Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.

1 © This material may not be reproduced without the written permission of the publisher.
Chapter 8 Learning Goals

✔ Define basic accounting ✔ Understand the thinking

terms and understand how behind double-entry
accounting contributes to bookkeeping.
the success of a business;
✔ Understand the concept of
the fiscal year and the steps
of the accounting cycle;
✔ Understand the components
of the Balance Sheet, the
Income Statement, and the
Cash Flow Statement;
✔ Understand how
accountants use financial
ratios to evaluate the
financial health of a
business; and

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
2 © This material may not be reproduced without the written permission of the publisher.
8.1 Why Accounting?

Calculating your own net worth

Your Net Worth (your Equity) is whatever you own or control
(your Assets) minus whatever you owe (your Liabilities).

@ Shuttterstock_456971038
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
3 © This material may not be reproduced without the written permission of the publisher.
What is accounting?
Accounting is the systematic and
extensive recording, measuring,
interpreting, and communicating of
financial information in a company.
✔ During the year, a bookkeeper
records all transactions.
✔ At the end of the accounting cycle,
a professional accountant creates
the final financial statements.

@ Shuttterstock_24644203
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
4 © This material may not be reproduced without the written permission of the publisher.
What is double-entry bookkeeping?
Double-entry bookkeeping is, essentially, an error-detection
system. It ensures the accounting equation is always balanced.
Each transaction is recorded twice, once as a “debit” and once
as a “credit.”

@ Shuttterstock_415272574
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
5 © This material may not be reproduced without the written permission of the publisher.
What is the Canada Revenue Agency?
The Canada Revenue Agency
(CRA) is the government
agency responsible for
collecting taxes in Canada.
✔ The CRA collects taxes,
administers tax policy, and
delivers benefit programs
and tax credits for the
federal government and most
provincial and territorial
governments.
The Canada Revenue Agency
(CRA) has wide authority
and powers. It is unforgiving.

Connaught Building
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
6 © This material may not be reproduced without the written permission of the publisher.
What is a fiscal year-end?
The fiscal year-end is the date at which the company must
tally up its income and expenses and calculate taxes on profits
made in the previous 12-month period.

@ Shuttterstock_1328366357
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
7 © This material may not be reproduced without the written permission of the publisher.
The Accounting Cycle
The accounting cycle consists
of eight basic steps, many
of which are automated by
accounting software.
The sequence of steps are
guidelines for recording,
analyzing, and final reporting of
a business’s financial activities
over one full accounting period.

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
8 © This material may not be reproduced without the written permission of the publisher.
8.2 Accounting Equation

What is the accounting equation?

The accounting equation
is the basis of modern
accounting systems.
It states:
“The total of all the company’s
Assets equals the sum of the
company’s Liabilities and
Owner’s Equity.”
Or,
A = L + OE

@ Shuttterstock_1662710185
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
9 © This material may not be reproduced without the written permission of the publisher.
Why is the accounting equation so
important?
The accounting equation is the foundation of accounting.
It is a system where every transaction affects both sides of the
equation. It must always be kept in balance.

@ Shuttterstock_1421380184
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
10 © This material may not be reproduced without the written permission of the publisher.
What are bookkeepers?
✔ A bookkeeper does much of the data-entry work, such as
paying bills, recording transactions from customers, payroll,
and sales invoices.

@ Shuttterstock_157901096
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
11 © This material may not be reproduced without the written permission of the publisher.
What are accountants?
✔ A professional accountant takes over after the bookkeeping
is done and uses the entries to create financial statements,
including the Balance Sheet, the Income Statement, and the
Cash Flow Statement.

@ Shuttterstock_1536232349
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
12 © This material may not be reproduced without the written permission of the publisher.
What are intangible assets?
Intangible assets do not show up on a company’s
Balance Sheet.
Intangible assets are
a company’s patents
and know-how, brand
recognition, solid
customer relationships,
unique production
processes and the like.
Intangible assets can be
contrasted with tangible
assets, which include
land, vehicles, equipment,
and inventory.

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
13 © This material may not be reproduced without the written permission of the publisher.
What is a chart of accounts?
A chart of accounts is a list of
all the accounts a company has
in its accounting system.
✔ Each list of accounts is
unique to each business,
but they all follow a similar
structure, grouped into
assets, liabilities, and
owner’s equity.
✔ Setting up a chart of
accounts is the first
step to having a robust

@ Shuttterstock_1682249074
accounting system.

