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.

Introduction to Accounting

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.
3

Introduction to Accounting

Agenda
1. 2. 3. 4. Fundamental concepts The Accounting Cycle Financial statements Comprehensive example

Introduction to Accounting

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.

Introduction to Accounting

Fundamental concepts Who uses accounting information? Owners Managers Investors (including potential)
Analysts on their behalf

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

Introduction to Accounting 6

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.

Introduction to Accounting 7

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.
Introduction to Accounting 8

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
Introduction to Accounting 9

Fundamental concepts
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)
Introduction to Accounting 10

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.

Introduction to Accounting 11

Fundamental concepts
Entity concept Going concern Unit of measure Periodic reporting

Introduction to Accounting

12

Fundamental concepts
Entity concept There are three basic structures that a company can have in Canada:
1. Sole proprietorship 2. Partnership 3. Corporation A sole proprietorship is not a legal entity separate from its owner A partnership is not a legal entity separate from its owners
These are both sub-components of their owners/partners for legal purposes

A corporation is a separate legal entity

The entity concept for accounting does not simply follow the legal guidelines
A business can be a separate entity for accounting even if it is not one from a legal perspective
Introduction to Accounting 13

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.
Introduction to Accounting 14

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.

Introduction to Accounting

15

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.
Introduction to Accounting 16

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.
Introduction to Accounting 17

Fundamental concepts
To review: Entity concept Going concern Unit of measure Periodic reporting

Introduction to Accounting

18

The Accounting Cycle 1. Transaction or event occurs

Could simply be the passage of time.

2. Recorded in the Journal using a Journal Entry.

event is translated into accounting language.

3. Journal is posted to Ledger

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

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

Introduction to Accounting 19

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
Introduction to Accounting 20

The Accounting Cycle

The making of decisions about what journal entry should be made when a transaction or event occurs is the prominent theme of ACTG 5100.
It is commonly believed that these decisions are bound by strict rules that dictate what the journal entry should be.
In reality, this is not true. There are principles that can guide the decisions, but there are many circumstances for which there are not specific treatments prescribed and, therefore, the judgment of the preparers determines the treatment.

For the purposes of this lecture, we will look mostly at non-ambiguous situations.
Students will become very aware of the ambiguity in the real world in ACTG 5100 (and from reading the newspaper).
Introduction to Accounting 21

Accounting Equation Fundamental Accounting Equation:

Assets = Liabilities + Owners Equity

This equation is always in balance

In order for this equation to remain in balance, double-entry bookkeeping is employed.

That is, the recording of every transaction or event must have at least two parts
Either an equal impact (increase or decrease) to both sides of the equation or equal and opposite impact to one side.

The recording of every transaction must keep this equation in balance

Introduction to Accounting 22

Journal Entries All journal entries have two sides: Debit and Credit
For every journal entry, the total debits must equal the total credits
This ensures that the fundamental accounting equation (A = L + OE) is always in balance.

The basic journal entry: Debit Account name1 Credit Account name2 To record
Introduction to Accounting

$amount $amount
23

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
Introduction to Accounting 24

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

Convention exists based on what element is being increased or decreased.
Each element lives in either debit or credit. If we want to increase something that lives in debit, we will debit it.

The convention works such that the fundamental equation (A = L + OE) is always kept in balance.

Introduction to Accounting

25

Journal Entries
The Basic Accounting Elements:

Asset

Expense

Liability

Revenue

Owners Equity
26

Introduction to Accounting

Journal Entries
The Basic Accounting Elements: Asset
Has future benefit to the entity

Liability
Obligation to transfer assets in the future

Owners Equity
Owners interest in the company

Revenue
Increase in economic resources resulting from normal operations of the company

Expense
Decrease in economic resources resulting from normal operations of the company
Introduction to Accounting 27

Journal Entries
The Basic Accounting Elements:
Balance Sheet
Balance Sheet/ Stmt of Retained Earnings

Income Statement

Debit

Asset

Expense

Credit

Liability

Revenue

Owners Equity
28

Introduction to Accounting

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
Introduction to Accounting 29

Journal Entries Going back to the Fundamental Accounting Equation:

