Intermediate Accounting: Eleventh Canadian Edition

KIESO WEYGANDT WARFIELD YOUNG WIECEK MCCONOMY
INTERMEDIATE
ACCOUNTING
VOLUME 1
ELEVENTH CANADIAN EDITION
Prepared by:
Darrin Ambrose CPA, CMA, MBA
University of Calgary
CHAPTER 3:
THE ACCOUNTING
INFORMATION SYSTEM
AND MEASUREMENT
ISSUES
2
Chapter 3:THE ACCOUNTING INFORMATION SYSTEM AND

MEASUREMENT ISSUES
After studying this chapter, you should be able to:

1.
2.
3.
4.
5.
6.
Understand basic accounting terminology and double-entry rules.

Explain how transactions affect the accounting equation.
Identify the steps in the accounting cycle and the steps in the recording process.
Explain the reasons for and prepare adjusting entries.
Explain how the type of ownership structure affects the financial statements.
Prepare closing entries and consider other matters relating to the closing process.
7. Use valuation techniques to measure financial statement

elements.
8. Use IFRS 13 to measure fair value.
9. Identify differences in accounting between ASPE and IFRS, and
what changes are expected in the near future.
After studying Appendix 3A, you should be able to:
10. Prepare a 10-column work sheet and financial statements
After studying Appendix 3B, you should be able to:

11. Understand and apply present value concepts
Copyright John Wiley & Sons
Canada, Ltd.
The Accounting Information System

and Measurement Issues

Canada, Ltd.
Basic Terminology
Event: The cause of changes of assets,
liabilities, and equity
Transaction: A transfer or exchange between
two or more entities or parties
Account: Where transactions are recorded
A separate account is used for each asset,
liability, revenue, expense, gain, loss and capital
(owners equity)
Canada, Ltd.
Basic Terminology
Permanent accounts (or real accounts)
Asset, liability, and equity accounts
Appear on the balance sheet
Permanent accounts are not closed at year end
Temporary accounts (or nominal accounts)

Revenue, expense, and dividend accounts
Revenue and expenses are on the income
statement; dividends are on the statement of
changes in shareholders equity.
Temporary accounts are closed at year end
Canada, Ltd.
Basic Terminology
Journalizing and Posting
A Journal is a book of original entry for all
transactions
The General Journal is a chronological listing
of transactions expressed as debits and
credits to particular accounts (known as a
journal entries)
Special Journals are used to summarize
transactions with common characteristics
(e.g. cash receipts, sales, purchases)
Posting: when the transaction information
7
Canada, Ltd.
entered in the journal
is transferred
to the
Basic Terminology
Ledger
Book (or electronic database) containing all
accounts
Each account has a separate page
General ledger contains all asset, liability, and all
equity related accounts (capital, revenue, and
expenses)
Subsidiary ledger contains details related to a
specific general ledger account (example:
accounts receivable subsidiary ledger)
Canada, Ltd.
Basic Terminology
Trial balance
Listing of all accounts and their balances from
the general ledger at a given point in time
Objective: prove the mathematical equality of
debits and credits after posting (i.e. to ensure
general ledger is in balance)
Typically prepared after end of period
adjustments (called Adjusted Trial Balance) and
possibly after closing entries (called Postclosing Trial Balance)
Canada, Ltd.
Basic Terminology
Adjusting entries
Entries made at the end of an accounting period

Brings all accounts up to date on an accrual
accounting basis
Seven classifications of adjusting entries:
Prepayment
Accruals
Estimated Items
1. Prepaid Expenses
3. Accrued Revenues
5. Bad Debts
2. Unearned Revenues
4. Accrued Expenses
6. Unrealized Holding
Gain or Loss
7. Unrealized Holding
Gain or Loss - OCI

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10
Basic Terminology
Financial statements
Final summaries of the accounting data for a specific
time period
Four statements:
Statement of Financial Position (or Balance Sheet under

