
income.
zRevenues may result from sale of
merchandise, performance of services, rental
of property, or lending of money.
zRevenues usually result in an increase in an
asset.

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Chapter 1 • Accounting In Action

EXPENSES AS A
BUILDING BLOCK

zExpenses are the decreases in owner’s equity

that result from operating the business.
zExpenses are the cost of assets consumed or
services used in the process of earning
revenue.
zExamples of expenses may be utility expense,
rent expense, supplies expense, and income
tax expense.

ILLUSTRATION 1-6
INCREASES AND DECREASES IN OWNER’S EQUITY

INCREASES DECREASES
Investments Withdrawals
by Owner by Owner
Owner’s
Equity
Revenues Expenses

STUDY OBJECTIVE 7

Analyse the effect of business transactions

on the basic accounting equation.

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TRANSACTION IDENTIFICATION PROCESS

Gerald Trenholm
7 MacCauly Drive
Fredericton NB 2000

Royal Imperial Dominion Bank of Montreal

Everywhere, Canada

Purchase Answer Pay rent

computer telephone
Is the financial position (assets, liabilities, and
owner’s equity) of the company changed?

Yes No Yes

Don’t
Record Record
Record

TRANSACTION ANALYSIS
TRANSACTION 1

z Marc Doucet decides to open a computer programming

service.
z On September 1, he invests $15,000 cash in the business,
which he names Softbyte.
BANK

Softbyte

TRANSACTION ANALYSIS
TRANSACTION 1 SOLUTION

Assets = Liabilities + Owner’s Equity

Doucet,
Cash Capital
(1) +$15,000 = +$15,000
Investment

There is an increase in the asset Cash,

$15,000, and an equal increase in the
owner’s equity, Doucet, Capital, $15,000.

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Chapter 1 • Accounting In Action

TRANSACTION ANALYSIS
TRANSACTION 2

Softbyte purchases computer equipment for $7,000 cash.

TRANSACTION ANALYSIS
TRANSACTION 2 SOLUTION

Assets = Liabilities + Owner’s Equity

Doucet,
Cash + Equipment = Capital
Old Bal. $15,000 $15,000
(2) -7,000 +$7,000
New Bal. $ 8,000 + $7,000 = $15,000

$15,000

Cash is decreased $7,000, and the

asset Equipment is increased $7,000.

TRANSACTION ANALYSIS
TRANSACTION 3

z Softbyte purchases computer paper and other supplies

expected to last several months from Chuah Supply
Company for $1,600.
z Chuah Supply Company agrees to allow Softbyte to pay
this bill in October, a month later.
z This transaction is often referred to as a purchase on
account or a credit purchase.
Chuah Supply Company

Softbyte

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TRANSACTION ANALYSIS
TRANSACTION 3 SOLUTION

Assets = Liabilities + Owner’s Equity

Accounts Doucet,
Cash + Supplies + Equipment = Payable + Capital
Old Bal. $8,000 $7,000 $15,000
(3) +$1,600 +$1,600
New Bal. $8,000 + $1,600 + $7,000 = $1,600 + $15,000

$16,600 $16,600

The asset Supplies is increased $1,600, and the

liability Accounts Payable is increased by the same
amount.

TRANSACTION ANALYSIS
TRANSACTION 4

z Softbyte receives $1,200 cash from customers for

programming services it has provided.
z This transaction represents the principal
revenue-producing activity of Softbyte.

Softbyte

TRANSACTION ANALYSIS
TRANSACTION 4 SOLUTION

Assets = Liabilities + Owner’s Equity

Accounts Doucet,
Cash + Supplies + Equipment = Payable + Capital
Old Bal. $8,000 $1,600 $7,000 $1,600 $15,000
(4) +1,200 +1,200 Service Revenue
New Bal. $9,200 + $1,600 + $7,000 = $1,600 + $16,200

$17,800 $17,800

Cash is increased $1,200, and Doucet,

Capital is increased $1,200.

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Chapter 1 • Accounting In Action

TRANSACTION ANALYSIS
TRANSACTION 5

Softbyte receives a bill for $250 from the Financial

Post for advertising the opening of its business but
postpones payment of the bill until a later date.

Softbyte Bill

Daily News

TRANSACTION ANALYSIS
TRANSACTION 5 SOLUTION

Assets = Liabilities + Owner’s Equity

Accounts Doucet,
Cash + Supplies + Equipment = Payable + Capital
Old Bal. $9,200 $1,600 $7,000 $1,600 $16,200
(5) +250 -250 Advertising Expense
New Bal. $9,200 + $1,600 + $7,000 = $1,850 + $15,950

$17,800 $17,800

Accounts Payable is increased $250, and

Doucet, Capital is decreased $250.

TRANSACTION ANALYSIS
TRANSACTION 6

z Softbyte provides programming services of $3,500

for customers.
z Cash amounting to $1,500 is received from
customers, and the balance of $2,000 is billed to
customers on account.

Softbyte
Bill

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TRANSACTION ANALYSIS
TRANSACTION 6 SOLUTION

Assets = Liabilities + Owner’s Equity

Accounts Accounts Doucet,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old Bal. $ 9,200 $1,600 $7,000 $1,850 $15,950
(6) +1,500 +2,000 +3,500 Service
New Bal. $10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $19,450 Revenue

$21,300 $21,300

Cash is increased $1,500; Accounts Receivable is

increased $2,000; and Doucet, Capital is increased $3,500.

TRANSACTION ANALYSIS
TRANSACTION 7

Expenses paid in cash for September are store rent,

$600, salaries of employees, $900, and utilities, $200.