Assets = Liabilities + Owners Equity Debit Credit Credit

Introduction to Accounting

30

Journal Entries
What about the Income Statement elements (Revenue and Expense)? They dont appear in the fundamental accounting equation, so how does it stay in balance when they are debited or credited? e.g. consultant sells services for $300 cash
In English: Cash (asset) increases $300 Revenue increases $300 In Accounting: Debit Cash (Asset) $300 Credit Consulting Revenue $300
To record payment for consulting services rendered

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

Introduction to Accounting

31

Element structures
Assets Liabilities Owners equity

Introduction to Accounting

32

Element structures
Assets
Current assets
Cash
Cash on hand Bank accounts CIBC BMO

Accounts receivable
Accounts receivable customer 1 Accounts receivable customer 2

Inventory
Raw materials Work in process Finished goods Product 1 Product 2
Introduction to Accounting 33

Element structures
Assets
Current assets Long-term assets
Buildings
Ontario buildings Quebec buildings Montreal building Sherbrooke building

Vehicles
Cars Trucks Truck 1 Truck 2

Introduction to Accounting

34

Element structures
Liabilities
Current liabilities
Accounts payable Accrued liabilities

Long-term liabilities
Bank loans
Loan from RBC Loan from Scotiabank

Notes payable Bonds payable

Introduction to Accounting

35

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.
Introduction to Accounting 36

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.

Introduction to Accounting

37

Element structures
The Closing Entry Whenever financial statements are to be prepared, the temporary (income statement) accounts must be closed to zero so that they can begin tracking data for the next period.
The amounts in the accounts at closing are transferred to Retained Earnings (so named because it is the earnings (net income) of the company that is retained in the company and not distributed to the owners).
We will see an example in the comprehensive example.
Introduction to Accounting 38

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.

Introduction to Accounting

39

Journal Entries
Going back to the Fundamental Accounting Equation:

Assets = Liabilities + Owners Equity Debit

Assets Current assets Long-term assets

Credit
Liabilities Current liabilities Long-term liabilities

Credit
Direct investment Capital stock Indirect investment Dividends (debit) Retained earnings Revenue (credit) Expense (debit)

Introduction to Accounting

40

Financial Statements
There are 4 statements in a standard set of financial statements
1. Balance Sheet
The what do we have? statement Shows what the entity owns and owes (the difference being the owners residual interest)

2. Income Statement
The what did we do? statement Shows the activity the entity undertook in its normal course of operations.

3. Statement of Retained Earnings

Shows the changes in Retained earnings in the year
Often shown at the bottom of the Income Statement

4. Statement of Cash Flows

Shows the sources and uses of cash in the year
Information is derived from the B/S and I/S and other
Introduction to Accounting 41

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.

Introduction to Accounting

42

Financial Statements
Company Name Income statement For year ended December 31, 2003 Revenue Expenses Salaries Utilities Rent Other 100,000 Company Name Balance Steet As at December 31, 2003 Assets Current assets Long-term assets

3,000 40,000

45,000 13,000 30,000 8,000 96,000 4,000

Total Assets Liabilities Current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings 3,500 4,000 500 7,000

43,000

Net Income

15,000 20,000 35,000 1,000 7,000 8,000

Company Name Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings

Total Liabilities and OE

43,000

Introduction to Accounting

43

Financial Statements
Company Name Income statement For year ended December 31, 2003 Revenue Expenses Salaries Utilities Rent Other 100,000 Company Name Balance Steet As at December 31, 2003 Assets Current assets Long-term assets

3,000 40,000

45,000 13,000 30,000 8,000 96,000 4,000

Total Assets Liabilities Current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings 3,500 4,000 500 7,000

