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Accounting By Ashley Liang

Definition of Accounting

A system of dealing with financial information that provides information for decision making. Also

A. Paints an overall picture of your company B. Encompasses payroll C. Summarizes, analyzes, verifies and reports results

Activities of Accounting

Gathering
financial
information

Preparing
and collecting
permanent
records

Rearranging,
summarizing
and classifying
information

Prepare
information
reports and
summaries

Establish controls
to promote
accuracy and
honesty

Users of Accounting

Managers of company

Managers of company

They look at how well the organization is doing to make business decisions （i.e. purchasing)

Owners of a company/Shareholders

Owners of a company/Shareholders

They observe the organization and decide whether to continue investing

Creditors/Bankers

Creditors/Bankers

See if the organization has the ability to pay off the bank loan

Canada Revenue Agency/CRA

Canada Revenue Agency/CRA

Requires the financial reports and figures to calculate the amount of income tax a company owes to the government.

General public

General public

Understand the quality of an organization and why it invests or enters a job

Competitors

Competitors

Know and compare themselves to the performance of their competitors.

Types of Business

Service

Service

Sells effort that does not result in a material item.

EX. hairdresser, accountant, and nail salon

Manufacturing

Manufacturing

Purchases raw materials to convert into a new product and combines effort and materials to produce a new product, then sells these products to earn a profit.

EX. A farm that produces milk, grain

A construction company

Merchandising

Merchandising

Purchases a manufacturer’s product and resells it to another customer for a higher price.

EX. Clothing store, supermarket

Not-for-Profit

Not-for-Profit

Carries on activities to provide a social benefit not for financial profit and accounting records must be kept accurate as they receive funds or tax-
deductible privileges from the government.

Subtopic

Forms of Business Ownership

Sole Proprietorship

Sole Proprietorship

A business enterprise that is owned by one person and which the entire equity belongs to that one person

1. Low start-up costs
2. Great freedom from regulation
3. All profits to owner
4. Owner has complete control

1.Unlimited liability
2. Difficult to raise capital
3. Llimited to owner’s knowledge
4. Lack of continuity
5. Profits taxed at personal rate

Partnership

Partnership

A form of business in which more that one person shares in the ownership and operation of a business

1. Ease of formation
2. Broader management skills
3. Limited regulations
4. More capital resources

1. Unlimited liability
2. Possible disagreements
3. Divided authority
4. Difficult to find partners
5. Partners liable for each other

Corporation

Corporation

A special form of business that is owned by shareholders. Also called a limited company

1. Limited liability of shareholders
2. Possible lower taxation rate
3. Can sue or be sued in the corporate name
4. More prestige
5. Continuity of business

1. Higher start up costs
2. Greater formalities
3. Requires annual maintenance from
accountant and lawyer
4. Losses cannot offset personal income

Executive

The executive runs the day-to-day operations of the business.

bd

Directors

Hire executives, guide mission, distribute profits between business and shareholders.

Shareholders

Provide capital, elect directors, receive dividends.

Accounting Basics

Balance Sheet

Fundamental Accounting Equation

Fundamental Accounting Equation

Assets= Liabilities + Owner's Equity

The formal way of presenting financial
position, reports a person or
company’s assets, liabilities and owners’
equity.

Assets

Assets

Resources owned by a business/company

Accounts Receivable

The debts of customers

Claims Against Assets

Creditors

Liabilities

Liabilities

Things that the company/business owed

Accounts Payable

Something that the owner owes

Owner's Equity

Owner's Equity

The owner's claim on the entity's assets/ the difference between assets and liabilities

1. Sale
2. Investment
3. Gain in the sale of an item

1. Withdrawal
2. Loss on sale of an asset
3. Expenses

Create Balance Sheet

Create Balance Sheet

Determine the 3 lines heading

List assets (Bold + underline)
Cash always first

List Liabilities (Bold + underline)
A/P always first

Calculate the owner’s equity

Put it all together

The first item and total has a “$” sign

Total Assets & Total Liabilities and Equity needs ( “$” sign + upper line+ double underline)

Total liabilities do not need double underline

1. No abbreviations
2. No corrections or changes on sheet
3. Align figures and dollar signs
4. Dollar signs on first item in each column and
final totals only
5. Single underline columns to be calculated
Double underline final totals only

Bookkeeping

Bookkeeping

The tedious part—the systematic recording of amounts, dates, and sources of every revenue and expense generated in the company must be done regularly.

