In 1939 New Orleans, Charlie B. Barkin and his best friend Itchy Itchiford escape from the dog pound and return to their casino riverboat on the bayou, formerly run by Charlie himself and his business partner, Carface Caruthers. Refusing to share the profits with Charlie, Carface had been responsible for Charlie and Itchy getting committed at the pound and persuades Charlie to leave town with 50% of the casino's earnings. Charlie agrees, but is later intoxicated and killed by Carface by Hit and run. He is sent to Heaven despite never actually doing any good deeds in his life, where he meets a whippet angel (later known as Annabelle), who tells him that a gold watch representing his life has stopped. He steals the watch and winds it back, returning to Earth, but is told that when the watch stops again, he will not return to Heaven and will end up in Hell instead. After reuniting with Itchy, they discover that Carface has kidnapped a young orphaned girl named Anne-Marie, who has the ability to talk to animals and gain knowledge of a race's results beforehand, allowing Carface to rig the odds on the rat races in his favor. They rescue her, intending to use her abilities to get revenge on Carface, though Charlie tells her that they plan to give their winnings to the poor and help her find some parents. The next day at the race track, Charlie steals a wallet from a couple as they talk to Anne-Marie and become alarmed by her unwashed appearance.
Charlie B. Barkin (Charlie Sheen) welcomes his friend, Itchy (Dom DeLuise), to Heaven, but states he is disillusioned by the afterlife. Carface Caruthers, their old enemy (Ernest Borgnine), steals Gabriel's Horn, but loses it somewhere over San Francisco in his attempt to escape with it. The dog angels are alerted of the horn's theft by Anabelle, the head angel (Bebe Neuwirth), who sends Charlie and Itchy to Earth to save it, and gives them one miracle to use. Upon arrival in San Francisco, they discover themselves as ghosts and therefore unable to interact with the physical world. At a tavern where Charlie flirts with a smooth-talking and gorgeous Irish Setter named Sasha La Fleur (Sheena Easton), Carface appears in a corporeal form granted by a red dog collar created by Red (George Hearn), an elderly dog fortune teller who gives Charlie and Itchy equivalent collars effective for a single day. Shortly thereafter, unbeknownst to the duo, Red reveals his true form as a large demonic cat who intends to take the horn for himself with Carface's help.