Introduction to

Accounting

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

Introduction to Accounting 2
 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 3
 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 4
 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 5
 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 6
 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 7
 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 8
 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 9
 Fundamental concepts
Entity concept
Going concern
Unit of measure
Periodic reporting

Introduction to Accounting 10
 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 11
 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 12
 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 13
 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 14
 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 entity’s 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 15
 Fundamental concepts
To review:
Entity concept
Going concern
Unit of measure
Periodic reporting

Introduction to Accounting 16
 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 17
 The Accounting Cycle
1. Transaction or event occurs
2. Recorded in the Journal using a Journal Entry.
3. Journal is posted to Ledger
4. Ledger accounts are totalled.
5. 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.
cont’d on next slide…

Introduction to Accounting 18
 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 19
 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 20
 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 $amount
Credit Account name2 $amount
To record…
Introduction to Accounting 21
 Journal Entries
“Debit” and “Credit” are just accounting-speak
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 22
 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 23
 Journal Entries
The Basic Accounting Elements:

Asset Expense

Owners’
Liability Revenue
Equity

Introduction to Accounting 24
 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 25
 Journal Entries
The Basic Accounting Elements:
Balance Sheet/
Income
Balance Sheet Stmt of Retained
Statement Earnings

Debit Asset Expense

Owners’
Credit Liability Revenue
Equity

Introduction to Accounting 26
 Journal Entries
Balance
Sheet/
Balance Income
Sheet Statement Stmt of
Retained
Earnings

Debit Asset Expense

Owners’
Credit Liability Revenue
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 27
 Journal Entries
Going back to the Fundamental Accounting
Equation:
Assets = Liabilities + Owners’ Equity
Debit Credit Credit

Introduction to Accounting 28
 Journal Entries
What about the Income Statement elements
(Revenue and Expense)?
They don’t 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 29
 Element structures
Assets
Liabilities
Owners’ equity

Introduction to Accounting 30
 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 31
 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 32
 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 33
 Element structures
Owners’ equity
Capital stock (direct investment)
Retained earnings (indirect investment)
Revenue
Expenses
(Dividends)
Although revenue and expenses are not sub-
pieces of Retained earnings the way Current
assets are a sub-piece of Total assets, for
the purposes of understanding how they fit in
to the equation, this representation is helpful.
Introduction to Accounting 34
 Element structures
The balance sheet is a permanent statement
Its’ accounts accumulate information from the entity’s
beginning.
The amounts presented on the balance sheet are aggregated
from the entity’s 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 35
 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 36
 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 37
 Journal Entries
Going back to the Fundamental Accounting Equation:

Assets = Liabilities + Owners’ Equity

Debit Credit Credit
•Direct investment
–Capital stock
•Liabilities
•Assets •Indirect investment
–Current liabilities
–Current assets –Dividends (debit)
–Long-term liabilities
–Long-term assets –Retained earnings
•Revenue (credit)
•Expense (debit)

Introduction to Accounting 38
 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 39
 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 40
 Financial Statements

Company Name Company Name

Income statement Balance Steet
For year ended December 31, 2003 As at December 31, 2003

Revenue 100,000 Assets

Current assets 3,000
Expenses Long-term assets 40,000
Salaries 45,000
Utilities 13,000
Rent 30,000
Other 8,000 Total Assets 43,000
- 96,000
Liabilities
Net Income 4,000 Current liabilities 15,000
Long-term liabilities 20,000
35,000
Company Name Owners' Equity
Statement of Retained Earnings Capital stock 1,000
For year ended December 31, 2003 Retained Earnings 7,000

Opening Retained Earnings 3,500 8,000

Net Income (Loss) 4,000
Dividends - 500 Total Liabilities and OE 43,000

Closing Retained Earnings 7,000

Introduction to Accounting 41
 Financial Statements

Company Name Company Name

Income statement Balance Steet
For year ended December 31, 2003 As at December 31, 2003

Revenue 100,000 Assets

Current assets 3,000
Expenses Long-term assets 40,000
Salaries 45,000
Utilities 13,000
Rent 30,000
Other 8,000 Total Assets 43,000
- 96,000
Liabilities
Net Income 4,000 Current liabilities 15,000
Long-term liabilities 20,000
35,000
Company Name Owners' Equity
Statement of Retained Earnings Capital stock 1,000
For year ended December 31, 2003 Retained Earnings 7,000

Opening Retained Earnings 3,500 8,000

Net Income (Loss) 4,000
Dividends - 500 Total Liabilities and OE 43,000

Closing Retained Earnings 7,000

Introduction to Accounting 42
 Loblaw

Introduction to Accounting 43
 Loblaw

Introduction to Accounting 44
 Loblaw

Introduction to Accounting 45
 Loblaw

Introduction to Accounting To Balance Sheet 46

 Loblaw

From Statement of 47
Introduction to Accounting
Retained Earnings
 Canadian Tire

Introduction to Accounting 48
 Canadian Tire

Introduction to Accounting 49
 Canadian Tire

Introduction to Accounting 50
 Canadian Tire

To Balance Sheet 51
Introduction to Accounting
 Canadian Tire

From Statement of 52
Introduction to Accounting
Retained Earnings
 Research In Motion

Introduction to Accounting 53
 Research In Motion

Introduction to Accounting 54
 Research In Motion

Introduction to Accounting 55
 Research In Motion

Introduction to Accounting 56
 Research In Motion

To Statement of
Introduction to Accounting 57
Shareholders’ Equity
 Research In Motion