43,000

Net Income

15,000 20,000 35,000 1,000 7,000 8,000

Company Name Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings

Total Liabilities and OE

43,000

Introduction to Accounting

44

Loblaw

Introduction to Accounting

45

Loblaw

Introduction to Accounting

46

Loblaw

Introduction to Accounting

47

Loblaw

Introduction to Accounting

To Balance Sheet

48

Loblaw

Introduction to Accounting

From Statement of Retained Earnings

49

Canadian Tire

Introduction to Accounting

50

Canadian Tire

Introduction to Accounting

51

Canadian Tire

Introduction to Accounting

52

Canadian Tire

Introduction to Accounting

To Balance Sheet

53

Canadian Tire

Introduction to Accounting

From Statement of Retained Earnings

54

Research In Motion

Introduction to Accounting

55

Research In Motion

Introduction to Accounting

56

Research In Motion

Introduction to Accounting

57

Research In Motion

Introduction to Accounting

58

Research In Motion

Introduction to Accounting

To Statement of Shareholders Equity

59

Research In Motion

From Income Statement

To Balance Sheet

Introduction to Accounting

60

Research In Motion

From Statement of Shareholders Equity

Introduction to Accounting

61

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.
Introduction to Accounting 62

Accounting Methods It is possible for cash receipt to coincide with revenue recognition and cash payment to coincide with expense recognition. However, in business in North America (and, indeed globally), it is the norm for the exchange of cash to either precede or follow the actual economic event. Except in the simplest of entities (e.g. an individual person) or in unique circumstances, cash accounting will not yield useful information.
Accrual accounting is the standard method.
Introduction to Accounting 63

Accrual Accounting
2 kinds of entries
1.Transactional
The recording of an exchange with another entity

2.Adjusting
Required only when financial statements are prepared to adjust accounts to where they should be Always include at least one Balance Sheet account and one Income Statement account.
e.g. Depreciation of capital assets, earning of interest revenue.

Introduction to Accounting

64

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.

Introduction to Accounting

65

Journal Entries
It is best to reason logically:
1. Which financial statement should be impacted?
Balance sheet, Income statement, or Stmt of Retained Earnings?

2. Which element on that statement should be impacted? 3. Which specific account should be impacted?
Assets 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
Introduction to Accounting 66

Example
We will account for a company, Tasman Inc., for its first year of operations. Tasman Inc. is a Pizza business that makes and delivers pizza in the Toronto area. It is 100% owned by Dave, who is also active in the business as its manager. Tasman Inc. is a corporation (a legal entity separate from Dave). The company begins on January 1, 2003. Its fiscal year end is December 31. We will prepare a Balance Sheet as at December 31, 2003 and an Income Statement and Statement of Retained Earnings for the year ended December 31, 2003.
Introduction to Accounting 67

Tasman

Introduction to Accounting

68

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.
Introduction to Accounting 69

Tasman

Introduction to Accounting

70

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 31, 2003 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 1, 2003 Assets Current assets Long-term assets

Total Assets

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings

Introduction to Accounting

71

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.

Introduction to Accounting

72

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 Credit

Incorporation costs Due to shareholder

Expense Liability

1,000 1,000

To record payment of incorporation costs by shareholder.

Introduction to Accounting

73

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Long-term assets

1,000 1,000 1,000

Total Assets Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings

Net Income

1,000 1,000 1,000 1,000 1,000 -

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000

Total Liabilities and OE

Introduction to Accounting

74

Tasman Inc.
2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return.

Introduction to Accounting

75

Tasman Inc.
2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return.

Debit Credit

Cash Capital stock

Asset Owners Equity

10,000 10,000

To record sale of common shares.

Introduction to Accounting

76

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Total current assets Long-term assets Total Assets Net Income 1,000 1,000 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings

10,000

1,000 -

10,000

10,000

1,000 1,000 1,000 10,000 1,000 9,000

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000

Total Liabilities and OE

10,000

Introduction to Accounting

77

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.

Introduction to Accounting

78

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 Credit

Cash Bank loan

Asset Liability

50,000 50,000

To record the receipt of bank loan.

Introduction to Accounting

79

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Total current assets Long-term assets Total Assets Net Income 1,000 1,000 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings

60,000

1,000 -

60,000

60,000

1,000 1,000 50,000 51,000 10,000 1,000 9,000

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000

Total Liabilities and OE

60,000

Introduction to Accounting

80

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.

Introduction to Accounting

81

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.

Introduction to Accounting

82

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

Introduction to Accounting

83

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

Debit Credit

Prepaid rent expense Cash

Asset Asset

36,000 36,000

To record the payment of 2003 rent in advance.

