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GRADE 11 ACCOUTING REVIEW (Golkinds Bible of Life) By HCI Students

2012

KEY TOPICS ARE FORMATTED LIKE THIS

Ren Puerta + other sexy mofos FUNDAMENTAL ACCOUNTING EQUATION Assets = Liabilities + Owners Equity A = L + OE Underline all subheadings!

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As seen on the balance sheet, it determines the financial position of a business on a particular date Owners equity is the net worth or net value of a business on said particular date Assets are listed in order of liquidity on the balance sheet Liabilities are listen in the order in which they will become due and payable Items seen on financial statements such as the balance sheet are called accounts Below is a classified report form balance sheet that will be on the exam

Balancing numbers + double underline

Look in the capital section to see the equation BC+NI-D=EC

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KEY TERMS YA Debtor: someone who owes the business money Creditor: someone who the business owes money Fiscal Year: any 12-month period of operation of a business Assets: anything of value that is owned or owed to the business Expenses: a cost of operating a business Cash Flow: the movement of cash in and out of a business Liability: any debt which the business is required to pay Liquidity: the ability to turn an asset or investmentn into cash quickly and easily Taking Off Balance: is another way of saying creating a trial balance SOURCE DOCUMENTS (As the vendor) Sales Invoice: shows the details of a transaction in which goods or services are sold on account A/R-debtor customer dr Revenue cr Point of Sale Summary: a list of all debit and credit card sales for the business for one day; also known as the Host Reconcilation/Card Summary; treated as cash sales Bank dr Revenue cr Cash Sales Slip: shows details of a transaction in which goods or services are sold for cash Bank dr Revenue cr Cheque Receipt Daily Summary: a detailed list of all cheques received from debtor customers for one day Bank dr A/R- debtor customer cr A/R- debtor customer cr A/R- debtor customer cr

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(As the purchaser) Bank Debit Advice/Memo: informs us that our bank has decreased our bank balance. Bank Interest and Charges (expense) dr Bank cr Bank Credit Advice/Memo: informs us that our bank has increased our bank balance. Bank dr Bank Loan cr OR Bank dr Interest Earned (revenue) cr Cheque Copy: represents our payment by cheque. This can be for a purchase of an asset, payment of an expense, owner withdrawal of cash, or payment of an oustanding liability. Asset Purchased/Expense Incurred/Drawings/A/P dr Bank cr Purchase Invoice: represents a purchases of goods or services or an expense on account (Asset Purchased) dr A/P-creditor cr OR (Expense Incurred) dr A/P-creditor cr

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GAAPs: (OUR FAVOURITE) GENERALLY ACCEPTED ACCOUNTING PRINCPLES The Business Entity Concept -accounting for a business or organization must be kept separate from the personal affairs of the owner or from any other business or organization -owner should not place personal items on balance sheet Example: Using business money to go on vacation with family The Continuing Concern Concept -assumes that a business will continue to operate unless it is known that it will not Example: Envelopes with companys names on them would be difficult to sell if they were going out of business The Principle of Conservatism -accounting for a business should be fair and reasonable -accountants are required to do their work, deliver opinions, make evaluations etc. Example: Accountants have to do this in a way that assets or profit are neither overstated nor understated The Objectivity Principle -accounting will be recorded on the basis of objective evidence **Objective Evidence means that different people looking at the evidence will arrive at the same values for the transaction -transactions will be based on fact and not on personal opinion or feeling Example: Source Document shows the amount agreed to by the buyer and the seller, who are usually independent and unrelated to each other The Revenue Recognition Convention -revenue should be recorded in the accounts at the time the transaction is completed Example: Recording revenue when the bill is sent to the customer Cash Transaction: recorded when sale is completed and cash is received The Time Period Concept -accounting takes place over specific time periods known as fiscal periods The Matching Principle -each expense item related to revenue earned must be recorded in the same period as the revenue it helped to earn -if not done properly the financial statement will not match

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INTERNAL CONTROL A set of accounting procedures designed to protect the companys assets and to assure accuracy in data

