Grade 11 Accounting Review
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
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
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
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
A business paper which serves as the original record of a 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
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
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
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?
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
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
Chart of Accounts
Chapter 6 The Journal and Source Documents
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.
All accounting changes for one transaction in the form in which they are written up in the journal.
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
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
- goods/services sold on credit
Dr A/R, Cr sales
- 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
- Document supporting the accounting entry for a payment by cheque
Cash Receipts Daily Summary
- lists money coming in from customers
- made by a mail-room clerk who opens the mail, checking for customer cheques
Cr Accounts Receivable
- 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
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
A liability account
When remitting the P.S.T. Dr PST payable, Cr bank
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.
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
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
Bank, marketable securities, bonds, accounts receivable, supplies, merchandise inventory – cash, soon to be
cash, things that get used up in a year or less
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
Chapter 9 Adjusting/Closing
Review what to debit and credit for each adjustment (supplies, prepaid expenses, late arriving invoices,
Be able to calculate straight-line, and declining balance depreciation.
Review the 50% rule.
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.