Introduction to Accounting

84

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 1,000 Total Assets 1,000 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities 1,000 1,000 9,000 Total Liabilities and OE 60,000 Owners' Equity Capital stock Retained Earnings 60,000

1,000 -

24,000 36,000

60,000

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings

1,000 1,000 50,000 51,000 10,000 1,000

Introduction to Accounting

85

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.

Introduction to Accounting

86

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 Credit Credit

Cooking equipment Cash Accounts payable

Asset Asset Liability

15,000 5,000 10,000

To record the purchase of oven partially on credit.

Introduction to Accounting

87

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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

1,000 1,000 1,000

19,000 36,000

55,000 15,000 15,000 70,000

Net Income

Total Assets Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings

1,000 10,000 11,000 50,000 61,000 10,000 1,000 9,000

Total Liabilities and OE

70,000

Introduction to Accounting

88

Tasman Inc.
7 Buy $1,500 of food supplies (ingredients to make pizzas).

Introduction to Accounting

89

Tasman Inc.
7 Buy $1,500 of food supplies (ingredients to make pizzas).

Debit Credit

Food inventory Cash

Asset Asset

1,500 1,500

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

Introduction to Accounting

90

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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

1,000 1,000 1,000

17,500 36,000 1,500

55,000 15,000 15,000 70,000

Net Income

Total Assets Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings

1,000 10,000 11,000 50,000 61,000 10,000 1,000 9,000

Total Liabilities and OE

70,000

Introduction to Accounting

91

Tasman Inc.
8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days.

Introduction to Accounting

92

Tasman Inc.
8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days.

Debit Credit

Office equipment Accounts payable

Asset Liability

4,000 4,000

To record the purchase of office equipment on credit.

Introduction to Accounting

93

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings

1,000 1,000 1,000

17,500 36,000 1,500

55,000 15,000 4,000 19,000 74,000

Net Income

1,000 14,000 15,000 50,000 65,000 10,000 1,000 9,000

Total Liabilities and OE

74,000

Introduction to Accounting

94

Tasman Inc.
9 Hired a chef. Salary of $33,800 per year paid biweekly (26 times a year).

Introduction to Accounting

95

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.

Introduction to Accounting

96

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.

Introduction to Accounting

97

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.

Introduction to Accounting

98

Tasman Inc.
11 First salary payments are made.

Introduction to Accounting

99

Tasman Inc.
11 First salary payments are made.

Debit Credit

Salary expense Cash

Expense Asset

1,300 1,300

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

Debit Credit

Salary expense Due to shareholder

Expense Liability

2,400 2,400

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

Introduction to Accounting

100

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 4,700 4,700 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings

1,000 3,700 4,700 4,700

16,200 36,000 1,500

53,700 15,000 4,000 19,000 72,700

Net Income

3,400 14,000 17,400 50,000 67,400 10,000 4,700 5,300

Total Liabilities and OE

72,700

Introduction to Accounting

101

Tasman Inc.
12 Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms.

Introduction to Accounting

102

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 Credit

Vehicle Cash

Asset Asset

10,000 10,000

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

Introduction to Accounting

103

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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

1,000 3,700 4,700 4,700

6,200 36,000 1,500 43,700 15,000 4,000 10,000

Net Income

29,000 72,700

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 4,700 4,700

3,400 14,000 17,400 50,000 67,400 10,000 4,700 5,300

Total Liabilities and OE

72,700

Introduction to Accounting

104

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

Introduction to Accounting

105

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

Debit Debit Credit

Cash Accounts receivable Catering revenue

Asset Asset Revenue

900 600 1,500

To record the earning of catering revenue.

Introduction to Accounting

106

Tasman Inc. Income statement For year ended December 31, 2003 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.

1,500 1,500 1,000 3,700 4,700 3,200

7,100 36,000 1,500 600 45,200 15,000 4,000 10,000

Net Income

29,000 74,200

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 3,200 3,200

3,400 14,000 17,400 50,000 67,400 10,000 3,200 6,800

Total Liabilities and OE

74,200

Introduction to Accounting

107

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

Introduction to Accounting

108

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

Debit Credit

Cash Store revenue

Asset Revenue

1,200 1,200

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

Introduction to Accounting

109

Tasman Inc. Income statement For year ended December 31, 2003 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.

