ACCT 1210 - Chapter 13 - Winter 2025

Overview of Accounting Principles

  • Basic Accounting Equation: Assets = Liabilities + Equity

    • Assets originate from either borrowings (liabilities) or investments (equity).

    • Assets increase with debits and decrease with credits.

    • Liabilities increase with credits and decrease with debits (normal balance is credit).

    • Equity increases with credits and decreases with debits (normal balance is credit).

Accounting Course Progression

  • Initial focus (Accounting 1110):

    • Basic accounting equation, closing entries, adjusting entries, cash, accounts receivable, and inventory.

  • Current focus (Accounting 1210):

    • Deeper examination of liabilities and equity, along with a review of assets.

Excel Worksheet Interaction

  • The use of an Excel spreadsheet for interactive exercises to illustrate concepts.

Types of Assets

  • Current Assets:

    • Expected to be realized within one year or longer operating cycle.

  • Long-Term Assets:

    • Realized over more than one year.

Types of Liabilities

  • Current and long-term liabilities discussed in detail after equity.

Shareholders' Equity

Definition of Retained Earnings

  • Retained earnings: net income remaining in the company after dividends have been distributed.

  • Generated from: Revenue - Expenses.

  • Positive net income increases retained earnings; negative net income or net loss decreases it.

Distinction between Types of Equity

  • Only one focus initially on retained earnings, with further exploration into other potential forms of equity in future lessons.

Characteristics of Corporations

  • Two primary types: Public and Private Corporations.

Public Corporations

  • Must comply with International Financial Reporting Standards (IFRS) due to public trading.

Private Corporations

  • May follow Accounting Standards for Private Enterprises (ASPE) or choose IFRS at will.

Legal and Operational Features

  • Corporations are separate legal entities with continuous life, liability limited to owner's investment, and distinct ownership-management separation.

Advantages and Disadvantages of Corporations

Advantages:

  • Ability to raise capital, continuous life, transfer of ownership, limited liability.

Disadvantages:

  • Separate ownership and management can create conflicts, earnings may be taxed twice (corporate and personal tax), and government regulations can impose costs.

Creating a Corporation

  • Fast process in Canada; registration can often be completed in under 24 hours after name approval (typically takes 5 days).

Steps to Registration:

  1. Name approval from BC registry.

  2. Articles of Incorporation: specify shares, control structures.

  3. Hire a lawyer for formal setup (cost approx. $350-$500).

  4. Establish a board of directors to implement governance.

Share Capital Components

Understanding Share Capital

  • Share Certificate: Issued document to shareholders.

  • Authorized Shares: Maximum shares a corporation can issue.

  • Issued Shares: Number of shares sold to investors.

  • Outstanding Shares: Issued shares that are held by shareholders.

Classifications of Shares

  • Common Shares: Basic ownership form, generally carry voting rights and fluctuating dividends.

  • Preferred Shares: Preferred in dividend payments, usually no voting rights, can have additional characteristics like cumulative or convertible rights.

Share Issuance Process

  1. Corporations must work with underwriters to issue shares.

  2. Initial Public Offering (IPO): Shares sold to public through underwriters.

  3. All documentation posted on regulatory systems for transparency.

Key Financial Concepts Explained

Dividends

  • Cash dividends can only be distributed when sufficient retained earnings and cash are available.

Declaration Process

  1. Declaration Date: Creates a liability.

  2. Date of Record: No journal entry.

  3. Payment Date: Reduction in cash and liability but increases in expenses.

Cumulative and Non-Cumulative Preferred Shares

  • Cumulative shares accumulate unpaid dividends, which must be paid in future declarations.

  • Non-cumulative shares do not carry unpaid dividends over years.

Shareholder Rights

  • Rights may include voting at meetings, receiving dividends, and being entitled to proportional shares of assets upon liquidation.

Book Value vs. Market Value

Book Value

  • Value recorded in corporate books based on shareholders' equity.

Market Value

  • Value based on the company's trading share price in the market, influenced by its financial position and future prospects.

Conclusion: Key Elements of Equity in Accounting

  • Shareholders' equity encompasses two components: Contributed Capital and Retained Earnings.

    • Contributed Capital includes all share classes; Retained Earnings refer to profits reinvested in the business.

  • Retained earnings are adjusted annually based on net income and dividends declared.

  • Understanding the difference between share types and their classification is crucial for evaluating company financial health and shareholder rights.