From Income
Statement

To Balance Sheet

Introduction to Accounting 58
 Research In Motion

From Statement of
Shareholders’ Equity

Introduction to Accounting 59
 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 60
 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 61
 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 62
 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 63
 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 •Owners’ Equity

–Current assets •Liabilities •Direct investment
• Cash –Current liabilities –Capital stock
• Accts • Accts payable •Indirect investment
receivable Long-term liabilities –Dividends (debit)
Long-term assets • Bank loan –Retained earnings
• Building •Revenue (credit)
• Land •Expense (debit)

Account Element

Introduction to Accounting 64
 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 65
 Tasman

Introduction to Accounting 66
 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 67
 Tasman

Introduction to Accounting 68
 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. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at January 1, 2003

Revenue - Assets
Current assets -
Expenses Long-term assets -
-
-
-
- Total Assets -
-
Liabilities
Net Income - Current liabilities -
Long-term liabilities -
-
Tasman Inc. Owners' Equity
Statement of Retained Earnings Capital stock -
For year ended December 31, 2003 Retained Earnings -

Opening Retained Earnings - -

Net Income (Loss) -
Dividends - Total Liabilities and OE -

Closing Retained Earnings -

Introduction to Accounting 69
 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 70
 Tasman Inc.
1
Tasman Inc. (Tasman) is incorporated on
January 1, 2003. Dave pays $1,000 of his own
money to pay for the incorporation.
If we assume that Dave is going to want to be
reimbursed by Tasman:

Debit Incorporation costs Expense 1,000

Credit Due to shareholder Liability 1,000
To record payment of incorporation costs by shareholder.

Introduction to Accounting 71
 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue - Assets
Current assets -
Expenses Long-term assets -
Incorp costs 1,000
-
-
- Total Assets -
- 1,000
Liabilities
Net Income - 1,000 Current liabilities
Due to shareholder 1,000

Tasman Inc. Total current liabilities 1,000

Statement of Retained Earnings Long-term liabilities -
For year ended December 31, 2003 1,000
Owners' Equity
Opening Retained Earnings - Capital stock -
Net Income (Loss) - 1,000 Retained Earnings - 1,000
Dividends -
- 1,000
Closing Retained Earnings - 1,000
Total Liabilities and OE -

Introduction to Accounting 72
 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 73
 Tasman Inc.
2
Dave opens a bank account for Tasman and
deposits $10,000. He receives 1,000 common
shares in return.

Debit Cash Asset 10,000

Owners’
Credit Capital stock Equity 10,000
To record sale of common shares.

Introduction to Accounting 74
 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue - Assets
Current assets
Expenses Cash 10,000 -
Incorp costs 1,000 Total current assets 10,000
- Long-term assets
-
- Total Assets 10,000
- 1,000
Liabilities
Net Income - 1,000 Current liabilities
Due to shareholder 1,000

Tasman Inc. Total current liabilities 1,000

Statement of Retained Earnings Long-term liabilities -
For year ended December 31, 2003 1,000
Owners' Equity
Opening Retained Earnings - Capital stock 10,000
Net Income (Loss) - 1,000 Retained Earnings - 1,000
Dividends -
9,000
Closing Retained Earnings - 1,000
Total Liabilities and OE 10,000

Introduction to Accounting 75
 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 76
 Tasman Inc.
3
Tasman Inc. gets a $50,000 loan from the bank.
Interest rate is 6% per year. Interest on the
outstanding amount must be paid each year on
the anniversary. Principal can be repaid at any
time.

Debit Cash Asset 50,000

Credit Bank loan Liability 50,000
To record the receipt of bank loan.

Introduction to Accounting 77
 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue - Assets
Current assets
Expenses Cash 60,000 -
Incorp costs 1,000 Total current assets 60,000
- Long-term assets
-
- Total Assets 60,000
- 1,000
Liabilities
Net Income - 1,000 Current liabilities
Due to shareholder 1,000

Tasman Inc. Total current liabilities 1,000

Statement of Retained Earnings Long-term liabilities 50,000
For year ended December 31, 2003 51,000
Owners' Equity
Opening Retained Earnings - Capital stock 10,000
Net Income (Loss) - 1,000 Retained Earnings - 1,000
Dividends -
9,000
Closing Retained Earnings - 1,000
Total Liabilities and OE 60,000

Introduction to Accounting 78
 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 79
 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 80
 Tasman Inc.
5
Make the rent payment for 2003 ($36,000).

Introduction to Accounting 81
 Tasman Inc.
5
Make the rent payment for 2003 ($36,000).

Debit Prepaid rent expense Asset 36,000

Credit Cash Asset 36,000
To record the payment of 2003 rent in advance.

Introduction to Accounting 82
 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue - Assets
Current assets
Expenses Cash 24,000 -
Incorp costs 1,000 Prepaid rent expense 36,000
-
- Total current assets 60,000
- Long-term assets
- 1,000
Total Assets 60,000
Net Income - 1,000
Liabilities
Current liabilities
Tasman Inc. Due to shareholder 1,000
Statement of Retained Earnings
For year ended December 31, 2003 Total current liabilities 1,000
Long-term liabilities 50,000
Opening Retained Earnings - 51,000
Net Income (Loss) - 1,000 Owners' Equity
Dividends - Capital stock 10,000
Retained Earnings - 1,000
Closing Retained Earnings - 1,000
9,000

Total Liabilities and OE 60,000

Introduction to Accounting 83
 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 84
 Tasman Inc.
6
Buy an oven which costs $15,000. Pay $5,000
cash, balance is due in one year. Interest rate
on the outstanding balance is 3.5% per year.