ASPE) - shows financial condition at a specific date
Statement of Comprehensive Income (or Income
Statement under ASPE) - measures the results of
operations during a period of time
Statement of Cash Flows - shows sources and uses of
cash
Statement of Changes in Shareholders Equity
(Statement of Retained Earnings under ASPE)
Canada, Ltd.
11
Debits and Credits

Debit (Dr.)
To record or enter an
amount on the left side
of a general ledger
account
Credit (Cr.)
To record or enter an
amount on the right side
of a general ledger
account
This system of recording transactions is referred to as the

double-entry accounting system; the two-sided effect of
each transaction is recorded in appropriate accounts
When a transaction is in balance, the debits equal the
credits
Debits and credits do not mean increases and decreases
Canada, Ltd.
12
The Accounting Equation
Assets = Liabilities + Shareholders Equity*
*Shareholders Equity = Common Shares +

Retained Earnings Dividends + Revenues Expenses
Assets = Liabilities + Common Shares + Retained
Earnings Dividends + Revenues - Expenses

Canada, Ltd.
13
The Rules of Debit and Credit

To increase the balance of any account,
record the amount in the normal balance
column
To decrease the balance of any account,
record the amount in the column opposite to
its normal balance
When any transaction is correctly recorded,
the accounting equation will remain in
balance
Canada, Ltd.
14
The Rules of Debit and Credit
Account
Debit
Credit
Assets
Increase
Decrease
Liabilities
Decrease
Increase
Shareholders Equity
Decrease
Increase
Revenue
Decrease
Increase
Expenses
Increase
Decrease

Canada, Ltd.
15
The Accounting Cycle: Steps

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Analyze the transaction

Journalize the transaction
Post the transaction to general ledger (and subledgers) accounts
Prepare the (unadjusted) trial balance
Prepare necessary adjusting journal entries
Prepare the (adjusted) trial balance
Prepare financial statements
Prepare closing journal entries for the year
Prepare post-closing trial balance (optional)
Prepare reversing entries (optional)
Canada, Ltd.
16
Recording a Transaction:
Shares are issued for $3,000 cash
Assets = Liabilities + Shareholders Equity

+ $3,000
+ $3,000
To record this transaction as a journal entry (in

General Journal):
Dr. Cash
Cr.
$3,000
Common Shares
$3,000
These amounts are then posted to the general

ledger
Cash
3,000
Canada, Ltd.
Common
Shares
3,000
17
Preparation of Trial Balance

PIONEER ADVERTISING AGENCY INC. at October 31, 2017
Cash
80,000
Notes Payable
50,000
Dividends
5,000
Revenue
100,000
Account
Credit
Cash
80,000
Accounts Receivable
Advertising Supplies
Prepaid Insurance
6,000
Fair Value Investments
10,000
Office Equipment
50,000
Notes Payable
Accounts Payable
Unearned Service Revenue
12,000
Common Shares
Dividends
Service Revenue
Salaries Expense
40,000
Rent
Expense
9,000
Copyright John
Wiley
& Sons Canada,
18
Ltd.
TOTALS
297,000
Debit
72,000
25,000
50,000
35,000
100,000
5,000
100,000
297,000
Preparation of Trial Balance

From the previous example, we can see that the
trial balance is in balance
However, the trial balance only proves the
mathematical accuracy of the ledger
Errors may still exist such as the following:
Transaction not journalized
Correct journal entry not posted
Journal entry posted twice
Incorrect accounts used in either the journal entry
or posting
5. Offsetting errors made during recording
1.
2.
3.
4.

