Chapter 2: The Recording Process

Accounting Cycle:

Accounting activities that take place over a fiscal year.

Figure 3: The Accounting Cycle
Illustration 2-4 (pg. 65) Retrieved from Weygandt et al (2016). Accounting Principles: Volume 1. Toronto: Wiley.

Journalizing Entries: Entering the transaction data in a Journal. Debit is abbreviated as DR. and Credit is abbreviated as CR. 

DR. Account name                          xx

CR. Account name                                           xx

Posting to Ledger: Entering the transaction data in the ledger / sub-ledgers (t-accounts)

Preparing Trial Balance: Entering the ending balances for all ledger accounts to ensure total debits equal the total credits.

All transactions including day-to-day transactions, adjusting entries, and closing entries are to be journalized, posted to ledgers, and a trial balance is to be prepared.

Chapter 3 : Adjusting the Accounts

Adjusting entries:

1. Prepaid Expenses: Expenses that have been paid for in cash and recorded as assets.

Dr. Expenses                        xx

Cr.Prepaid Assets                             xx

2. Depreciation Expenses: Allocating the cost of the capital assets as expenses over the useful life of the assets.

Dr.Expenses                           xx

Cr.Contra – Assets                           xx

3. Accrued Expenses: Expenses accrued over the accounting period but not paid for or not recorded

Dr.Expenses                           xx

Cr.Liabilities                                        xx

4. Unearned Revenues: Revenues received as cash and recorded as liabilities

Dr.  Liabilities                          xx
Cr.  Revenues                                    xx

5. Accrued Revenues: Revenues accrued over the accounting period but not yet received or recorded.

Dr.Assets                               xx

Cr.Revenues                                      xx

Direct Method:

Balance Sheet:

Normal Balance Sheet:

Total Assets = Total Liabilities + Owner’s Equity

Classified Balance Sheet:

Chapter 5: Accounting for Merchandising Operations

Perpetual inventory: Merchandise inventory is continuously updated and most commonly used.

Periodic inventory: Merchandise inventory is updated at the end of the period and rarely used.

Entries on the Purchaser’s Books

Entries on Seller's Books

Income Statements:
 

Single step income Statement

Revenue – Expenses = Profit / Loss

Multi step income statement

Net Sales – COGS = Gross Profit

Gross Profit – operating expenses = Profit from operations

Profit from operations + Other Revenue – Other expenses = Profit

Note:

Net sales: [sales revenue – (sales discount + sales returns and allowances)]

Chapter 6: Inventory Costing

FOB Shipping Point: Buyer takes ownership and responsibility of inventory when inventory is shipped out to the seller. Buyer pays the shipping charges.

Fob Destination: Seller has ownership and responsibility of inventory until the inventory reaches the buyer. Seller pays for shipping.

FIFO: Earliest purchased goods are first to be sold.

Weighted Average: Used when inventory is comprised of identical items. The average cost is updated after each purchase.

COGS and Ending Inventory:

Beginning Inventory + net purchases = Goods available for sale

Goods available for sale – COGS = Ending inventory

ALSO: Goods available for sale – Ending inventory = COGS

Chapter 7: Internal Control and Cash

Bank Reconciliation:

Bank records and book records are reconciled at the end of each month to ensure both have the same information. Journal entries are made on the book side but not for the bank side.

When the bank statement is received, it usually differs from the book records. This can be due to a few factors; deposits in transit are not recorded on the bank side until the bank receives them, Cheques written by the company/individual may be still outstanding, and there may be errors in recording transactions. Similarly, the books can be missing information such as EFTs, interest revenue, bank charges, NSF fees, bank debit or credit memos, and errors. Once the adjustments are made on both sides, the balances should be reconciled. But the journal entries are only made for the book side and not the bank side. The discrepancies on the bank are corrected by the bank when the deposits are received, when the outstanding cheques are cashed, and when the banks notice their errors.

Deposits in transit:

- have not been recorded by the bank, so they have to be added to the bank’s balance

Outstanding cheques:

- issued cheques that have not yet been paid by the bank, meaning they have to be deducted from the bank’s balance.

Errors:

- all errors made by the depositor are reconciling items in determining the adjusted cash balance per book
- all errors made by the bank are reconciling items in determining the adjusted cash balance per bank.

Bank Memo:

- debit memo for bank service charge is deducted from the book’s balance
- credit memo for interest earned is added to the book’s balance

Chapter 8: Accounting for Receivables

Accounts Receivables:

Percentage of Receivables: (also known as the balance sheet approach)

% of receivables or an aging schedule is used to estimate the amount of uncollectibles also known as the allowance for doubtful accounts. This is a contra-asset account and cannot be closed so can have a debit or credit balance from previous accounting period. The estimate is for the allowance and the ending balance for the allowance for doubtful accounts should equal the estimated uncollectibles.

Percentage of Net sales: (also known as the income statement approach)

% of net sales is recorded as the bad debt expense and hence the allowance for doubtful accounts can have an ending balance of more (or less) than the estimated uncollectibles.

Chapter 9: Long-lived Assets

Depreciation of Capital Assets:

1.Straight- Line

Step 1:  Cost – Residual Value = Depreciable amount

Step 2:   Depreciable amount ÷ useful life = Annual Depreciation Expense

2.Double - Diminishing balance

Step 1: Cost * 2 = 200% Cost

Step 2:  200% cost ÷ useful life = depreciate rate

Step 3: Carrying amount of the asset at the beginning of the year * depreciation rate = annual depreciation expense

3.Units of Production

Step 1: Cost – residual value = Depreciable amount

Step 2: depreciable amount ÷ total estimated units of production = depreciable amount per unit

Step 3: Depreciable Amount per item * unit produced during the year = Annual Depreciation Expense