Debit Cooking equipment Asset 15,000

Credit Cash Asset 5,000
Credit Accounts payable Liability 10,000
To record the purchase of oven partially on credit.

Introduction to Accounting 85
Tasman Inc. Tasman Inc.
Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue - Assets
Current assets
Expenses Cash 19,000 -
Incorp costs 1,000 Prepaid rent expense 36,000
-
- Total current assets 55,000
- Long-term assets
- 1,000 Cooking equipment 15,000

Net Income - 1,000 15,000

Total Assets 70,000

Tasman Inc. Liabilities

Statement of Retained Earnings Current liabilities
For year ended December 31, 2003 Due to shareholder 1,000
Accounts payable 10,000
Opening Retained Earnings - Total current liabilities 11,000
Net Income (Loss) - 1,000 Long-term liabilities 50,000
Dividends - 61,000
Owners' Equity
Closing Retained Earnings - 1,000 Capital stock 10,000
Retained Earnings - 1,000

9,000

Total Liabilities and OE 70,000

Introduction to Accounting 86
 Tasman Inc.
7
Buy $1,500 of food supplies (ingredients to make
pizzas).

Introduction to Accounting 87
 Tasman Inc.
7
Buy $1,500 of food supplies (ingredients to make
pizzas).

Debit Food inventory Asset 1,500

Credit Cash Asset 1,500
To record the purchase of supplies to be used in making pizzas for sale.

Introduction to Accounting 88
Tasman Inc. Tasman Inc.
Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue - Assets
Current assets
Expenses Cash 17,500 -
Incorp costs 1,000 Prepaid rent expense 36,000
- Food inventory 1,500
- Total current assets 55,000
- Long-term assets
- 1,000 Cooking equipment 15,000

Net Income - 1,000 15,000

Total Assets 70,000

Tasman Inc. Liabilities

Statement of Retained Earnings Current liabilities
For year ended December 31, 2003 Due to shareholder 1,000
Accounts payable 10,000
Opening Retained Earnings - Total current liabilities 11,000
Net Income (Loss) - 1,000 Long-term liabilities 50,000
Dividends - 61,000
Owners' Equity
Closing Retained Earnings - 1,000 Capital stock 10,000
Retained Earnings - 1,000

9,000

Total Liabilities and OE 70,000

Introduction to Accounting 89
 Tasman Inc.
8
Purchase office equipment costing $4,000 on
credit. Full amount to be paid within 30 days.

Introduction to Accounting 90
 Tasman Inc.
8
Purchase office equipment costing $4,000 on
credit. Full amount to be paid within 30 days.

Debit Office equipment Asset 4,000

Credit Accounts payable Liability 4,000
To record the purchase of office equipment on credit.

Introduction to Accounting 91
Tasman Inc. Tasman Inc.
Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue - Assets
Current assets
Expenses Cash 17,500 -
Incorp costs 1,000 Prepaid rent expense 36,000
- Food inventory 1,500
- Total current assets 55,000
- Long-term assets
- 1,000 Cooking equipment 15,000
Office equipment 4,000
Net Income - 1,000 19,000
Total Assets 74,000

Tasman Inc. Liabilities

Statement of Retained Earnings Current liabilities
For year ended December 31, 2003 Due to shareholder 1,000
Accounts payable 14,000
Opening Retained Earnings - Total current liabilities 15,000
Net Income (Loss) - 1,000 Long-term liabilities 50,000
Dividends - 65,000
Owners' Equity
Closing Retained Earnings - 1,000 Capital stock 10,000
Retained Earnings - 1,000

9,000

Total Liabilities and OE 74,000

Introduction to Accounting 92
 Tasman Inc.
9
Hired a chef. Salary of $33,800 per year paid bi-
weekly (26 times a year).

Introduction to Accounting 93
 Tasman Inc.
9
Hired a chef. Salary of $33,800 per year paid bi-
weekly (26 times a year).

No entry.
Hiring of an employee is not considered a transaction for
accounting purposes.

Introduction to Accounting 94
 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 95
 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 96
 Tasman Inc.
11
First salary payments are made.

Introduction to Accounting 97
 Tasman Inc.
11
First salary payments are made.

Debit Salary expense Expense 1,300

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

Debit Salary expense Expense 2,400

Credit Due to shareholder Liability 2,400
To record salary expense for Manager, not paid in cash (62,400/26 = 2,400)

Introduction to Accounting 98
Tasman Inc. Tasman Inc.
Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue - Assets
Current assets
Expenses Cash 16,200 -
Incorp costs 1,000 Prepaid rent expense 36,000
Salaries 3,700 Food inventory 1,500
- Total current assets 53,700
- Long-term assets
- 4,700 Cooking equipment 15,000
Office equipment 4,000
Net Income - 4,700 19,000
Total Assets 72,700

Tasman Inc. Liabilities

Statement of Retained Earnings Current liabilities
For year ended December 31, 2003 Due to shareholder 3,400
Accounts payable 14,000
Opening Retained Earnings - Total current liabilities 17,400
Net Income (Loss) - 4,700 Long-term liabilities 50,000
Dividends - 67,400
Owners' Equity
Closing Retained Earnings - 4,700 Capital stock 10,000
Retained Earnings - 4,700

5,300

Total Liabilities and OE 72,700

Introduction to Accounting 99
 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 100

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

Debit Vehicle Asset 10,000

Credit Cash Asset 10,000
To record purchase of used vehicle to be used as delivery vehicle.