General Rules of Internal Control 1. Where possible, two different employees should be responsible for preparing accounting records independently of one another, and their work should agree 2. An employee who records transactions should have no control over the firms tangible assets 3. All assets should be kept in a safe place 4. Two authorized employees should always be present when negotiable assets (cash, cheques) are dealt with 5. Only a few key employees should be authorized to approve transactions 6. An independent public accounting should carry out regular audits of the companys books 7. Employee responsibilities should be clearly spelled out so as to ensure accountability Specific Internal Control Procedures for Cash 1. An employee who handles cash should not also be responsible for keeping records for cash. For example, the person who opens mail in order to prepare the cash receipts daily summary should not also be a member of the accounting department 2. All cash and cash receipts should be deposited daily so as to minimize the amount of cash on hand 3. Other than petty cash and cash refunds, all payments should be made by cheque or electronic transfer of funds, not by cash 4. Cheques received from debtor customers should immediately be endorsed For Deposit Only 5. Deposit slips should be prepared in duplicate and stamped copy of the slip should be retained by company as receipt of the deposit 6. The companys cash account and bank account should be reconciled monthly, so as to take account of the companys outstanding cheques and late deposits, in addition to bank debit memos, customer NSF cheques, and accounting errors

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MONTHLY REMITTANCE OF SALES TAX At the end of every federal reporting period (monthly or quarterly), businesses are required to send the sales taxes that they owe the government. The equation for this transaction is: HST Payable (owed to government) HST Recoverable (owes to us) Actual amount remitted (returned) If HST Recoverable is greater than HST Payable, the amount is a tax refund to be returned to the company from the government. Example Journal Entry for remittance of HST: HST Payable 2000 HST Recoverable 1400 Bank 600 In this example, the company owes the government a total of $600 in sales tax. This journal entry brings both HST Payable and HST Recoverable balances to zero. JOURNALISING OPENING ENTRIES The opening journal entry is the first journal entry for every business. This entry sets up the financial position of a business. Example opening journal entry: Bank 1400 Supplies 2425 Equipment 8715 Automobile 19550 Bank Loan 10000 R. Puerta, Capital 22090 Opening entry for *name of business* Opening entry for a small business.

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SOLE PROPRIETORSHIPS, PARTNERSHIPS, AND CORPORATIONS Type of Business Sole Proprietorship What It Is
-Owned & operated by one person -Owner takes full responsibility for all business operations & risks -Examples: small businesses & family businesses

Pros
-Easy to organize -Minimal start up costs -Owner keeps all profits -Owner makes all business decisions -Does not have to publically disclose confidential business information about the business -Easy to organize -Minimal start-up costs -Easy to obtain financing b/c there is more to offer for collateral -Partners bring more expertise in different areas -Partners share profits & losses according to partnership agreement

Cons
-Unlimited Liability: personally liable for all debts/liabilities of the business (personal assets may be used) -Difficult to borrow money for expansion/ expenses b/c banks need collateral (asset offered to guarantee repayment -Responsible for all aspects of the business -Unlimited liability -Partners must share profits according to the partnership agreement whether or not every partner agrees -Disagreements arise between partners

Partnership

-Ownership shared between 2 or more individuals -Created through agreements among owners -Partnership Agreement: written contract that describes: rights & responsibilities of each partner, professional contributions, decision-making powers, division of profits/losses, procedures for dissolving partnership & dealing with the death of a partner.

Corporation

-Corporation is considered separate legal entity from its owners -4 basic types: 1) Private Corporation: shares cannot be offered to

-Owners (shareholders) posses limited liability (they can only lose what they invested into the business) -Relatively easy to borrow funds due to

-Complicated legal structure. Involves lawyers & accountants during the establishment & operation -In large corporations, the business is often run by employees, not

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public, max. 50 shares 2) Public Corporation: no restrictions on sale/purchase of shares 3)Crown Corporation: government owned (eg. Canada Post) 4)Non-Profit Corporation: charities -Created by filing articles of incorporation with federal or provincial government -Articles of incorporation include name of business, # of directors & any business activity restrictions -Identified by 1 of the 6 words in the name of the business: Limited, Ltd, Incorporated, Inc, Corporation, Corp large pool of collateral -Exists independently. Is not affected by death of owners -ownership is easily transferable b/c owners in public corps can transfer share at any time -Corporate name holds a great deal of prestige

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owners & therefore they have less commitment to the business -Public corporations are required by law to publically disclose confidential financial information about the business (in a document known as an annual report)

FINANCIAL RATIOS FOR COPORATIONS Ratio Name Current Ratio or Working Capital Ratio Quick Ratio or Acid Test Ratio Ratio Equation Current Assets Current Liabilities Current Assets (Inventory + Prepaid Expenses) Current Liabilities Debit Ratio Total Liabilities Total Assets x100 55.8% 1.8:1 Example 3.6:1

