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Grade 11 Accounting Review Chapter 1 Types of Business Service business – does not make or sell a product as its main activity Merchandising business – buys goods and resells them at a higher price Manufacturing business – buys raw materials, converts them into a new product and sells that new product Non-Profit Organization – carries on activities to meet social needs and not for financial profit Types of Business Ownership Sole Proprietorship – one owner Partnership – two or more people share ownership Corporation – owned by shareholders Accounting Cycle Transactions occur, recorded in journal, posted to ledger, trial balance, work sheet, formal financial statements, adjustments and closing entries, post-closing trial balance. Professional Accounting Organizations CGA – certified general accountants association CMA – certified management accountant CA – Chartered Accountant CICA – Canadian Institute of chartered accountants – CICA handbook – GAAPs Duties of an Accounting Clerk - ensure transactions are properly recorded - record accounting entries in journal/ledger - make payroll calculations - make banking transactions Duties of an Accountant - developing accounting systems - ensuring all GAAPs are followed - interpreting data - preparing reports - going to management meetings - supervising work of all accounting employees Chapter 2 The Balance Sheet Assets Things owned by an individual or firm, which have value Liabilities Debts Equity Difference between assets and liabilities, also called capital, or net worth Fundamental Accounting Equation Assets – Liabilities = Owner's Equity Assets = Liabilities + Owner's Equity Know the parts of a balance sheet. Be familiar with the different accounts! Creditor's Claims on Assets – liabilities Owner's Claim on Assets – Equity GAAPS Business Entity Concept – accounting for a business organization must be kept separate form the personal affairs of its owner Continuing Concern Concept – business will continue to operate unless it is known that it will not Principle of Conservatism – accounting for a business should be fair and reasonable Chapter 3 Transactions Source Document A business paper which serves as the original record of a transaction. Transaction A change in financial position. GAAP – The Objectivity Principle Accounting will be recorded on the basis of objective evidence. Know what to debit, and what to credit in various transactions! Chapter 4 The Simple Ledger Account – a page specially designed to record the changes in each individual item affecting financial position Ledger – group or file of accounts Assets – have natural debit balances, increase on debit side Liabilities – have natural credit balances, increase on the credit side Equity – accounts which increase equity (revenue, owner's equity) have natural credit balances, and increase on the credit side – accounts which decrease equity (drawings, and expenses) have natural debit balances, and increase on the debit side Exceptional Balances Occur when an account carries a balance opposite to its natural balance. (i.e. bank account has a credit balance) 4 Uses of the term "on account" 1. Purchase on account debit an asset credit A/P 2. Sale on account debit A/R credit revenue 3. Payment on account debit A/P credit bank 4. Receipt on account debit bank credit A/R Trial Balance The adding of all ledger balances. Debit balances added in dr column, Credit balances added in cr column. Ledger is said to be in balance if dr column = cr column. Called "taking off a trial balance" Steps to take if trail balance is out of balance 1. re-add columns 2. check that all account balances transferred from ledger, and transferred properly 3. recalculate each account balance in the ledger 4. Check that each accounting entry (transaction) is balanced Chapter 5 The Expanded Ledger: Revenue, Expense and Drawings Expanding of the Ledger Equity – Revenues Expenses Drawings GAAP – Revenue Recognition Convention Revenue must be recorded in the accounts at the time the transaction is completed Know the various parts of the income statement Users of the Income Statement 1. Owners and managers – is it earning a profit? How much? What should our future plans be? 2. Bankers – should we lend money? Will they be able to repay a loan? 3. Income tax authorities (government) – How much tax should they pay? Fiscal Period Period of time over which earnings are measured. All fiscal periods for an individual business are of the same length. Also called the accounting period. Most companies have a 12 month (year) long fiscal period. GAAP – The time period concept Accounting will take place over specific time periods known as fiscal periods. GAAP – The matching principle Each expense item related to revenue earned must be recorded in the same period as the revenue it helped to earn. Chart of Accounts Assets 100-199 Liabilities 200-299 Capital/Drawings 300-399 Revenues 400-499 Expenses 500-599 Chapter 6 The Journal and Source Documents Journal A book in which the accounting entries for all transactions are first recorded, in chronological (order that they happened) order. Also called the book of original entry. Journal Entry All accounting changes for one transaction in the form in which they are written up in the journal. Journalizing Process of recording accounting entries in the journal. Know how to write the date properly in the journal. (pg. 159) - debits come before credits - credits should be indented Opening Entry Journal entry that starts the books off, or opens them. Source Documents – 2 purposes 1. They serve as proof of a transaction. 2. Serve as reference for checking work, finding errors, etc. Cash Sales Slip - goods/services sold for cash Dr bank, Cr sales Sales Invoice - goods/services sold on credit Dr A/R, Cr sales Purchase Invoice - goods/services purchased on credit Dr asset account, Cr A/P Point of Sale Summary - summary of revenues collected in the form of debit and credit card transactions - use P.O.S. or point of sale terminal (electronic, computerized cash register) Dr bank, Cr sales Cheque Copies - Document supporting the accounting entry for a payment by cheque Dr A/P Cr Bank Cash Receipts Daily Summary - lists money coming in from customers - made by a mail-room clerk who opens the mail, checking for customer cheques Dr Bank Cr Accounts Receivable Bank Advice - document informing a business about an increase or decrease to their bank account Bank Credit advice – Dr bank, Cr interest earned (revenue) Bank Debit advice – Dr interest expense, Cr bank GAAP – The Cost Principle Accounting for purchases must be at the cost price to the