Introduction to Accounting 101

Tasman Inc. Tasman Inc.
Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue - Assets
Current assets
Expenses Cash 6,200
Incorp costs 1,000 Prepaid rent expense 36,000
Salaries 3,700 Food inventory 1,500
- Total current assets 43,700
- Long-term assets
- 4,700 Cooking equipment 15,000
Office equipment 4,000
Net Income - 4,700 Vehicle 10,000 29,000
Total Assets 72,700

Tasman Inc. Liabilities

Statement of Retained Earnings Current liabilities
For year ended December 31, 2003 Due to shareholder 3,400
Accounts payable 14,000
Opening Retained Earnings - Total current liabilities 17,400
Net Income (Loss) - 4,700 Long-term liabilities 50,000
Dividends - 67,400
Owners' Equity
Closing Retained Earnings - 4,700 Capital stock 10,000
Retained Earnings - 4,700

5,300

Total Liabilities and OE 72,700

Introduction to Accounting 102

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

Introduction to Accounting 103

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

Debit Cash Asset 900

Debit Accounts receivable Asset 600
Credit Catering revenue Revenue 1,500
To record the earning of catering revenue.

Introduction to Accounting 104

Tasman Inc. Tasman Inc.
Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 1,500 Current assets
1,500 Cash 7,100
Expenses Prepaid rent expense 36,000
Incorp costs 1,000 Food inventory 1,500
Salaries 3,700 Accounts receivable 600
- Total current assets 45,200
- Long-term assets
- 4,700 Cooking equipment 15,000
Office equipment 4,000
Net Income - 3,200 Vehicle 10,000 29,000
Total Assets 74,200

Tasman Inc. Liabilities

Statement of Retained Earnings Current liabilities
For year ended December 31, 2003 Due to shareholder 3,400
Accounts payable 14,000
Opening Retained Earnings - Total current liabilities 17,400
Net Income (Loss) - 3,200 Long-term liabilities 50,000
Dividends - 67,400
Owners' Equity
Closing Retained Earnings - 3,200 Capital stock 10,000
Retained Earnings - 3,200

6,800

Total Liabilities and OE 74,200

Introduction to Accounting 105

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

Introduction to Accounting 106

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

Debit Cash Asset 1,200

Credit Store revenue Revenue 1,200
To record the aggregate sales for the first day of business.

Introduction to Accounting 107

Tasman Inc. Tasman Inc.
Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 1,500 Current assets
Store sales 1,200 2,700 Cash 8,300
Expenses Prepaid rent expense 36,000
Incorp costs 1,000 Food inventory 1,500
Salaries 3,700 Accounts receivable 600
- Total current assets 46,400
- Long-term assets
- 4,700 Cooking equipment 15,000
Office equipment 4,000
Net Income - 2,000 Vehicle 10,000 29,000
Total Assets 75,400

Tasman Inc. Liabilities

Statement of Retained Earnings Current liabilities
For year ended December 31, 2003 Due to shareholder 3,400
Accounts payable 14,000
Opening Retained Earnings - Total current liabilities 17,400
Net Income (Loss) - 2,000 Long-term liabilities 50,000
Dividends - 67,400
Owners' Equity
Closing Retained Earnings - 2,000 Capital stock 10,000
Retained Earnings - 2,000

8,000

Total Liabilities and OE 75,400

Introduction to Accounting 108

 Tasman Inc.
15
The company upstairs in Tasman’s 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 109

 Tasman Inc.
15
The company upstairs in Tasman’s building
approaches Dave about an exclusive catering
arrangement whereby the company will pay
Tasman $4,000 up front to cater 5 functions
throughout the year. Dave accepts the deal and
$4,000 cash.

Debit Cash Asset 4,000

Credit Unearned revenue Liability 4,000
To record the receipt of cash for work to be performed in the future.

Introduction to Accounting 110

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 1,500 Current assets
Store sales 1,200 2,700 Cash 12,300
Expenses Prepaid rent expense 36,000
Incorp costs 1,000 Food inventory 1,500
Salaries 3,700 Accounts receivable 600 50,400
- Long-term assets
- Cooking equipment 15,000
- 4,700 Office equipment 4,000
Vehicle 10,000 29,000
Net Income - 2,000 Total Assets 79,400

Liabilities
Tasman Inc. Current liabilities
Statement of Retained Earnings Due to shareholder 3,400
For year ended December 31, 2003 Accounts payable 14,000
Unearned revenue 4,000 21,400
Opening Retained Earnings - Long-term liabilities 50,000
Net Income (Loss) - 2,000 71,400
Dividends - Owners' Equity
Capital stock 10,000
Closing Retained Earnings - 2,000 Retained Earnings - 2,000

8,000

Total Liabilities and OE 79,400

Introduction to Accounting 111

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

Introduction to Accounting 112

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

Debit Food inventory Asset 5,000

Credit Accounts payable Liability 5,000
To record the purchase of food inventory on credit.

Introduction to Accounting 113

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 1,500 Current assets
Store sales 1,200 2,700 Cash 12,300
Expenses Prepaid rent expense 36,000
Incorp costs 1,000 Food inventory 6,500
Salaries 3,700 Accounts receivable 600 55,400
- Long-term assets
- Cooking equipment 15,000
- 4,700 Office equipment 4,000
Vehicle 10,000 29,000
Net Income - 2,000 Total Assets 84,400

Liabilities
Tasman Inc. Current liabilities
Statement of Retained Earnings Due to shareholder 3,400
For year ended December 31, 2003 Accounts payable 19,000
Unearned revenue 4,000 26,400
Opening Retained Earnings - Long-term liabilities 50,000
Net Income (Loss) - 2,000 76,400
Dividends - Owners' Equity
Capital stock 10,000
Closing Retained Earnings - 2,000 Retained Earnings - 2,000

8,000

Total Liabilities and OE 84,400

Introduction to Accounting 114

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

Introduction to Accounting 115

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

Debit Accounts payable Liability 4,000

Credit Cash Asset 4,000
To record the payment of amounts owing to supplier of office equipment.