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Equity Ratio

Total Equity Total Assets x100

44.2%

Rate of Return on Net Sales

Net Income Average Equity (beg eq + end eq/2) x100

14.7%

Rate of Return on Shareholders Equity

Net Income Net Sales x100 Net Income Interest Expense Accounts Receivable Avg. Credit Sales/Day (net annual sales/365 days)

18.9%

Times Interest Earned Ratio Collection Period (assuming all sales on account)

7.8 times

36.4 days

Inventory Turnover

Cost of Goods Sold Avg. Merchandise Inventory (beg inv + end inv/2) 9.3 times/year

Earnings per Share

Net Income # of Outstanding Common Shares

$2.65/share

Price Earnings Ratio (public corporations only)

Current Market Price/Share Earnings/Share

14.9 times

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Ren Puerta + other sexy mofos INCOME STATEMENT ANALYSIS Comparative Analysis (year to year changes)

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Either the dollar or percentage change (increase or decrease) from the first year to the second year. Dollar change: Year 2 Year 1

Percentage change: Year 2 Year 1 x100 Year 1

Year 1 Sales $500

Year 2 $600

dollar change +$100

percentage change +20%

One business, one figure, over two years.

Trend Analysis (changes over multiple years)

The analysis of individual income statement items (accounts or totals) of a business over several consecutive years. Year 1 figure is the base figure (100%). Trends are expressed as percentage of the base figure.

Calculated by: Year 3(1200) x100 = 120% Year 1 (1000)

Year 1 Rent Expense $1000

Year 2 $1100

Year 3 $1200

Year 4 $800

Year 5 $657.30

100%

110%

120%

80%

65.7%

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Ren Puerta + other sexy mofos Common Size Analysis

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A common-size income statement, comparing individual accounts to a base figure (which is always total revenue). On a common-size IS each figure is expressed as a percentage of the base figure. Rent(200) Sales(1000) x100 = 20%

Sales

$1000

100%

Rent Wages Total Expenses

$200 $500 $700

20% 50% 70%

Net Income

$300

30%

ANALYZING BALANCE SHEETS Working Capital Working Capital = Current assets ($43 000) Current liabilities ($33 000) = $10 000.

Working Capital Ratio = Current assets ($43 000) Current liabilities ($33 000)

= 1.3:1

A business needs a high working capital to pay off its short-term debts.

Common-Size Balance Sheet

On a common-size balance sheet, the base figure is total assets OR total liabilities and equity (theyre the same number). Virtually the same procedure as a common-size IS.

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Ren Puerta + other sexy mofos Bank (3000) Total Assets (183 000) $ Assets Bank Accounts Receivable Plant and Equipment Automobiles Total Assets 3000 10000 132 000 38000 183 000 DEPRECIATION METHODS x100 = 1.6%.

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1.6% 15.5% 72.1% 20.8% 100%

StraightLineMethod Depreciationisidenticalfromyeartoyear Partyeardepreciationtakesintoaccountthepurchasedateoftheasset Annualdepreciationexpense=originalpurchasepriceofassetestimatedresidual value EstimatedlifeofAsset(inyears) Originalpurchaseprice:thepriceoriginallypaidfortheasset Estimatedresidualvalue:howmuchtheassetisestimatedtobeworthattheendofits life Estimatedlifeofasset:predictedlifeofasset ExampleInformation: Purchasedate:September1st Fiscalyearend:December31st Originalpurchaseprice:$12000 Estimatedresidualvalue:$2000 Estimatedlifeofasset:10years ADE=$12000$2000 10years ADE=$1000 Withpartyeardepreciation NetBookValue AnnualDepreciation AccumulatedDepreciation Expense (contraasset)

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Ren Puerta + other sexy mofos Year1 Year2 Year3 12000 11666.67 10666.67 333.33 1000 1000 AnnualDepreciation Expense 1000 1000 1000

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Withoutpartyeardepreciation NetBookValue Year1 Year2 Year3 12000 11000 10000