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
14 © This material may not be reproduced without the written permission of the publisher.
What are the three financial statements?
(1)  balance sheet
(2)  income statement
(3)  cash flow statement

@ Shuttterstock_1864459870
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
15 © This material may not be reproduced without the written permission of the publisher.
Who uses financial statements?
Financial statements are used
by everyone who needs to
know the financial state of a
business.
This includes
✔ managers
✔ shareholders
✔ banks
✔ investors
✔ suppliers
✔ employees

@ Shuttterstock_2223942733
✔ competitors
✔ governments

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
16 © This material may not be reproduced without the written permission of the publisher.
8.3 The Balance Sheet

What is a balance sheet?

A balance sheet shows the financial position of an organization
on a specific date. It is a snapshot of the company’s
financial health.

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
17 © This material may not be reproduced without the written permission of the publisher.
What is the purpose of a balance sheet?
A balance sheet shows
✔ Whether or not the company
is using its resources (assets)
wisely, and
✔ How competently the
company is financing the
business (liabilities and
owner’s equity).

@ Shuttterstock_151894916
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
18 © This material may not be reproduced without the written permission of the publisher.
310 Introduction to Business | Knowledge, Skills, and Applications

8.3 What Is a Balance Sheet?

The Balance Sheet shows the financial position of the business on
a specific date. It is a snapshot. It is similar to what is required of an
individual when requesting a personal loan.

What is the format of a balance sheet?

A Balance Sheet shows the owner and investors how well the
company is using its resources (Assets) and how competently it
is managing the financial affairs of the business (Liabilities and
Owner’s Equity).

Balance sheets have a standard format. TheyTheareFormat of usually

the Balance Sheet

prepared monthly, quarterly, and yearly. This financial statement is called a Balance Sheet because the Assets
The Balance Sheet.
must equal (or balance) the Liabilities and Owner’s Equity.
A Balance Sheet is a financial

✔ On the left side of the balance sheet is a list ofquarter,

allandthe
The Balance Sheet follows a standard format and is usually prepared
statement that shows Assets
each month, year. On the left side of the Balance Sheet,
owned and Liabilities owed by

company’s assets.
a business, along with the net the assets are listed under the title “Assets.” On the right side are two
worth of a business at a given sections: Liabilities and Owner’s Equity, which are totalled at the
point in time. bottom of the right side, thereby balancing the Balance Sheet.

✔ On the right side are Jared’s Oil and Vinegar Shop

two lists: liabilities and Balance Sheet
As at July 31, 20XX

owner’s equity. Assets Liabilities

✔ The total of the liabilities and

Cash $10,500.00 Accounts Payable
Accounts Receivable Itala Oils $27,000.00

owner’s equity are shown at Angel’s Restaurant 3,500.00 Jerico Vinegars 12,000.00

the bottom of the right side

Tony’s Grocery 4,200.00 Ontario Bottles 10,000.00

Investments 5,000.00 Bank Loan [Debt] 30,000.00

✔ The left and right sides

Inventory 12,000.00 Mortgage [Debt] 150,000.00

Supplies 1,000.00 Total Liabilities $229,000.00

should each add up to Furniture 4,000.00

the same total — thereby

Equipment 2,500.00 Owner’s Equity
Truck 22,000.00 Jared Cole, Equity 145,700.00

bringing the balance sheet Building 230,000.00 Total Owner’s Equity $145,700.00

into balance.
Land 80,000.00
Total Assets $374,700.00 Total Liabilities + Owner’s Equity $374,700.00

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
19 © This material may not be reproduced without the written permission of the publisher.
What are assets?
Assets are items the company owns. Some examples are
✔ cash ✔ buildings
✔ trucks ✔ equipment
✔

@ Shuttterstock_1602923980
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
20 © This material may not be reproduced without the written permission of the publisher.
What are liabilities?
Liabilities are financial debts — what
the company owes.
Some examples are
✔ invoices still to be paid for goods
and services the company has
purchased
✔ a company loan
✔ a mortgage

@ Shuttterstock_1345641971
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
21 © This material may not be reproduced without the written permission of the publisher.
How is owner’s equity calculated?
Owner’s equity is calculated by subtracting total liabilities
from total assets. The accounting equation can simply be
rearranged:
Owners Equity equals Assets minus Liabilities

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
22 © This material may not be reproduced without the written permission of the publisher.
Who needs a balance sheet?
The balance sheet is an tool that
helps someone understand the
financial health of a business.
By reading a balance sheet, owners
can tell a lot about the financial
well-being of their business —
for example, its total assets, its
indebtedness, and the owners’ share
in the company.
Balance sheets are also used by
bankers (before they give a loan),
by investors (before they invest),

@ Shuttterstock_745635814
and stock traders (before they buy
shares).