1,500 1,200 1,000 3,700 -

2,700

8,300 36,000 1,500 600 46,400 15,000 4,000 10,000

4,700 2,000

Net Income

29,000 75,400

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000

3,400 14,000 17,400 50,000 67,400 10,000 2,000 8,000

Total Liabilities and OE

Introduction to Accounting

75,400
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.

Introduction to Accounting

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 Credit
Cash Unearned revenue
Asset Liability

4,000 4,000

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

Introduction to Accounting

112

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 1,500 1,200 1,000 3,700 Net Income 4,700 2,000

2,700

12,300 36,000 1,500 600 15,000 4,000 10,000

50,400

29,000 79,400

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000

3,400 14,000 4,000

21,400 50,000 71,400 10,000 2,000 8,000

Total Liabilities and OE

79,400

Introduction to Accounting

113

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

Introduction to Accounting

114

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

Debit Credit

Food inventory Accounts payable

Asset Liability

5,000 5,000

To record the purchase of food inventory on credit.

Introduction to Accounting

115

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 1,500 1,200 1,000 3,700 Net Income 4,700 2,000

2,700

12,300 36,000 6,500 600 15,000 4,000 10,000

55,400

29,000 84,400

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000

3,400 19,000 4,000

26,400 50,000 76,400 10,000 2,000 8,000

Total Liabilities and OE

84,400

Introduction to Accounting

116

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

Introduction to Accounting

117

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

Debit Credit Debit

Accounts payable Cash

Liability Asset

4,000 4,000 5,000

To record the payment of amounts owing to supplier of office equipment. Accounts payable
Liability

Credit

Cash

Asset

5,000

To record the payment of amount owing to supplier of food inventory.

Introduction to Accounting

118

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 1,500 1,200 1,000 3,700 Net Income 4,700 2,000

2,700

3,300 36,000 6,500 600 15,000 4,000 10,000

46,400

29,000 75,400

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000

3,400 10,000 4,000

17,400 50,000 67,400 10,000 2,000 8,000

Total Liabilities and OE

75,400

Introduction to Accounting

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.

Introduction to Accounting

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 Credit

Bad debt expense Accounts receivable

Expense Asset

600 600

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

Introduction to Accounting

121

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 1,500 1,200 1,000 3,700 600 Net Income 5,300 2,600

2,700

3,300 36,000 6,500 15,000 4,000 10,000

45,800

29,000 74,800

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,600 2,600

3,400 10,000 4,000

17,400 50,000 67,400 10,000 2,600 7,400

Total Liabilities and OE

74,800

Introduction to Accounting

122

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

Introduction to Accounting

123

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

Debit Credit

Unearned revenue Catering revenue

Liability Revenue

800 800

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

Introduction to Accounting

124

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 2,300 1,200 1,000 3,700 600 Net Income 5,300 1,800

3,500

3,300 36,000 6,500 15,000 4,000 10,000

45,800

29,000 74,800

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,800 1,800

3,400 10,000 3,200

16,600 50,000 66,600 10,000 1,800 8,200

Total Liabilities and OE

74,800

Introduction to Accounting

125

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

Introduction to Accounting

126

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

Debit Credit

Cash Store revenue

Asset Revenue

220,000 220,000

To record aggregate store revenue for the year.

Introduction to Accounting

127

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 2,300 221,200 1,000 3,700 600 Net Income 5,300 218,200

223,500

223,300 36,000 6,500 15,000 4,000 10,000

265,800

29,000 294,800

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 218,200 218,200

3,400 10,000 3,200

16,600 50,000 66,600 10,000 218,200 228,200

Total Liabilities and OE

294,800

Introduction to Accounting

128

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

Introduction to Accounting

129

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

Debit Credit

Salary expense Cash

Expense Asset

32,500 32,500

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

Debit Credit
Credit

Salary expense Cash

Due to shareholder

Expense Asset
Liability

60,000 31,200
28,800

To record salary expense for Manager (62,400 2,400 (previously recorded) = 60,000)
130

Introduction to Accounting

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 2,300 221,200 1,000 96,200 600 Net Income 97,800 125,700

223,500

159,600 36,000 6,500 15,000 4,000 10,000

202,100

29,000 231,100

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 125,700 125,700

32,200 10,000 3,200

45,400 50,000 95,400 10,000 125,700 135,700

Total Liabilities and OE

231,100

Introduction to Accounting

131

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

Introduction to Accounting

132

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

Debit Credit

Food inventory Cash

Asset Asset

80,000 80,000

To record aggregate food supply purchases for the year.