Debit Accounts payable Liability 5,000

Credit Cash Asset 5,000
To record the payment of amount owing to supplier of food inventory.

Introduction to Accounting 116

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 1,500 Current assets
Store sales 1,200 2,700 Cash 3,300
Expenses Prepaid rent expense 36,000
Incorp costs 1,000 Food inventory 6,500
Salaries 3,700 Accounts receivable 600 46,400
- Long-term assets
- Cooking equipment 15,000
- 4,700 Office equipment 4,000
Vehicle 10,000 29,000
Net Income - 2,000 Total Assets 75,400

Liabilities
Tasman Inc. Current liabilities
Statement of Retained Earnings Due to shareholder 3,400
For year ended December 31, 2003 Accounts payable 10,000
Unearned revenue 4,000 17,400
Opening Retained Earnings - Long-term liabilities 50,000
Net Income (Loss) - 2,000 67,400
Dividends - Owners' Equity
Capital stock 10,000
Closing Retained Earnings - 2,000 Retained Earnings - 2,000

8,000

Total Liabilities and OE 75,400

Introduction to Accounting 117

 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 118

 Tasman Inc.
18
Dave finds out that the company that owes
Tasman $600 for the catering job has gone
bankrupt and Tasman will not be receiving
payment.

Debit Bad debt expense Expense 600

Credit Accounts receivable Asset 600
To record the write-off of amount owing from customer.

Introduction to Accounting 119

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 1,500 Current assets
Store sales 1,200 2,700 Cash 3,300
Expenses Prepaid rent expense 36,000
Incorp costs 1,000 Food inventory 6,500
Salaries 3,700 Accounts receivable - 45,800
Bad debts 600 Long-term assets
- Cooking equipment 15,000
- 5,300 Office equipment 4,000
Vehicle 10,000 29,000
Net Income - 2,600 Total Assets 74,800

Liabilities
Tasman Inc. Current liabilities
Statement of Retained Earnings Due to shareholder 3,400
For year ended December 31, 2003 Accounts payable 10,000
Unearned revenue 4,000 17,400
Opening Retained Earnings - Long-term liabilities 50,000
Net Income (Loss) - 2,600 67,400
Dividends - Owners' Equity
Capital stock 10,000
Closing Retained Earnings - 2,600 Retained Earnings - 2,600

7,400

Total Liabilities and OE 74,800

Introduction to Accounting 120

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

Introduction to Accounting 121

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

Debit Unearned revenue Liability 800

Credit Catering revenue Revenue 800
To record the earning of catering revenue (assume $4,000 is earned evenly over 5 events)

Introduction to Accounting 122

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 2,300 Current assets
Store sales 1,200 3,500 Cash 3,300
Expenses Prepaid rent expense 36,000
Incorp costs 1,000 Food inventory 6,500
Salaries 3,700 Accounts receivable - 45,800
Bad debts 600 Long-term assets
- Cooking equipment 15,000
- 5,300 Office equipment 4,000
Vehicle 10,000 29,000
Net Income - 1,800 Total Assets 74,800

Liabilities
Tasman Inc. Current liabilities
Statement of Retained Earnings Due to shareholder 3,400
For year ended December 31, 2003 Accounts payable 10,000
Unearned revenue 3,200 16,600
Opening Retained Earnings - Long-term liabilities 50,000
Net Income (Loss) - 1,800 66,600
Dividends - Owners' Equity
Capital stock 10,000
Closing Retained Earnings - 1,800 Retained Earnings - 1,800

8,200

Total Liabilities and OE 74,800

Introduction to Accounting 123

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

Introduction to Accounting 124

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

Debit Cash Asset 220,000

Credit Store revenue Revenue 220,000
To record aggregate store revenue for the year.

Introduction to Accounting 125

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 2,300 Current assets
Store sales 221,200 223,500 Cash 223,300
Expenses Prepaid rent expense 36,000
Incorp costs 1,000 Food inventory 6,500
Salaries 3,700 Accounts receivable - 265,800
Bad debts 600 Long-term assets
- Cooking equipment 15,000
- 5,300 Office equipment 4,000
Vehicle 10,000 29,000
Net Income 218,200 Total Assets 294,800

Liabilities
Tasman Inc. Current liabilities
Statement of Retained Earnings Due to shareholder 3,400
For year ended December 31, 2003 Accounts payable 10,000
Unearned revenue 3,200 16,600
Opening Retained Earnings - Long-term liabilities 50,000
Net Income (Loss) 218,200 66,600
Dividends - Owners' Equity
Capital stock 10,000
Closing Retained Earnings 218,200 Retained Earnings 218,200

228,200

Total Liabilities and OE 294,800

Introduction to Accounting 126

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

Introduction to Accounting 127

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

Debit Salary expense Expense 32,500

Credit Cash Asset 32,500
To record payment of chef’s salary (33,800 - 1,300 (previously recorded) = 32,500).

