BAT4M Grade 12 Accounting Chapter 1 to 4 Test Chapter 1 – Ethics are standards used to judge someone’s actions as right or wrong – Analyzing an ethical dilemma: Recognize the situation, Identify and analyze the elements of the situation, Identify the alternatives and their effects – Internal users: finance, marketing, human resources, production – External users: investors, creditors, labor unions, customers – Information systems do 3 things: identify, record, and communicate economic activities – GAAPs are the common set of standards implemented by the Canadian Institute of Chartered Accountants which guide the methods of accounting – GAAPs are now becoming the IFRS – Cost Principle: assets should be recorded at their original historic cost – Assumptions: create a foundation for the accounting process – Going Concern Assumption: assumes the company will continue to operate in the near future – Monetary Unit Assumption: only transactions that can be expressed through money is included in records – Economic Entity Assumption: the economic activities of an entity must be kept separate from the owner – Proprietorship: business owned by a single person – Partnership: business owned by two or more persons – Corporation: owned through transferable shares – Public corporation: a corporation of which shares can be purchased publically – Private corporation: a corporation of which shares can not be purchased publically – Income trust: special/limited purpose corporation set up to invest in assets – Accounting equation: Assets = Liabilities + Owner’s Equity – Assets: resources owned by a business – Liabilities: claims against assets – existing debts and obligations – Owner’s equity: owner’s claim on total assets – Investments may be put in by the owner and may be cash or other assets – Drawings are withdrawals taken out by the owner – Net income is when revenues are greater than expenses – Net loss is when expenses is greater than revenues – Revenues: any activities done to earn income – Expenses: costs of assets and services used to earn revenue – Owner’s Equity = Owner’s Investments – Drawings + Net Income – In order to record a transaction, there must be some sort of change in the economic status of the business – Annual reports are documents that include important non-financial and financial information about a company – Cash Flow Statements: financial statement that provides information about the cash inflows and cash outflows Chapter 2 – An account is an individual accounting record of increases/decreases in a specific asset, liability, or owner’s equity account – Debit means left, credit means right – Double-entry system: every transaction must have debits equal credits – Steps in the recording process: Analyze each transaction, Enter the transaction in a journal, Transfer the journal information to the correct accounts in the ledger – Journal = Book of original entry – Ledger = Book of accounts – Journals have several uses. They provide a chronological order of transactions, retain the full impacts of transactions in one place, help prevent errors because debits and credits are easily compared, and provide explanations for each transaction. – Recording data in the journal is known as journalizing – Transactions involving more than 2 accounts are known as compound entries – General ledgers contain all asset, liability, and owner’s equity accounts – A chart of accounts lists the accounts and the account numbers that identify where the accounts are in the ledger – Trial balances are lists of accounts and their balances at a specific time Locating Errors – If the error is an amount such as 1, 100, or 1000, re-add the trial balance columns – If the error can be evenly divided into 2, search for half of the difference – If the error can be divided by 9, look for transposition errors – If none of the above apply, look for missing posts in the ledger Chapter 3 – Managers want monthly statements – Investors want quarterly statements – The Canada Revenue Agency requires annual statements with income tax returns – Revenue Recognition Principle: revenue must be recognized/recorded in the accounting period in which it is earned – Matching Principle (Expense Recognition): expenses be recognized/recorded in the accounting period in which the revenue it helped earn exists – matches efforts (expenses) with accomplishments (revenues) – Because accounting is done when the service is completed rather than when money is collected, the accrual foundation of accounting results in the recording of service performance. – Because accounting is done when cash is moved, the cash basis of accounting records cash collections and payments rather than the fulfillment of services, which can be quite deceptive. – Adjusting entries are needed to ensure that the revenue recognition and matching principles are followed – Books can be out of balance for 3 reasons: 1. It may be inefficient to journalize everything (such as wages earned in a day) 2. Costs that occur over time do not need to be recorded every day (such as depreciation or rent) 3. Some things such as bills will not be recorded because the bill has yet to be received Types Prepaid Expenses: expenses paid in cash and recorded as assets before they are used or consumed Unearned Revenues: cash received and recorded as a liability before revenue is earned Accrued Expenses: expenses incurred but not yet paid in cash (such as interest) Accrued Revenues: revenues earned but not yet received in cash (such as gift certificates) Amortization: Estimated decrease in the value of an asset over time Journal Entries Prepaid Expenses: For supplies – DR Supplies Expense, CR Supplies For insurance: DR Insurance Expense, CR Prepaid Insurance For amortization: DR Amortization Expense, CR Accumulated Amortization – Asset Unearned Revenue: DR Unearned Revenue, CR Revenue Accrued Revenue: When the service is performed – DR Accounts Receivable, CR Revenue When cash is received for the service – DR Cash, CR Accounts Receivable Accrued Expenses: As it is accruing – DR Interest Expense, CR Interest Payable When payment is made – DR Interest Payable, CR Cash For salaries: create a liability account called Salaries Payable to temporarily hold the salaries expense Chapter 4 – Completing the accounting cycle involves the closing of nominal or temporary accounts – Permanent or real accounts remain unclosed and are all asset, liability, and the owner’s equity capital account – Temporary or nominal accounts are all revenue, expense, and drawings accounts – Closing entries are used to transfer nominal account balances to owner’s equity – Income summary is created to hold all the closing entries – Steps to closing: DR Revenue & CR Income Summary, CR Expenses & DR Income Summary, DR Income Summary & CR Owner’s Capital (if net loss occurs, DR Capital and CR Income Summary), and CR Drawings & DR Capital – Post-closing trial balances only show real/permanent accounts – Worksheets can be used to organize financial data – Work sheets are not financial statements but rather an optional tool of use – Reversing entries are also optional and are used to cancel the effect of an adjusting entry – Correcting entries are done whenever an error is found and must be journalized and posted before closing entries are made – Correcting entries are also optional and should only be done when there is an error – Working Capital = Current Assets – Current Liabilities – Current Ratio = Current Assets / Current Liabilities Classified Balance Sheet – Current Assets (short term assets) – Long-Term Investments (bonds, real estate) – Property, Plant, and Equipment (long-term assets) – Intangible Assets (copyrights) – Current Liabilities (accounts payable, taxes payable) – Long-Term Liabilities (mortgages, bank loans) – Equity (owner’s equity accounts) Accounting Cycle 1. 2. 3. 4. 5. 6. 7. 8. 9. Analyze business transactions Journalize transactions Post to ledger accounts Prepare a trial balance Journalize and post adjusting entries Prepare an adjusted trial balance Prepare financial statements Journalize and post closing entries Prepare post-closing trial balance Vocabulary Accounting: process of identifying, recording, and communicating the economic events of an organization to users Useful Life: The number of years of service an asset will serve Straight-Line Amortization: (Original Cost – Salvage Value) / Useful Life = annual expense Time Period Assumption: the life of a business can be split into artificial time periods Interim Periods: anything less than a year i.e. a month, quarter, or half year Fiscal Periods: time periods of one year Contra Account: account offset from a related account Net Book Value: difference between the original cost of an asset and its accumulated amortization