Canada, Ltd.
19
Adjusting Journal Entries

Adjusting entries ensure that revenue recognition
and matching are followed within the period
Reasons for adjusting entries include:
To record those events that are not journalized
daily
To record those costs, which expire with time and
are therefore not recorded
To record item previously unrecorded
Adjusting entries are required each time financial

statements are prepared
Canada, Ltd.
20
Adjusting Entries for Prepayments
Prepaid Expenses
Prepayments made in cash and recorded as
assets before item is used
Unearned Revenues
Revenue received in cash and recorded as
liabilities before being earned

Canada, Ltd.
21

Prepaid expenses expire either with the passage
of time (e.g. rent and insurance) or by being used
and consumed (e.g. supplies)
Example: Company paid $6,000 for one year
insurance when coverage begins October 1 and
debited Prepaid Insurance for $6,000.
Adjust Prepaid Insurance on Dec. 31:
Dr Insurance Expense 1,500
Cr Prepaid Insurance 1,500
($6,000/12 * 3)
Canada, Ltd.
22

When payment is received from customers for services (or
goods) that will be provided in a future accounting period,
a liability (unearned revenue) is recognized
e.g. Rent, magazine subscriptions, deposits
Example: Company received $12,000 for four months
advertising services that begins Oct. 1. $12,000 was
credited to unearned revenue
Adjustment required on December 31:
Dr Unearned Revenue 9,000
Cr Service Revenue 9,000
($12,000/4 * 3)
Canada, Ltd.
23
Adjusting Entries for Accruals

Accrued Revenues
Revenues earned but not yet received in
cash and not recorded
Accrued Expenses
Expenses incurred but not yet paid in cash
and not recorded

Canada, Ltd.
24
Adjusting Journal Entries

Expenses must be accrued when they are incurred;
also revenues must be recorded as earned
Accruals needed: interest expense, salaries
expense, bad debts expense, interest earned
Example: assume on January 5, a company pays
$20,000 for salaries which includes $10,000 of
salaries for December
Adjustment required on December 31:
Dr Salaries Expense 10,000
Cr Salaries Payable
10,000
Canada, Ltd.
25
Adjusting Entries for Estimated Items

Bad Debts
Expenses relating to impaired accounts receivable
estimated in the period and relating to revenue that
has been earned
Investments Fair Value Adjustments

For certain categories of investments, an unrealized
gain or loss must be recorded in the statement of
comprehensive income
Adjustment made either through:
Net Income, or
Other Comprehensive Income
Canada, Ltd.
26
Financial Statements and Ownership

Structure

Canada, Ltd.
27
Financial Statements and Ownership

Structure

Canada, Ltd.
28
The Closing Process

Closing entries are made to close all nominal
accounts (revenue and expense accounts) for the
year
The balances in these accounts are transferred to
a clearing account (Income Summary)
The balance in Income Summary represents net
income or net loss for the period
Real (or permanent) accounts are not closed
The Dividends account is closed to retained
earnings
Canada, Ltd.
29
The Closing Process

The following closing entries are made (assume net income and
other comprehensive income for the year):
1. Income Summary $$$
Expense Accounts (individually) $$$
2. Revenue Accounts (individually) $$$
Income Summary $$$
3. Income Summary $$$
Retained Earnings $$$
4. Retained Earnings $$$
Dividends $$$
5. OCI Accounts (individually) $$$
Accumulated OCI $$$
Canada, Ltd.
30
Retained Earnings: Closing Entries

Ret. Earnings
Dividends
Income Summary
3
Expense
Revenue
1

Canada, Ltd.
31
Closing Entries: Inventory
In a periodic inventory system, closing entries

are made to record cost of goods sold and
ending inventory
In a perpetual inventory system, such entries
are not required

Canada, Ltd.
32
Periodic Inventory:
Closing Entry
Collegiate Apparel Shop has the following
balances at year end. The company uses a
periodic inventory system.
Beginning Inventory
Purchases (gross)
Transportation-In
Purchases Returns
Purchase Discounts
Ending Inventory
$ 30,000
$200,000
$ 6,000
$ 1,000
$ 3,000
$ 26,000

Canada, Ltd.
33
Periodic Inventory:
Closing Entry
First Step: Determine Cost of Goods Sold
Beginning Inventory
Purchases
$200,000
Less: Purchase returns $1,000
Purchase discounts 3,000
4,000
Net Purchases
196,000
Plus: Transportation-In
6,000
Cost of Goods Purchased
Cost of Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold
Canada, Ltd.
$ 30,000
202,000
232,000
26,000
$206,000
34
Periodic Inventory:
Closing Entry
Account
Dr.
Cost of Goods Sold