Debit Salary expense Expense 60,000

Credit Cash Asset 31,200
Credit Due to shareholder Liability 28,800
To record salary expense for Manager (62,400 – 2,400 (previously recorded) = 60,000)

Introduction to Accounting 128

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 2,300 Current assets
Store sales 221,200 223,500 Cash 159,600
Expenses Prepaid rent expense 36,000
Incorp costs 1,000 Food inventory 6,500
Salaries 96,200 Accounts receivable - 202,100
Bad debts 600 Long-term assets
- Cooking equipment 15,000
- 97,800 Office equipment 4,000
Vehicle 10,000 29,000
Net Income 125,700 Total Assets 231,100

Liabilities
Tasman Inc. Current liabilities
Statement of Retained Earnings Due to shareholder 32,200
For year ended December 31, 2003 Accounts payable 10,000
Unearned revenue 3,200 45,400
Opening Retained Earnings - Long-term liabilities 50,000
Net Income (Loss) 125,700 95,400
Dividends - Owners' Equity
Capital stock 10,000
Closing Retained Earnings 125,700 Retained Earnings 125,700

135,700

Total Liabilities and OE 231,100

Introduction to Accounting 129

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

Introduction to Accounting 130

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

Debit Food inventory Asset 80,000

Credit Cash Asset 80,000
To record aggregate food supply purchases for the year.

Introduction to Accounting 131

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 2,300 Current assets
Store sales 221,200 223,500 Cash 79,600
Expenses Prepaid rent expense 36,000
Incorp costs 1,000 Food inventory 86,500
Salaries 96,200 Accounts receivable - 202,100
Bad debts 600 Long-term assets
- Cooking equipment 15,000
- 97,800 Office equipment 4,000
Vehicle 10,000 29,000
Net Income 125,700 Total Assets 231,100

Liabilities
Tasman Inc. Current liabilities
Statement of Retained Earnings Due to shareholder 32,200
For year ended December 31, 2003 Accounts payable 10,000
Unearned revenue 3,200 45,400
Opening Retained Earnings - Long-term liabilities 50,000
Net Income (Loss) 125,700 95,400
Dividends - Owners' Equity
Capital stock 10,000
Closing Retained Earnings 125,700 Retained Earnings 125,700

135,700

Total Liabilities and OE 231,100

Introduction to Accounting 132

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

Introduction to Accounting 133

 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 134

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

Total purchased in the year

= 1,500 + 5,000 + 80,000 = 86,500
86,500 – 3,500 = 83,000 = Cost of the inventory used
= Cost of goods sold

Debit Cost of goods sold Expense 83,000

Credit Food inventory Liability 83,000
To record the cost of food inventory used in the year.

Introduction to Accounting 135

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 2,300 Current assets
Store sales 221,200 223,500 Cash 79,600
Prepaid rent expense 36,000
Cost of goods sold - 83,000 Food inventory 3,500
Gross margin 140,500 Accounts receivable - 119,100
Long-term assets
Expenses Cooking equipment 15,000
Incorp costs 1,000 Office equipment 4,000
Salaries 96,200 Vehicle 10,000 29,000
Bad debts 600 Total Assets 148,100
-
- 97,800 Liabilities
Current liabilities
Net Income 42,700 Due to shareholder 32,200
Accounts payable 10,000
Unearned revenue 3,200 45,400
Tasman Inc. Long-term liabilities 50,000
Statement of Retained Earnings 95,400
For year ended December 31, 2003 Owners' Equity
Capital stock 10,000
Opening Retained Earnings - Retained Earnings 42,700
Net Income (Loss) 42,700
Dividends - 52,700

Closing Retained Earnings 42,700 Total Liabilities and OE 148,100

Introduction to Accounting 136

 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 137

 Tasman Inc.
Summary amount 5
Utilities expenses were all paid in cash on the
last day of each month. Total for the year was
$9,600.

Debit Utilities expense Expense 9,600

Credit Cash Asset 9,600
To record aggregate payment of utilities expense for the year.

Introduction to Accounting 138

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 2,300 Current assets
Store sales 221,200 223,500 Cash 70,000
Prepaid rent expense 36,000
Cost of goods sold - 83,000 Food inventory 3,500
Gross margin 140,500 Accounts receivable - 109,500
Long-term assets
Expenses Cooking equipment 15,000
Incorp costs 1,000 Office equipment 4,000
Salaries 96,200 Vehicle 10,000 29,000
Bad debts 600 Total Assets 138,500
Utilities 9,600
- 107,400 Liabilities
Current liabilities
Net Income 33,100 Due to shareholder 32,200
Accounts payable 10,000
Unearned revenue 3,200 45,400
Tasman Inc. Long-term liabilities 50,000
Statement of Retained Earnings 95,400
For year ended December 31, 2003 Owners' Equity
Capital stock 10,000
Opening Retained Earnings - Retained Earnings 33,100
Net Income (Loss) 33,100
Dividends - 43,100

Closing Retained Earnings 33,100 Total Liabilities and OE 138,500

Introduction to Accounting 139

 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 140

 Tasman Inc.
Summary amount 6
Tasman catered 3 of the remaining events for
the company upstairs. The last one will be held
on January 7, 2004.

Debit Unearned revenue Liability 2,400

Credit Catering revenue Revenue 2,400
To record the earning of revenue for 3 of remaining 4 events that had been pre-paid.