$600

Softbyte
$900

$200

TRANSACTION ANALYSIS
TRANSACTION 7 SOLUTION

Assets = Liabilities + Owner’s Equity

Accounts Accounts Doucet,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old Bal. $10,700 $2,000 $1,600 $7,000 $1,850 $19,450
(7) -1,700 -600 Rent Exp.
-900 Salaries Exp.
-200 Utilities Exp.
New Bal. $ 9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $17,750

$19,600 $19,600

Cash is decreased $1,700 and Doucet, Capital is decreased

the same amount.

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Chapter 1 • Accounting In Action

TRANSACTION ANALYSIS
TRANSACTION 8

Softbyte pays its Financial Post advertising bill of

$250 in cash.

Softbyte

Daily News

TRANSACTION ANALYSIS
TRANSACTION 8 SOLUTION

Assets = Liabilities + Owner’s Equity

Accounts Accounts Doucet,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old Bal. $9,000 $2,000 $1,600 $7,000 $1,850 $17,750
(8) -250 -250
New Bal. $8,750 + $2,000 + $1,600 + $7,000 = $1,600 + $17,750

$19,350 $19,350

Cash is decreased $250 and Accounts Payable is

decreased the same amount.

TRANSACTION ANALYSIS
TRANSACTION 9

The sum of $600 in cash is received from

customers who have previously been billed
for services in Transaction 6.

Softbyte

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TRANSACTION ANALYSIS
TRANSACTION 9 SOLUTION

Assets = Liabilities + Owner’s Equity

Accounts Accounts Doucet,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old Bal. $8,750 $2,000 $1,600 $7,000 $1,600 $17,750
(9) +600 -600
New Bal. $9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $17,750

$19,350 $19,350

Cash is increased $600 and Accounts

Receivable is decreased by the same
amount.

TRANSACTION ANALYSIS
TRANSACTION 10

Marc Doucet withdraws $1,300 in cash from

the business for his personal use.

$1,300
Softbyte

TRANSACTION ANALYSIS
TRANSACTION 10 SOLUTION

Assets = Liabilities + Owner’s Equity

Accounts Accounts Doucet,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old Bal. $9,350 $1,400 $1,600 $7,000 $1,600 $17,750
(10) -1,300 -1,300 Drawings
New Bal. $8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $16,450

$18,050 $18,050

Cash is decreased $1,300 and Doucet, Capital is decreased

by the same amount.

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Chapter 1 • Accounting In Action

STUDY OBJECTIVE 8

Distinguish between an income statement,

statement of owner’s equity, balance sheet, and
statement of cash flows.

FINANCIAL STATEMENTS

After transactions are identified, recorded, and

summarized, four financial statements are
prepared from the summarized accounting data:
1 An income statement presents the revenues
and expenses and resulting net income or
net loss of a company for a specific period of
time.
2 A statement of owner’s equity summarizes
the changes in owner’s equity for a specific
period of time.

FINANCIAL STATEMENTS

In addition to the income statement, and statement of

owner’s equity, the remaining statements include:
3 A balance sheet reports the assets, liabilities,
andequity of a business enterprise at a
specific date.
4 A statement of cash flows summarizes
information concerning the cash inflows
(receipts) and outflows (payments) for a
specific period of time.
The notes are an integral part of the financial statements.

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ILLUSTRATION 1-9 FINANCIAL

STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE, INC.
Income Statement
For the Month Ended September 30, 1999
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income $2,750

Net income of $2,750 shown on the income statement is added to the

beginning balance of owner’s capital in the statement of owner’s
equity.

ILLUSTRATION 1-9 FINANCIAL

STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE, INC.
Statement of Owner’s Equity
For the Month Ended September 30, 1999
M. Doucet, Capital, September 1 $ –0–
Add: Investments $ 15,000
Net income 2,750 17,750
17,750
Less: Drawings 1,300
M. Doucet, Capital, September 30 $16,450

Net income of $2,750 is carried forward from the income statement to the
statement of owner’s equity. The owner’s capital of $16,450 at the end of the
reporting period is shown as the final total of the owner’s equity column of the
Summary of Transactions (Illustration 1-8).

ILLUSTRATION 1-9 FINANCIAL

STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE, INC.
Balance Sheet
September 30, 1999
Assets
Cash $ 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $ 1,600

Owner’s equity
M. Doucet, capital 16,450
Total liabilities and owner’s equity $ 18,050

Owner’s capital of $16,450 at the end of the reporting period shown in the statement of
owner’s equity is shown on the balance sheet. Cash of $8,050 on the balance sheet is
reported on the statement of cash flows.

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Chapter 1 • Accounting In Action

ILLUSTRATION 1-9 FINANCIAL

STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE, INC.
Statement of Cash Flows
For the Month Ended September 30, 1999
Cash flows from operating activities
Cash receipts from customers $ 3,300
Cash payments to suppliers and employees (1,950)
Net cash provided by operating activities 1,350
Cash flows from investing activities
Purchase of equipment (7,000)
Cash flows from financing activities
Investments by owner $ 15,000
Drawings by owner (1,300)
Net cash provided by financing activities 13,700
Net increase in cash 8,050
Cash at the beginning of the period –0–
Cash at the end of the period $ 8,050

Cash of $8,050 on the balance sheet and statement of cash flows is shown as the
final total of the cash column of the Summary of Transactions (Illustration 1-8).

USING THE INFORMATION IN THE

FINANCIAL STATEMENTS

• Annual Reports

– Non-financial
information

– Financial
information

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