Introduction to Accounting

133

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 2,300 221,200 1,000 96,200 600 Net Income 97,800 125,700

223,500

79,600 36,000 86,500 15,000 4,000 10,000

202,100

29,000 231,100

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 125,700 125,700

32,200 10,000 3,200

45,400 50,000 95,400 10,000 125,700 135,700

Total Liabilities and OE

231,100

Introduction to Accounting

134

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

Introduction to Accounting

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

Introduction to Accounting

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 Credit

Cost of goods sold Food inventory

Expense Liability

83,000 83,000

To record the cost of food inventory used in the year.

Introduction to Accounting

137

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 2,300 221,200 -

223,500 83,000 140,500

79,600 36,000 3,500 15,000 4,000 10,000

119,100

1,000 96,200 600 97,800 42,700

29,000 148,100

Net Income

32,200 10,000 3,200

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 42,700 42,700

45,400 50,000 95,400 10,000 42,700 52,700

Total Liabilities and OE

148,100

Introduction to Accounting

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.

Introduction to Accounting

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 Credit

Utilities expense Cash

Expense Asset

9,600 9,600

To record aggregate payment of utilities expense for the year.

Introduction to Accounting

140

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 2,300 221,200 -

223,500 83,000 140,500

70,000 36,000 3,500 15,000 4,000 10,000

109,500

1,000 96,200 600 9,600 107,400 33,100

29,000 138,500

Net Income

32,200 10,000 3,200

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 33,100 33,100

45,400 50,000 95,400 10,000 33,100 43,100

Total Liabilities and OE

138,500

Introduction to Accounting

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.

Introduction to Accounting

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 Credit

Unearned revenue Catering revenue

Liability Revenue

2,400 2,400

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

Introduction to Accounting

143

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 4,700 221,200 -

225,900 83,000 142,900

70,000 36,000 3,500 15,000 4,000 10,000

109,500

1,000 96,200 600 9,600 107,400 35,500

29,000 138,500

Net Income

32,200 10,000 800

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 35,500 35,500

43,000 50,000 93,000 10,000 35,500 45,500

Total Liabilities and OE

138,500

Introduction to Accounting

144

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

Introduction to Accounting

145

Tasman Inc.
Adjusting entry 1 Costs related to the oven, the office equipment, and the Camaro must be recorded.
Debit
Credit
Depreciation expense
Accumulated Depreciation Oven
Expense
Contra-asset

3,000
3,000

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

Debit Credit

Depreciation expense Accumulated Depreciation Office equipment

Expense Contra-asset

1,000 1,000

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

Debit

Depreciation expense

Expense

2,000

Credit

Accumulated Depreciation Vehicle

Contra-asset

2,000

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

Introduction to Accounting 146

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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

4,700 221,200 -

225,900 83,000 142,900

70,000 36,000 3,500 15,000 4,000 10,000 6,000

109,500

1,000 96,200 600 9,600 6,000 -

23,000 132,500

113,400 29,500

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 29,500 29,500

32,200 10,000 800

43,000 50,000 93,000 10,000 29,500 39,500

Total Liabilities and OE

Introduction to Accounting

132,500
147

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

Introduction to Accounting

148

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

Debit Credit

Interest expense Interest payable

Expense Liability

3,000 3,000

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

Debit

Interest expense

Expense

350

Credit

Interest payable

Liability

350

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

Introduction to Accounting

149

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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

4,700 221,200 -

225,900 83,000 142,900

70,000 36,000 3,500 15,000 4,000 10,000 6,000

109,500

1,000 96,200 600 9,600 6,000 3,350 -

23,000 132,500

116,750 26,150

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 26,150 26,150

32,200 10,000 3,350 800

46,350 50,000 96,350 10,000 26,150 36,150 132,500

150

Total Liabilities and OE

Introduction to Accounting

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.

Introduction to Accounting

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 Credit
Rent expense Prepaid rent expense
Expense Asset

36,000 36,000

To record the rent expense which had been prepaid at the beginning of the year.

