Accounting

3.1 Business Transactions

Source Documents

Examples of source documents include hydro bills, telephone bills, cheque copies, store receipts, cash register summaries, and credit card slips.

1. accounting entries are made from business papers known as source documents

2. source documents are kept on file for reference purposes and are proof of transactions

Accounting Standards—The Objectivity Principle

3.2 Equation Analysis Sheet

Updating the Equation Analysis Sheet

Updating the Balance Sheet

Developing Good Work Habits

Summary of Steps in Analyzing a Transaction

Step 1 Identify all asset and liability items that must be changed and make all necessary changes.When thinking about the transaction, try to be logical and use common sense.

• Carefully analyze the information given for any transaction.

• Classify each item affected as an asset or a liability.

• Decide whether each item affected is to be increased or decreased.

Step 2 See if the owner’s equity has changed.Remember the accounting equation.

For example, if assets decrease and there is a corresponding liability decrease, the owner’s equity will not change. However, if assets decrease and liabilities are unchanged, the equation must be balanced by a decrease in owner’s equity. Eventually, you will come to recognize whether or not owner’s equity has changed.

Generally, if a business is better off after a transaction, owner’s equity has increased. If a business is worse off after a transaction, owner’s equity has decreased.

Step 3 Make certain that at least two of the individual items have changed.

It is possible for several items—assets, liabilities

or owner’s equity—to change

but there can never be only one change.

Step 4 Make sure that the equation is still in balance. The fundamental accounting equation must be respected: assets must equal liabilities plus owner’s equity.

3.3 A Spreadsheet for Transaction Analysis

We use a TRANSACTION ANALYSIS sheet to arrange the accounting equation in a way that allows us to record changes to our financial position as a result of transactions

FROM TEXTBOOK

4.1 Ledger Accounts

Important Features of Ledger Accounts

1. Each individual balance sheet item is given its own T-account with the name of the item at the top.

I Learn to call them the Cash account, the R. Van Loon account, the Packham Products account, the Bank Loan account, and so on.

2. The dollar figure for each item is recorded in the account on the first line.

This is the beginning value for the account.

3. For any item, the correct side for its beginning value is the side on which the item itself would appear in the accounting equation (A = L + OE).

For assets, like cash or supplies, beginning values are on the left side of the T because assets are on the left side of the equation.

For liabilities and equity items, like bank loan or capital, beginning values are on the right side of the T because liabilities and equity are on the right side of the equation.

4.2 Debit and Credit Theory

In accounting terms,debit means left, credit means right.(the two new terms apply to every account)

Debit is the word associated with the left side of an account.

Credit is the word associated with the right side of an account.

The Rules of Debit and Credit

In T-account form, the rules of debit and credit can be simplified even further, using the fundamental accounting equation as shown.

Applying the Rules of Debit and Credit

4.3 Account Balances and Terminology

Calculating the Balance of an Account

working without a calculator

Step 1 Add the two sides of the account separately. Use tiny pencil figures to write down these two subtotals, one beneath the last item on each side.

Step 2

A. Subtract the smaller total from the larger total.

B. Write the result beside or beneath the larger of the two pin totals from Step 1. For now, circle this final amount.

working with a calculator

Step 1 Decide whether the normal balance for the account is a debit or a credit.

Step 2 On your calculator, enter the first amount on the normal side of the T-account, followed by the plus symbol. Repeat for the remaining amounts on the normal side.

With one exception: after the last amount is entered, press the minus symbol.

Step 3 Enter the amounts from the opposite side of the T-account. Press the minus symbol after all amounts except the last one.

Interpreting the Balance of an Account

The Bank Account

Buying and Selling on Credit

4.4 Trial Balance

Methods of Taking Off a Trial Balance

Step 1 Write a heading at the top.
It must show the name of the individual or business, the title “Trial Balance,” and the date.

Step 2 List all the accounts and their balances. Dollar signs are unnecessary because the trial balance is an internal record and not normally shown to outsiders.

Step 3 Place the debit balances in a debit column and the credit balances in a credit column.

Step 4 Add up the two columns.

Step 5 See if the two column totals are the same. If they are, write the totals and finish by drawing a rule above and a double rule below them to indicate a final balance amount.

If the column totals are not the same, you must find your errors.

Creating a Trial Balance(Steps in ‘taking off a trial balance’)

1.List the accounts and their balances, leave room for a 3-line heading

2.Place all the debit balances in the debit column and the credit balances in the credit column

3.Add up the two columns

4.See if the two sides balance.

If yes = “in balance”

If not = “out of balance”

5.Write a heading at the top including the name of the business, the title “Trial Balance” and the date.

4.5 A Spreadsheet for Ledger Accounts and the Trial Balance

Adding Formulas

Using the Spreadsheet Model for Transactions

FROM CLASS

Double Entry Accounting

At least two accounts are affected in each transaction

The total value of the debits equals total value of the credits

Example: Buy $100 supplies with cash on Feb. 1

The INFORMATION stored in each account includes:

The name of the account (written at the top)

The dollar value and whether that is a debit or a credit

Steps for the Simple Ledger

Step 1

Add the two sides of the account separately & write down these two subtotals (using small print)beneath the last item on each side.

Called pin totals or pencil footings.