Introduction to Accounting 141

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 4,700 Current assets
Store sales 221,200 225,900 Cash 70,000
Prepaid rent expense 36,000
Cost of goods sold - 83,000 Food inventory 3,500
Gross margin 142,900 Accounts receivable - 109,500
Long-term assets
Expenses Cooking equipment 15,000
Incorp costs 1,000 Office equipment 4,000
Salaries 96,200 Vehicle 10,000 29,000
Bad debts 600 Total Assets 138,500
Utilities 9,600
- 107,400 Liabilities
Current liabilities
Net Income 35,500 Due to shareholder 32,200
Accounts payable 10,000
Unearned revenue 800 43,000
Tasman Inc. Long-term liabilities 50,000
Statement of Retained Earnings 93,000
For year ended December 31, 2003 Owners' Equity
Capital stock 10,000
Opening Retained Earnings - Retained Earnings 35,500
Net Income (Loss) 35,500
Dividends - 45,500

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

Introduction to Accounting 142

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

Introduction to Accounting 143

 Tasman Inc.
Adjusting entry 1
Costs related to the oven, the office equipment,
and the Camaro must be recorded.
Debit Depreciation expense Expense 3,000
Accumulated Depreciation
Credit – Oven
Contra-asset 3,000
To record annual depreciation of Oven (15,000/5 = 3,000 (assume 5-year life)).

Debit Depreciation expense Expense 1,000

Accumulated Depreciation
Credit – Office equipment
Contra-asset 1,000
To record annual depreciation of office equipment (4,000/4 = 1,000 (assume 4-year life)).

Debit Depreciation expense Expense 2,000

Accumulated Depreciation
Credit – Vehicle
Contra-asset 2,000
To record annual depreciation of delivery vehicle (10,000/5 = 2,000).

Introduction to Accounting 144

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 4,700 Current assets
Store sales 221,200 225,900 Cash 70,000
Prepaid rent expense 36,000
Cost of goods sold - 83,000 Food inventory 3,500
Gross margin 142,900 Accounts receivable - 109,500
Long-term assets
Expenses Cooking equipment 15,000
Incorp costs 1,000 Office equipment 4,000
Salaries 96,200 Vehicle 10,000
Bad debts 600 Accum Depn (total) - 6,000 23,000
Utilities 9,600 Total Assets 132,500
Depreciation 6,000 - 113,400
Liabilities
Net Income 29,500 Current liabilities
Due to shareholder 32,200
Accounts payable 10,000
Tasman Inc. Unearned revenue 800 43,000
Statement of Retained Earnings Long-term liabilities 50,000
For year ended December 31, 2003 93,000
Owners' Equity
Opening Retained Earnings - Capital stock 10,000
Net Income (Loss) 29,500 Retained Earnings 29,500
Dividends -
39,500
Closing Retained Earnings 29,500
Total Liabilities and OE 132,500

Introduction to Accounting 145

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

Introduction to Accounting 146

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

Debit Interest expense Expense 3,000

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

Debit Interest expense Expense 350

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

Introduction to Accounting 147

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at

Revenue Assets
Catering 4,700 Current assets
Store sales 221,200 225,900 Cash 70,000
Prepaid rent expense 36,000
Cost of goods sold - 83,000 Food inventory 3,500
Gross margin 142,900 Accounts receivable - 109,500
Long-term assets
Expenses Cooking equipment 15,000
Incorp costs 1,000 Office equipment 4,000
Salaries 96,200 Vehicle 10,000
Bad debts 600 Accum Depn (total) - 6,000 23,000
Utilities 9,600 Total Assets 132,500
Depreciation 6,000
Interest 3,350 - 116,750 Liabilities
Net Income 26,150 Current liabilities
Due to shareholder 32,200
Accounts payable 10,000
Tasman Inc. Interest payable 3,350
Statement of Retained Earnings Unearned revenue 800 46,350
For year ended December 31, 2003 Long-term liabilities 50,000
96,350
Opening Retained Earnings - Owners' Equity
Net Income (Loss) 26,150 Capital stock 10,000
Dividends - Retained Earnings 26,150
36,150
Closing Retained Earnings 26,150
Total Liabilities and OE 132,500
Introduction to Accounting 148
 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 149

 Tasman Inc.
Adjusting entry 3
Rent expense must be recorded.

Recall that $36,000 was paid at the beginning of

the year for the full year and was recorded as an
asset, Prepaid rent expense.

Debit Rent expense Expense 36,000

Credit Prepaid rent expense Asset 36,000
To record the rent expense which had been prepaid at the beginning of the year.

Introduction to Accounting 150

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at December 31, 2003

Revenue Assets
Catering 4,700 Current assets
Store sales 221,200 225,900 Cash 70,000
Prepaid rent expense -
Cost of goods sold - 83,000 Food inventory 3,500
Gross margin 142,900 Accounts receivable - 73,500
Long-term assets
Expenses Cooking equipment 15,000
Incorp costs 1,000 Office equipment 4,000
Salaries 96,200 Vehicle 10,000
Bad debts 600 Accum Depn (total) - 6,000 23,000
Utilities 9,600 Total Assets 96,500
Rent 36,000
Depreciation 6,000 Liabilities
Interest 3,350 - 152,750 Current liabilities
Due to shareholder 32,200
Net Income - 9,850 Accounts payable 10,000
Interest payable 3,350
Unearned revenue 800 46,350
Tasman Inc. Long-term liabilities 50,000
Statement of Retained Earnings 96,350
For year ended December 31, 2003 Owners' Equity
Capital stock 10,000
Opening Retained Earnings - Retained Earnings - 9,850
Net Income (Loss) - 9,850 150
Dividends -
Closing Retained Earnings - 9,850 Total Liabilities and OE 96,500

Introduction to Accounting 151

 The Accounting Cycle
1. Transaction or event occurs
2. Recorded in the Journal using a Journal Entry.
3. Journal is posted to Ledger
4. Ledger accounts are totalled.
5. Financial statements are prepared.

We have done step 2 (journal entries).

Step 3 is most easily done using a spreadsheet
(Friedlan text provides a template).
We will use the old-fashioned method known as T-
accounts.
Each account is represented by a T. All debits are “posted” on
the left, all credits are “posted” on the right.
Spreadsheets have made this practice virtually obsolete, but it
is informative to do it to help understand the fundamentals.