Inventory (Ending)
Purchases Returns
Purchase Discounts
Cr.
$ 206,000
$ 26,000
$ 1,000
$ 3,000
Purchases (Gross)
Transportation-in
Inventory (Beginning)

Canada, Ltd.
$ 200,000
$ 6,000
$ 30,000
35
Valuation Techniques
There are two common types of valuation

techniques market models and income
models
Market models: use prices and other
information from identical or similar
transactions
Income models: uses future cash flows and
converts them to current amounts
Canada, Ltd.
36
When determining the value of a financial

statement element, an accountant must ask:
Which model or technique is being used?
Which inputs should be used?
Does the resulting measurement result in
useful information?

Canada, Ltd.
37
Which model should be used?

Depends on the item being measured
Depends on the information available
Income models are frequently used in practice
as cash flow projections are readily available

Canada, Ltd.
38
Appendix 3A: Using a Work Sheet
Companies often use a work sheet to make

the financial statement preparation process
easier.
Does not replace the financial statements
Completing the worksheet gives certainty that
all of the details have been captured in the
end-of-period financial statements.

Canada, Ltd.
39
Appendix 3A: Using a Work Sheet

Canada, Ltd.
40
Appendix 3B: Present Value Concepts
The value of one dollar today is not equal to

the value of one dollar in the future.
Money today can be invested and interest
can be earned over time.
The more risk involved in the investment, the
higher the interest rate.

Canada, Ltd.
41

There are three fundamental variables in PV
calculations:
Principal: The amount borrowed or
invested
Interest Rate: A percentage of the
outstanding principal. Generally stated as
an annual rate
Time: The duration or number of periods
Canada, Ltd.
42

The simple interest calculation is:
P = Principal
I = rate of interest for a single period
N = number of periods

Canada, Ltd.
43

There are many different ways to calculate
present values, including the following:
Present value formulas
Present value tables
Financial Calculators
Spreadsheets (Excel)

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44

Example (PV of a Single Future Amount)
Assume you want to invest a sum of money at
5% in order to have $1,000 at the end of one
year. The amount that you would need to invest
today is called the present value of $1,000
discounted for one year at 5%

Canada, Ltd.
45

Example Present Value Formula
Present Value (PV) = Future Value (FV)
(1 + i)n
PV = $1,000 / (1 + 5%)1
= $1,000 / 1.05
= $952.38
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46
Example Present Value Table

Present Value (PV) = $1,000 x 0.95238
= $952.38

Canada, Ltd.
47

Example Financial Calculators
PV = Present Value
I = Interest Rate
N = Number of Periods
FV = Future Value
?
5%
1
$1,000

Canada, Ltd.
48

PV = Present Value
I = Interest Rate
FV = Future Value
952.38
5%
1
$1,000

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49
Example Spreadsheets (Excel)


Canada, Ltd.
50

Inputs:
PV = Present Value
Rate = Interest Rate
Nper = Number of
Periods
Pmt = Payment
FV = Future Value
Type = Type of Annuity

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51

Inputs:
PV = to be calculated
Rate = 0.05 or 5%
Nper = 1
Pmt = 0
FV = $1,000

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52

Inputs:
Rate = 0.05 or 5%
Nper = 1
Pmt = 0
FV = $1,000

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53
Example (PV of a Series of Future Cash Flows)

Assume you want will pay $1,000 cash annually
for three years (at the end of the year) and that
the discount rate is 4%

Canada, Ltd.
54
Example Present Value Formula

Present Value (PV) = Future Value (FV)
(1 + i)n
PV = $1,000 / (1 + 4%)1 + $1,000/(1+4%)2 +
$1,000/(1+4)3
= $961.54 + $924.56 + $889.00
= $2,775.10
Canada, Ltd.
55