Introduction to Accounting

152

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 31, 2003 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 4,700 221,200 -

225,900 83,000 142,900

70,000 3,500 15,000 4,000 10,000 6,000

73,500

1,000 96,200 600 9,600 36,000 6,000 3,350 -

23,000 96,500

152,750 9,850

32,200 10,000 3,350 800

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 9,850 9,850

46,350 50,000 96,350 10,000 9,850 150 96,500

153

Total Liabilities and OE

Introduction to Accounting

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.

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.

Introduction to Accounting

154

T-Accounts (posting to ledgers)

Before the closing entry:
Cash 10,000 36,000 50,000 5,000 900 1,500 1,200 1,300 4,000 10,000 220,000 9,000 32,500 31,200 80,000 9,600 70,000 Accounts Receivable 600 600 Prepaid rent expense 36,000 36,000 Food inventory 1,500 83,000 5,000 80,000 3,500 Due to shareholder 1,000 2,400 28,800 32,200 Accounts payable 9,000 10,000 4,000 5,000 10,000 Interest payable 3,000 350 3,350 Unearned revenue 800 4,000 2,400 800 Bank loan 50,000 50,000 Capital stock 10,000 10,000 Catering revenue 1,500 800 2,400 4,700 Store sales 1,200 220,000 221,200

Cost of goods sold 83,000 83,000 Incorporation costs 1,000 1,000 Salaries 3,700 92,500 96,200 Bad debts 600 600 Retained earnings

Rent 36,000 36,000 Depreciation 3,000 1,000 2,000 6,000 Interest 3,000 350 3,350 Utilities 9,600 9,600

Cooking equipment 15,000 15,000 Accumulated depn 3,000 1,000 2,000 6,000

Office equipment 4,000 4,000 Vehicle 10,000 10,000

Introduction to Accounting

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
Introduction to Accounting 156

T-Accounts (posting to ledgers)

After the closing entry:
Cash 10,000 36,000 50,000 5,000 900 1,500 1,200 1,300 4,000 10,000 220,000 9,000 32,500 31,200 80,000 9,600 70,000 Accounts Receivable 600 600 Prepaid rent expense 36,000 36,000 Food inventory 1,500 83,000 5,000 80,000 3,500 Due to shareholder 1,000 2,400 28,800 32,200 Accounts payable 9,000 10,000 4,000 5,000 10,000 Interest payable 3,000 350 3,350 Unearned revenue 800 4,000 2,400 800 Bank loan 50,000 50,000 Capital stock 10,000 10,000 Catering revenue 1,500 800 2,400 4,700 4,700 Cost of goods sold 83,000 83,000 83,000 Incorporation costs 1,000 1,000 1,000 Salaries 3,700 92,500 96,200 96,200 Bad debts 600 600 Store sales 1,200 220,000 221,200 221,200

Rent 36,000 36,000 36,000 Depreciation 3,000 1,000 2,000 6,000 6,000 Interest 3,000 350 3,350 3,350 Utilities 9,600 9,600 9,600 -

Cooking equipment 15,000 15,000 Accumulated depn 3,000 1,000 2,000 6,000

Office equipment 4,000 4,000 Vehicle 10,000 10,000

600

Retained earnings 9,850 9,850

Introduction to Accounting

157

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

Rent 36,000 36,000 36,000 Depreciation 3,000 1,000 2,000 6,000 6,000 Interest 3,000 350 3,350 3,350 Utilities 9,600 9,600 9,600 -

Cooking equipment 15,000 15,000 Accumulated depn 3,000 1,000 2,000 6,000

Office equipment 4,000 4,000 Vehicle 10,000 10,000

600

Retained earnings 9,850 9,850

Introduction to Accounting

158

Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 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 31, 2003 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 9,850 9,850 4,700 221,200 -

225,900 83,000 142,900

70,000 3,500 15,000 4,000 10,000 6,000

73,500

1,000 96,200 600 9,600 36,000 6,000 3,350 -

23,000 96,500

152,750 9,850

32,200 10,000 3,350 800

46,350 50,000 96,350 10,000 9,850 150 96,500

Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings

Total Liabilities and OE

Introduction to Accounting

159