purchaser P.S.T. – Responsibilities of the Purchaser None P.S.T. – Responsibilities of the Seller 1. calculate the tax 2. collect the tax 3. accumulate the tax – P.S.T. payable account 4. remit the tax – on the 15th of the following month P.S.T. A liability account When remitting the P.S.T. Dr PST payable, Cr bank G.S.T. Responsibilities for seller – same as P.S.T. Responsibilities for purchaser – accumulate in G.S.T. Recoverable – contra-liability account In Ontario – P.S.T. 8%, G.S.T. 7% Chapter 7 Posting Balance column account A ledger account with 3 columns: debit, credit, and balance Balances stand out more clearly than with a simple “T” account 6 Steps in posting 1. turn to proper page 2. record date 3. record page number in PR column from journal (i.e. J22) 4. record amount 5. calculate and enter new balance 6. record account number in PR column of journal Correcting errors found immediately Cross our error, write correction directly above. Correcting errors found later Use a correcting entry, with an equal debit and credit. Forwarding System used when a ledger page becomes full. Write “Forwarded” in particulars column, and carry the balance onto the next page. Write “Forwarded” again in the particulars column. Quick Tests for Finding a Single Error 1. multiple of ten – addition error 2. difference is an amount equal to an amount in the journal/ledger – something may not be posted 3. difference divided by 2 is equal to an amount in the journal/ledger – something may have been posted to the wrong side (debit/credit) 4. multiple of nine – transposition, or decimal place error Chapter 8 The Work Sheet and Financial Statements Work Sheet An informal business paper used to organize and plan the information for the financial statements. This is a sheet only used by the accountant to prepare the statements, it is not a financial statement itself. Know which columns each account gets extended to. i.e. wages gets extended to the Income Statement debit column sales revenue gets extended to the Income Statement credit column G.S.T. recoverable gets extended to the Balance Sheet debit column Be able to calculate a percentage increase or decrease for a comparative statement. i.e. Year 2 – Year 1 = increase or decrease increase or decrease/ year 1 = percentage increase or decrease Common-size Income Statement All numbers are divided by total revenue (sales) and multiplied by 100 to get a percent. Common-size Balance Sheet All numbers are divided by total assets and multiplied by 100 to get a percent. Account form of Balance Sheet Assets on left, Liabilities & Equity section on right Report form of Balance Sheet Assets on top, Liabilities& Equity underneath. Fits on regular sized paper. How balance sheet appears on annual reports. Current Assets Bank, marketable securities, bonds, accounts receivable, supplies, merchandise inventory – cash, soon to be cash, things that get used up in a year or less Fixed Assets Also called plant & equipment 5 Users of Financial Statements 1. Managers – to make decisions, and improve company 2. Owners – to judge performance of managers, and learn about how their company is being run 3. Creditors – can the company pay back its loans? 4. Shareholders – same as owners 5. Investors/Brokers – so they can study the company’s progress and advise their clients GAAP – The Consistency Principle Business must use the same accounting methods and procedures from period to period. GAAP – Materiality Principle Accountants must follow generally accepted accounting principles except when to do so would be expensive or difficult, and where it makes no real difference if the rules are ignored. GAAP – Full Disclosure Principle All information needed for a full understanding of the company’s financial affairs must be included in the financial statements. Chapter 9 Adjusting/Closing Review what to debit and credit for each adjustment (supplies, prepaid expenses, late arriving invoices, depreciation) Be able to calculate straight-line, and declining balance depreciation. Review the 50% rule. Closing Entries 1. Close revenue: debit revenue, credit income summary 2. Close expenses: debit income summary, credit all expense accounts 3. Close income summary: debit income summary (in the case of net income), credit capital account 4. Close drawings: debit capital account, credit drawings Chapter 11 Accounting for a Merchandising Business Merchandise Inventory – the quantity of merchandise on hand. Periodic Inventory System - is one in which the cost of the inventory sold is determined only at the end of each fiscal period. Physical Inventory – is a procedure by which the unsold goods of a merchandising business are counted and valued (at cost price). Ending Inventory = Beginning Inventory (for the next fiscal period) Cost of Goods Sold – the cost of inventory that was sold. Note: Goods aka Merchandise. Gross Profit – is used to accumulate any transportation charges on incoming goods. Freight-In Account – is used to accumulate any transportation charges on incoming goods. Sales Returns and Allowances – is an account used to accumulate corrections, cancellations or returns of sales made in the books of the vendor. Credit Invoice – or a "credit note", is a "minus" invoice issued by the vendor to reverse a charge that was previously made on a regular sales invoice. Cash Refund – is the return of money to the buyer from the seller when merchandise is returned. Purchase Returns and Allowances – is an account used to accumulate corrections, cancellations or returns made of purchases in the books of the purchaser. Beginning Inventory + (Net Cost of Purchases + Freight-In) – Ending Inventory + Cost of Goods Sold Cash Discount – is a reduction of the amount of a bill if payment is made on or before the discount date stated on the bill. Terms of Sale C.O.D. - cash on delivery On Account or Charge – full amount is due within a brief time of invoice being received, usually 25 days. 30 Days or Net 30 – the full amount of the invoice is due 30 days after the date of the invoice. 60 Days or Net 60 – the full amount of the invoice is due 60 days after the date of the invoice. 2/10, n/30 – if the bill is paid within 10 days of the invoice date, a cash discount of 2% is taken; otherwise, the full amount is due within 30 days. 1/15, n/60 – if the bill is paid within 15 days of the invoice date, a cash discount of 1% is taken; otherwise, the full amount is due within 60 days. Discounts Earned – is an account used to accumulate any discounts earned by the purchaser. Discounts Allowed – is an account used to accumulate any discounts allowed by the vendor.
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