Step 2

Subtract the smaller total from the larger total

Write the result beneath the larger of the two pin totals from Step 1 and circle this final amount

Exceptional Balances

Other transactions can bring exceptional balances as well:

You overpay an A/P

A customer who paid cash, returns an unsatisfactory purchase

You return goods to a supplier, where you have no previous account balance

You over-draw (overdraft) your cash (bank account)

On Account/On Credit

The term “on account” or “on credit” is used widely in businessand can be used in the following 4 ways:

A purchase on account is one that is not paid for at the time you receive the product/service

A sale on account is a sale for which the money is not received at the time you provide the product/service

A payment on account is money paid to a creditor to reduce the amount we owe them

A receipt on account is money received from a debtor to reduce the amount they owe to us

Out of Balance

When a trial balance is out of balance, at least one error has been made in the accounting process

It is an accountant's job to find and correct these errors

If Trial Balance does not balance:

1.Re-Add the columns.

2.Check the figures from the ledger against those in the trial balance. Make sure none are missing, written incorrectly or on the wrong side.

3.Re-calculate the account balances

4.Check that there is a balanced accounting entry in the accounts for each transaction.

1.1 What Is Accounting?

Accounting is a system of dealing with financial data that provides information for decision making.

five main activities

gathering financial information

preparing and collecting permanent records.

rearranging, summarizing, and classifying financial information

preparing information reports and summaries for the following purposes

A.to help management make decisions

B. to serve the needs of groups outside the business, such as bankers and investors

establishing controls to promote accuracy and honesty among employees

1.2 Why Study Accounting?

Accounting on the Job

Accounting in Daily Life

Accounting as a Profession

Accountant (CA)

Certified General Accountant (CGA)

ment Accountant (CMA).

Owning Your Own Business

Complexity of Business

Career Profiles and Activities

1.3 Characteristics of Business

Types of Business

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Service
eg.hotels, hair salon, schools, hospitals

Manufacturing
eg.Toyota, Apple, Honda

Merchandising
eg.grocery store, convenience store, H&M

Not-For-Profit
eg.operation smile, unicef, make a wish

TYPES of Business Ownership

Sole proprietor

Advantages

Be your own boss

Easy to start

Less expensive than other forms of business ownership

Owner keeps profits

Disadvantages

Invests own funds to start the business

Unlimited Liability

EXAMPLE

Small corner stores,

restaurants

butcher shops,

Partnership

Limited

Limited Liability

Partners are only responsible for the funds they both
invested in the initial business

General

Unlimited liability

All partners have unlimited liability in the firm’s debts

Each partner could be held responsible for the other
partners business errors

Advantages

Strengths of more than one person

More capital and financing

Shared responsibilities

Disadvantages

Unlimited liability in general partnerships

Partner Disagreements

Example

Law and Accounting Firms

Formerly A&W, Baskin-Robbins, Black & Decker

Corporations

Private corporations

Public corporations

Crown corporations

Municipal corporations

1.4 The Nature of Accounting

Categories of Accounting Work

1.Routine Daily Activities

2. Periodic Accounting Activities

3. Miscellaneous Activities

1.5 Becoming a Professional Accountant

1.6 Roles in Accounting

Bookkeeper

Auditor

Comptroller

CFO

Tax Accountant

Forensic Accountant

1.7 How Accountants Use Computer Technology

2.1 Financial Position

equity/capital

Step 1 List and total the things that you own that have dollar values. These are called assets.

Step 2 List and total your debts. These are called liabilities.

Step 3 Calculate the difference between total assets and total liabilities.

The Fundamental Accounting Equation

A − L = OE (Assets − Liabilities = Owner’s Equity)

A = L + OE (Assets = Liabilities + Owner’s Equity)

2.2 The Balance Sheet

A personal balance sheet

STEPS

Set up in the form of the accounting equation

A 3-lined heading – who, what, when

Assets are listed in order of liquidity

Liabilities listed in order they are DUE

Financial details are fully disclosed (land, building,mortgage, all separated)

Two final totals are on each side of the statement,double underlined.

2.3 Claims against the Assets

Creditors’ Claims First

2.4 Accounting Standards

Canadian Institute of Chartered Accountants
(CICA) has established the standards for Canadian accountants.

Canadian Generally Accepted Accounting Principles (Canadian GAAP).

the Accounting Standards Board (AcSB).

International Accounting Standards Board(IASB).

International Financial Reporting Standards (IFRS)

Accounting Standards for Private Enterprises (ASPE).

2.5 A Spreadsheet for Balance Sheets

Balance sheets present the financial position of a person, business, or organiza tion in a formal way.

Preparing a Personal Balance Sheet

Labels

Values

Formulas

Functions

Changing Spreadsheet Amounts

Generally Accepted Accounting
Principles (GAAP)

GAAP are rules that make up acceptable accounting practices.

Understandable

Relevant

Reliable

Comparable

Canadian GAAP are being replaced by International Financial Reporting Standards (IFRS).

The long-term goal is to have all countries using the same set of standards-IFRS.

Adoption of IFRS will improve comparability of accounting

information so users can make more informed decisions.

Business Entity Principle

Only transactions related to the business should be recorded on the books

This excludes owners’ personal transactions, assets & liabilities

All transactions are recorded at the actual amount of cash paid or received at the time of the transaction.

In the absence of cash, the fair value (equivalent) of cash is recorded.

Financial statements reflect the assumption that the business will continue operating, instead of being closed or sold.