Introduction to Accounting 152

 T-Accounts (posting to ledgers)
Before the closing entry:
Cash Accounts Receivable Due to shareholder Catering revenue Store sales
10,000 36,000 600 600 1,000 1,500 1,200
50,000 5,000 - 2,400 800 220,000
900 1,500 28,800 2,400 221,200
1,200 1,300 Prepaid rent expense 32,200 4,700
4,000 10,000 36,000 36,000
220,000 9,000 - Accounts payable
32,500 9,000 10,000
31,200 Food inventory 4,000
80,000 1,500 83,000 5,000 Cost of goods sold Rent
9,600 5,000 10,000 83,000 36,000
70,000 80,000 83,000 36,000
3,500 Interest payable
3,000 Incorporation costs Depreciation
Cooking equipment 350 1,000 3,000
15,000 3,350 1,000 1,000
15,000 Office equipment 2,000
4,000 Unearned revenue Salaries 6,000
Accumulated depn 4,000 800 4,000 3,700
3,000 2,400 92,500 Interest
1,000 Vehicle 800 96,200 3,000
2,000 10,000 350
6,000 10,000 Bank loan Bad debts 3,350
50,000 600
50,000 600 Utilities
9,600
Capital stock Retained earnings 9,600
10,000
10,000

Introduction to Accounting 153

 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 154

 T-Accounts (posting to ledgers)
After the closing entry:
Cash Accounts Receivable Due to shareholder Catering revenue Store sales
10,000 36,000 600 600 1,000 1,500 1,200
50,000 5,000 - 2,400 800 220,000
900 1,500 28,800 2,400 221,200 221,200
1,200 1,300 Prepaid rent expense 32,200 4,700 4,700 -
4,000 10,000 36,000 36,000 -
220,000 9,000 - Accounts payable
32,500 9,000 10,000 Cost of goods sold Rent
31,200 Food inventory 4,000 83,000 36,000
80,000 1,500 83,000 5,000 83,000 83,000 36,000 36,000
9,600 5,000 10,000 - -
70,000 80,000
3,500 Interest payable Incorporation costs Depreciation
3,000 1,000 3,000
Cooking equipment 350 1,000 1,000 1,000
15,000 3,350 - 2,000
15,000 Office equipment 6,000 6,000
4,000 Unearned revenue Salaries -
Accumulated depn 4,000 800 4,000 3,700
3,000 2,400 92,500 Interest
1,000 Vehicle 800 96,200 96,200 3,000
2,000 10,000 - 350
6,000 10,000 Bank loan 3,350 3,350
50,000 Bad debts -
50,000 600
600 600 Utilities
Capital stock - 9,600
10,000 9,600 9,600
10,000 Retained earnings -
9,850
9,850

Introduction to Accounting 155

 Financial statements
Numbers to go to the financial statements
Cash Accounts Receivable Due to shareholder Catering revenue Store sales
10,000 36,000 600 600 1,000 1,500 1,200
50,000 5,000 - 2,400 800 220,000
900 1,500 28,800 2,400 221,200 221,200
1,200 1,300 Prepaid rent expense 32,200 4,700 4,700 -
4,000 10,000 36,000 36,000 -
220,000 9,000 - Accounts payable
32,500 9,000 10,000 Cost of goods sold Rent
31,200 Food inventory 4,000 83,000 36,000
80,000 1,500 83,000 5,000 83,000 83,000 36,000 36,000
9,600 5,000 10,000 - -
70,000 80,000
3,500 Interest payable Incorporation costs Depreciation
3,000 1,000 3,000
Cooking equipment 350 1,000 1,000 1,000
15,000 3,350 - 2,000
15,000 Office equipment 6,000 6,000
4,000 Unearned revenue Salaries -
Accumulated depn 4,000 800 4,000 3,700
3,000 2,400 92,500 Interest
1,000 Vehicle 800 96,200 96,200 3,000
2,000 10,000 - 350
6,000 10,000 Bank loan 3,350 3,350
50,000 Bad debts -
50,000 600
600 600 Utilities
Capital stock - 9,600
10,000 9,600 9,600
10,000 Retained earnings -
9,850
9,850

Introduction to Accounting 156

 Tasman Inc.
Tasman Inc. Tasman Inc.
Income statement Balance Steet
For year ended December 31, 2003 As at December 31, 2003

Revenue Assets
Catering 4,700 Current assets
Store sales 221,200 225,900 Cash 70,000
Food inventory 3,500 73,500
Cost of goods sold - 83,000 Long-term assets
Gross margin 142,900 Cooking equipment 15,000
Office equipment 4,000
Expenses Vehicle 10,000
Incorp costs 1,000 Accum Depn (total) - 6,000 23,000
Salaries 96,200 Total Assets 96,500
Bad debts 600
Utilities 9,600 Liabilities
Rent 36,000 Current liabilities
Depreciation 6,000 Due to shareholder 32,200
Interest 3,350 - 152,750 Accounts payable 10,000
Interest payable 3,350
Net Income - 9,850 Unearned revenue 800 46,350
Long-term liabilities 50,000
96,350
Tasman Inc. Owners' Equity
Statement of Retained Earnings Capital stock 10,000
For year ended December 31, 2003 Retained Earnings - 9,850
150
Opening Retained Earnings -
Net Income (Loss) - 9,850 Total Liabilities and OE 96,500
Dividends -
Closing Retained Earnings - 9,850

Introduction to Accounting 157