Example Present Value Table
for three
years (at the end
the year)
Future
Value
x PVofFactor
(4%)and
= that
Present
Valuerate is 4%
the discount
$1,000 (one year away)
x 0.96154
$961.54
$1,000 (two years away) x 0.92456
$924.56
$1,000 (three years away) x 0.88900
$889.00
Total
2.77510
=
$2,775.10
Canada, Ltd.
56
=
=
=

PV = Present Value
I = Interest Rate
PMT = Payment
?
4%
3
-$1,000

Canada, Ltd.
57

PV = Present Value
I = Interest Rate
PMT = Payment
$2,775.09
4%
3
-$1,000

Canada, Ltd.
58

Inputs:
PV = Present Value
Rate = Interest Rate
Nper = Number of
Periods
Pmt = Payment
FV = Future Value

Canada, Ltd.
59

Inputs:
Rate = 0.04 or 4%
Nper = 3
Pmt = -1,000
FV = n/a
Type = 0

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60

Inputs:
Rate = 0.05 or 5%
Nper = 1
Pmt = 0
FV = $1,000

Canada, Ltd.
61
COPYRIGHT
Copyright 2016 John Wiley & Sons Canada, Ltd. All rights
reserved. Reproduction or translation of this work beyond that
permitted by Access Copyright (The Canadian Copyright
Licensing Agency) is unlawful. Requests for further information
should be addressed to the Permissions Department, John
Wiley & Sons Canada, Ltd. The purchaser may make back-up
copies for his or her own use only and not for distribution or
resale. The author and the publisher assume no responsibility
for errors, omissions, or damages caused by the use of these
programs or from the use of the information contained herein.

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KIESO WEYGANDT WARFIELD YOUNG WIECEK MCCONOMY

Chapter 3:THE ACCOUNTING INFORMATION SYSTEM AND

After studying this chapter, you should be able to:

Understand basic accounting terminology and double-entry rules.

7. Use valuation techniques to measure financial statement

After studying Appendix 3B, you should be able to:

The Accounting Information System

Copyright John Wiley & Sons

Temporary accounts (or nominal accounts)

Entries made at the end of an accounting period

Copyright John Wiley & Sons

Statement of Financial Position (or Balance Sheet under

Debits and Credits

This system of recording transactions is referred to as the

The Accounting Equation

Assets = Liabilities + Shareholders Equity*

*Shareholders Equity = Common Shares +

Copyright John Wiley & Sons

The Rules of Debit and Credit

The Rules of Debit and Credit

Copyright John Wiley & Sons

The Accounting Cycle: Steps

Analyze the transaction

Assets = Liabilities + Shareholders Equity

To record this transaction as a journal entry (in

These amounts are then posted to the general

Preparation of Trial Balance

Preparation of Trial Balance

Copyright John Wiley & Sons

Adjusting Journal Entries

Adjusting entries are required each time financial

Adjusting Entries for Prepayments

Copyright John Wiley & Sons

Adjusting Entries for Prepayments

Adjusting Entries for Prepayments

Adjusting Entries for Accruals

Copyright John Wiley & Sons

Adjusting Journal Entries

Adjusting Entries for Estimated Items

Investments Fair Value Adjustments

Financial Statements and Ownership

Copyright John Wiley & Sons

Financial Statements and Ownership

Copyright John Wiley & Sons

The Closing Process

The Closing Process

Retained Earnings: Closing Entries

Copyright John Wiley & Sons

Closing Entries: Inventory

In a periodic inventory system, closing entries

Copyright John Wiley & Sons

Copyright John Wiley & Sons

Cost of Goods Sold

Copyright John Wiley & Sons

There are two common types of valuation

When determining the value of a financial

Copyright John Wiley & Sons

Which model should be used?

Copyright John Wiley & Sons

Appendix 3A: Using a Work Sheet

Companies often use a work sheet to make

Copyright John Wiley & Sons

Appendix 3A: Using a Work Sheet