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
23 © This material may not be reproduced without the written permission of the publisher.
Chartered Professional Accountants
The Chartered Professional
Accountants of Canada (CPA)
represents the accounting profession
across Canada.
The CPA designation came about
recently when Canada rolled three
earlier designations — Chartered
Accountant (CA), Certified General
Accountant (CGA), and Certified
Management Accountant (CMA) —
into one designation.

@ Shuttterstock_2210377289
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
24 © This material may not be reproduced without the written permission of the publisher.
8.4 The Income Statement

What is the purpose of an income

statement?
The income statement shows a company’s profit (or loss) over
a period of time.
It is on this profit-and-loss information that business taxes are
calculated and dividends to shareholders are paid out.

@ Shuttterstock_2136329375
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
25 © This material may not be reproduced without the written permission of the publisher.
The income statement for a service
business.
For a service business, the
three sections of the income
statement are simply:
(1)  revenue
(2)  expenses
(3)  net income

@ Shuttterstock_2102130424
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
26 © This material may not be reproduced without the written permission of the publisher.
How do you calculate net income for a
service business?
For a service business, calculating
net income is straightforward.
You subtract total expenses from
total revenue.
Net Income = Revenue – Expenses
✔ The income statement for a retail
or manufacturing business is a
little more complicated.
✔ The reason is because they hold
inventory.

@ Shuttterstock_2235277705
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
27 © This material may not be reproduced without the written permission of the publisher.
318 Introduction to Business | Knowledge, Skills, and Applications Chapter 8: Accounting for Business Success 319

The income statement of a The Income Statement for a Retail Business

Below is a sample Income Statement for a retail business. Note the

merchandising business?
“Cost of Goods Sold” section.

Reed’s Custom Cabinets and Home Furnishings

Income Statement

The income statement of a

For the Year Ending December 31, 20XX

Revenues

manufacturing or retail business Cabinet Sales

Furnishing Sales
$300,000.00

250,000.00

includes a Cost of Goods Sold line. Designing Fees

Total Revenues
30,000.00

$580,000.00

COGS is the amount that a Cost of Goods Sold

manufacturing or retail business Cost of Cabinets

Cost of Furnishings
210,000.00

130,000.00

pays to manufacture (or purchase) Total Cost of Goods Sold $340,000.00

the products that it then resells. Gross Income $240,000.00

Gross Income is the sale price of an

Operating Expenses
Advertising expense 10,000.00

item minus the Cost of Goods Sold

Electricity expense 8,000.00

Gasoline expense 12,000.00

(but before operating expenses).

Insurance expense 800.00

Rent expense 55,000.00

Salaries expense 45,000.00

Supplies expense 500.00

Total Expenses $131,300.00

Operating Income (EBIT) $108,700.00

Provision for Interest and Taxes $16,305.00

Net Income $92,395.00

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
28 © This material may not be reproduced without the written permission of the publisher.
What is Cost of Goods Sold (COGS)?
Cost of Goods Sold is the unit
inventory cost — the amount that
a retail or manufacturing business
pays to manufacture (or purchase)
the products that it then resells.
✔ For example, in the case of a book
publishing company, the COGS is
the PP&B cost (the paper, print,
and binding cost) for that unit of
inventory.

@ Shuttterstock_270481325
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
29 © This material may not be reproduced without the written permission of the publisher.
Accounting for inventory
Merchandising businesses sell
products, each of which has an unit
cost (e.g., materials and labour).
The entire inventory cost resides
in the inventory account. There is a
unit cost associated with each item.
When an item is sold, the inventory
cost for that unit is recorded in the
expense account “Cost of Goods
Sold.”
In other words, in the accounting
system, at the moment of sale, the

@ Shuttterstock_711673021
amount is taken out of the inventory
asset account and recorded as an
expense against the sale.
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
30 © This material may not be reproduced without the written permission of the publisher.
318 Introduction to Business | Knowledge, Skills, and Applications Chapter 8: Accounting for Business Success 319

What are the different income categories The Income Statement for a Retail Business
Below is a sample Income Statement for a retail business. Note the

on the income statement?

“Cost of Goods Sold” section.