Accounting Cycle

Accounting Cycle

Originating

Journalizing

Posting

Trial Balance

Worksheet

Financial Statements

Closing Entries

Post- closing Trail Balance

GAPPs

GAPPS=Generally Accepted Accounting Principles
Are specific rules, practices, and procedures that accountants follow.

Canadian Institute of Chartered Accountants (CICA)

Canadian Institute of Chartered Accountants (CICA)

Business Entity Concept

Business Entity Concept

1. Accounting for business must be separate from the owner's personal affairs 2. Accounting for business must be separate from other opinion or feelings 3. Accounting entries will be based on fact, not on personal opinion or feelings

EX. Owner's personal home should not be on the company's Balance Sheet

Cost Principle

Cost Principle

1. Accountants must record the value of assets at their historical cost price.
2. Ensures that different people looking at the evidence will arrive at the same values for the transaction.

EX. The original cost of the asset purchased must be recorded, regardless of the market value.

Continuing Concern

Continuing Concern

Assumes a business will continue to operate/exist unless it is known that it will not.

EX. If a business is going out of business, then the value of the assets cannot be determined until sold.

Principle of Conservatism

Principle of Conservatism

1.States that the accounting for a business should be fair and reasonable.
2. States that accounting will be recorded on
the basis of objective evidence
3. Financial reports should present realistic numbers
4. Accountants must make evaluations, set procedures, and provide estimates that ensure assets and profits are neither understated nor overstated.

Fundamental Accounting Practice

Transaction Analysis Sheet

Transaction Analysis Sheet

A sheet that recording changes in a business's financial position, It also illustrates how business transactions affect financial position.

Business Transaction

Business Transaction

Any financial event that results in a change in financial position.

EX. Phone bill, store receipts, cheque copies,credit card slips, purchase orders, etc.

Source Documents/ Original Record

Source Documents/ Original Record

A business paper or document that verifies the
transaction and dollar amount

1. Source documents are kept on file as they provide proof that transactions occurred.
2. For future reference purposes as they may be required for audit purposes.
3. A source document for a transaction is almost always the best objective evidence available to maintain objectivity.

Objectivity Principle

1. Ensures that different people looking at the
evidence will arrive at the same values for
the transaction.
2. Accounting entries will be based on fact, not
on personal opinion or feelings.

Ledger

Ledger

T-Accounts

T-Accounts

Make the T- Accounts

Enter the account balances into each ledger account

Enter the amount on either as either a debit or credit

DR/CR Theory

Debit means Left Side of the account.
Credit means Right Side of the account.

Trial Balance

Trial Balance

A listing of accounts (in ledger order) showing debit/credit balances for each account.

Left= Right / DR=CR

Create Trial Balance

Start with a three-lines heading.

List all the accounts in the proper order.
(Assets follow liquidity order; Liabilities follow order in which they have to be paid and (AP goes first)

Transfer the final balances (circled) from the ledger to the proper column of the Trial Balance. Place the debit balances in the debit column and the credit balances in the credit column.

Add up the two columns. If the totals are equal, then write them and draw a double underline beneath each total, which is now referred to as the “balancing figure”. If the totals do not balance, then all errors must be found and corrected.

Correct the Trial Balance

Check the addition of each column in trial balance

Check to see if each account balance from the ledger was copied correctly to the trial balance.

Recalculate the balance in each ledger account to ensure accuracy.

Check that each transaction entered in the ledger is balanced. (Debits = credits)

If the Trial Balance is still out of balance at this point, you must start again (re-calculate the Trial Balance), as you missed the error.

Account Balances

Exceptional Balances

Exceptional Balances

Balances that are opposite their “normal” may either be due to a mistake, or may in fact be an exceptional (abnormal, opposite) balance.