AccumulatedDepreciation (contraasset) 1000 2000 3000

DecliningBalanceMethod DepreciationdeclineseachyearaccordingtotheCanadaRevenueAgencys(CRA)fixed rateofdepreciationforspecificassets. 50%rule:allowsanassetsdepreciationvalueforyearonetobesplitinhalfifitwas purchasedinthemiddleofthefiscalyear/periodregardlessofthedatetheassetwas purchased AnnualDepreciationExpense=netbookvalueofassetxfixedrateofdepreciation Netbookvalue:theundepreciated/remainingvalueoftheasset Fixedrateofdepreciation:specificrateofdepreciationsetbyCRA ExampleInformation: Purchasedate:September1st Fiscalyearend:December31st Originalpurchaseprice:$12000 Annualrateofdepreciation:20% ADE=NBVx20% With50%rule NetBookValue AnnualDepreciation AccumulatedDepreciation Expense (contraasset) Year1 12000 1200 1200 Year2 10800 2160 3360 Year3 8640 1728 5088 Without50%rule NetBookValue AnnualDepreciation AccumulatedDepreciation Expense (contraasset) Year1 12000 2400 2400 Year2 9600 1920 4320 Year3 7680 1536 5856

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Ren Puerta + other sexy mofos JournalEntryOutlineforDepreciation 31DepreciationExpense*nameofasset* AccumulatedDepreciation*nameofasset* Adjustmentfordepreciation

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$____ $____

PERIODIC VS. PERPETUAL INVENTORY SYSTEM Periodic Inventory System

Vendor Sale Accounts Receivable Sales HST Payable $___ $___ $___

Perpetual Inventory System

Vendor Sale * Account Receivable Sales HST Payable $___ $___ $___

Cost of Goods Sold $___ Merchandise Inventory $___ Return Sales Returns & Allowances HST Payable Accounts Receivable $___ $___ $___ Return Sales Returns & Allowances HST Payable Accounts Receivable Merchandise Inventory $____ Cost of Goods Sold Payment Bank Sales Discount Accounts Receivable Purchaser Purchase Purchases HST Recoverable Accounts Payable $___ $___ $___ Payment Bank Sales Discount Accounts Receivable Purchaser Purchase Merchandise Inventory $___ HST Recoverable Accounts Payable $___ $___ $___ $___ $___ $___ $___

$___ $___ $___

$___ $___

Return Accounts Payable $___ Purchase Returns & Allowances $___ HST Recoverable $___ Payment Accounts Payable Bank Purchase Discount $___ $___ $___

Return Accounts Payable $___ Merchandise Inventory $___ HST Recoverable Payment Accounts Payable Bank Purchase Discounts $___

$___

$___ $___

Notes Net Sales = Sales SRA Net Purchases = Purchases PRA Allowance: a reduction in price granted to a customer who has purchased damaged or

Notes st *The 1 journal entry is the sale price (the price nd that customers). The 2 entry is the cost price (the price that the goods cost the business). Returned goods that cannot be resold or goods

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defective goods but is who chooses to keep those unsatisfactory good while also demanding a reduction in price as compensation. Return: when a customer physically returns damaged or defective goods to the vendor while demanding a cash refund or credit invoice.

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that have been stolen or damaged are also recorded in the journal using the Inventory Shrinkage account. Inventory Shrinkage $___ Merchandise Inventory $___

CALCULATING AND JOURNALIZING ADJUSTING ENTRIES AND CLOSING ENTRIES Closing for Supplies: Supplies Expense Supplies $500 $500

Prepaid Expense (E.g: Insurance) Insurance Expense $1,200 $1,200

Prepaid Insurance

*Note: Other expense (non prepaid) close into Accounts Payable (LAPI) in such a fashion Misc. Expense Telephone Expense Truck Expense Accounts Payable $100 $250 $1,000 $1,350

Closing Entries: 1. Close out revenue account into income summary account E.g: Revenue $1, 000 $1,000

Income Summary

2. Close out expenses accounts to the Income summary account (All accounts listed do not summarize) E.g: Income Summary $500 $200

Bank Charges Expense

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Ren Puerta + other sexy mofos Misc. Expense Rent Expense $150 $150

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3. Close income summary into capital account. E.g: Income Summary A. Hunt, Capital $500 $500

4. Close Drawings into Capital. E.g: A. Hunt, Capital $4,000 $4,000

A. Hunt, Drawings

TERMS OF SALE C.O.D : Cash on delivery, goods must be paid for at the time at which they are delivered. On Account or Charge : Buy now, pay later. # Days or Net # : The full amount of invoice is due after # days. 1/10, n/30 : 1 percent of final price if payment is delivered in 10 from delivery of slip, net after 30.

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