Reed’s Custom Cabinets and Home Furnishings

Income Statement

For a merchandising business that

For the Year Ending December 31, 20XX

Revenues

has inventory: Cabinet Sales

Furnishing Sales
$300,000.00

250,000.00

✔ Gross Income is calculated by

Designing Fees 30,000.00

Total Revenues $580,000.00

deducting Cost of Goods Sold from Cost of Goods Sold

revenues (sales).
Cost of Cabinets 210,000.00

Cost of Furnishings 130,000.00

✔ Operating Income deducts COGS

Total Cost of Goods Sold $340,000.00

and all operating expenses. It also

Gross Income $240,000.00

called Earnings before Interest and

Operating Expenses
Advertising expense 10,000.00

Taxes (EBIT). Electricity expense

Gasoline expense
8,000.00

12,000.00

✔ Net Income deducts all expenses,

Insurance expense 800.00

Rent expense 55,000.00

including interest and taxes. Salaries expense

Supplies expense
45,000.00

500.00

This is the true “bottom line” — Total Expenses $131,300.00

the amount that is left over for Operating Income (EBIT)

Provision for Interest and Taxes $16,305.00

$108,700.00

shareholder dividends. Net Income $92,395.00

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
31 © This material may not be reproduced without the written permission of the publisher.
What is the net profit margin?
The net profit margin is an ratio calculated using information
on the income statement. It is expressed as a percentage.
The net profit margin measures the relationship of net profit
(the “bottom line”) to total revenue.
Net Profit Margin = Net Income divided by Total Revenue

@ Shuttterstock_61824193
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
32 © This material may not be reproduced without the written permission of the publisher.
8.5 A Cash Flow Statement

What is the cash flow statement?

The cash flow statement summarizes the amount of cash and
cash equivalents entering and leaving a company during the
fiscal year.

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
33 © This material may not be reproduced without the written permission of the publisher.
Why is a cash flow statement necessary?
The cash flow statement is
necessary because most
companies use accrual
accounting.
Accrual accounting means
that revenue is recorded in the
accounting system as soon as
a sale occurs rather than when
the cash is actually received
for that sale.
Accrual accounting is different
from cash-based method of

@ Shuttterstock_1020915394
accounting that a person or a
small business uses.

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
34 © This material may not be reproduced without the written permission of the publisher.
The sources of cash
1. Cash from Operations
2. Cash from Investing Activities
3. Cash from Financing Activities

@ Shuttterstock_264465926
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
35 © This material may not be reproduced without the written permission of the publisher.
What is liquidity?
Liquidity describes access to
cash to allow a company to
pay its expenses and debts in a
short period of time.
In an era of high interest rates,
liquidity is important not only
in business but also in personal
life and in the financial life
of nations.

@ Shuttterstock_656310655
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
36 © This material may not be reproduced without the written permission of the publisher.
How can a cash flow statement be used?
A cash flow statement can
show owners and managers
whether a company has enough
cash to pay its short-term
expenses.
Cash flow obviously is very
important for
✔ businesses that mainly sell
on credit and
✔ seasonal businesses where
income is uneven throughout
the year.

@ Shuttterstock_v572444404
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
37 © This material may not be reproduced without the written permission of the publisher.
Who can use cash flow statements?
By reviewing a business’s cash
flow statement, a business
owner or a potential investor
can get a better picture of
✔ How much cash is actually
coming in
✔ Where it is coming from
✔ How the business uses
its cash

@ Shuttterstock_250476625
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
38 © This material may not be reproduced without the written permission of the publisher.
What is the cash flow margin?
The Cash Flow Margin is a ratio
that indicates how much actual
cash a business generates
for every dollar it takes in
as revenue.

Cash Flow Margin =

Net cash from operations
divided by
Total revenue

@ Shuttterstock_2145864109
Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
39 © This material may not be reproduced without the written permission of the publisher.
Key Terms in Chapter 8

✔ Net worth ✔ First claim ✔ Net income

✔ Accounting ✔ Assets / Liabilities / ✔ Cash Flow
✔ Double-entry Equity Statement
bookkeeping ✔ IFRS ✔ Accrual accounting
✔ Canadian Revenue ✔ GAAP ✔ Liquidity
Agency ✔ Chart of accounts
✔ Fiscal year ✔ Financial
✔ Accounting cycle statements
✔ Bookkeeper ✔ Balance Sheet
✔ Chartered ✔ Financial audits
professional ✔ Income Statement
accountant
✔ The Balance Sheet
✔ Accounting
✔ Cost of Goods Sold
equation
(COGS)
✔ Journal
✔ Gross income
✔ Post
✔ Operating income
✔ General ledger (EBIT)

Launching and Leading a Business: Knowledge, Skills, and Applications © 2024, Thompson Educational Publishing, Inc.
40 © This material may not be reproduced without the written permission of the publisher.