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Business Entity Principle

each business is considered a separate entity from the individual owners
financials kept separate

Cost Principle

assets shown on the balance sheet at the cost of acquisition/construction

Time Period Principle

Use the same period of time or consistency

Matching Principle

expenses should be recorded in the same time as the revenue they helped earn

Principle of Objectivity

all accounting records have to be based on objective evidence

Principle of Materiality

information that could affect the decision making of users of financial information must be included in reports

Principle of Conservatism

accountants should chose accounting methods that result in lower net income and net assets


items owned of value


debts of a business


a person's net worth


a person or business that has extended credit or loaned money

Double Entry Accounting

each transaction in the debits must equal credits


money earned after expenses paid (OE up)


Amount earned from sales of goods/services (OE up)


cost of items/ services used in operation of business (OE down)

Accrual Basis

recording revenue when it's earned and expenses when incurred

Cash Basis

recording revenue and expenses when cash is paid or received


record of transactions in chronological order "book of original entry" (organized, reduces errors)
easier to keep track of, easier to follow


transfer of information from the journal to the ledger

Chart of Accounts

list of account names and numbers
Assets- 100
Liabilities- 200
Owner's Equity- 300
Revenue- 400
Cost of Goods Sold- 500
Expenses- 600

Source Documents

business form that serves as the original source of information that a transaction has occured

Trial Balance

working paper, not official financial statement (formal, list form, machine tape form)
lists all ledger account balances
ensures DR=CR
checks for mathematical accuracy


multi-column form used in preparing financial statements, not official

Liquidity Order

order/speed that something can be converted to cash

Prepaid expenses

expenses paid in advance

Current Assets

converted into cash or used up within a year (cash, A/R, supplies)

Fixed Assets

asset with a life longer than 1 year (land, building, equipment, vehicle)

Current Liabilities

to be paid within 1 year (A/P, Salaries Payable..)

Long-Term Liabilities

to be paid within 1 year (bank loan, mortgage payable)


accounting changes recorded to ensure that account balances are correct


allocation of a cost to fixed assets as they are used

Contra Asset

offset the value of another account

Book Value

initial value of asset minus depreciation, amount remaining after accumulated depreciation

Straight Line Depreciation

same amount each period

Declining Balance Depreciation

greater amount in the early years (% on value)

Closing the Books

process where temporary accounts are closed and reduced to zero (updates OE and prepares revenue and expenses for next accounting period)

Income Summary

owner's equity account (300)

Post-Closing Trial Balance

prepared after the closing entries have been posted to the ledger

Merchandise Inventory

dollar value of goods on hand for sale (Profit=Revenue-COGS)

Supporting Schedules

provides details of an item on a statement (Net Income=profit-expenses)

Operating Expenses

expenses incurred for the general operation of the business

Perpetual Inventory Method

continuous record of inventory

Periodic Inventory Method

physical count

HST Tax Credit

amount of tax the government gives back

HST Payable

a liability

HST Receivable

contra liability

Subsidiary Ledger

a group of accounts of one type

Direct Posting

record of information from source document directly into subsidiary ledger

Indirect Posting

recording information from source documents into the general journal, then ledger

Accounting Controls

protects assets from waste, theft and fraud
ensures reliable accounting

Administration Controls

ensures accurate and consistent application of firm policy
evaluates the performance of departments and personnelv

Petty Cash Funds

amount of cash used to make small payments quickly (staples, supplies)

Bad Debts

uncollectible amounts owed by customers

Bad Debts Expense

loss due to uncollectible amounts

Income Statement Method

% of net sales

Balance Sheet Method

% of AR

Accrued Expenses/Revenue

expenses/revenue that have been incurred but not yet recorded

Unearned Revenue

Money received

Trend Analysis

used to forecast future results

Comparative Financial Statement

provides 2 or more years of financial data with changes

Condensed Statement Analysis

single totals for key items to highlight figures

Common-Sized Statements

using % to make statements common-sized each year

Horizontal Analysis

compare % from year to year

Vertical Analysis

Presenting data as %


financial plan for an accounting period

Sales/Revenue Budget

estimate of goals/services sold as well as revenue

Expense budget

estimate of cost and expenses to be incurred

Capital Budget

estimate purchase of capital building, equipment

Accounting Period

period of time covered by a financial statement

Business transaction

an exchange of things of value


a group of accounts


a form where transactions are recorded

Recording transactions

1. Determine the accounts
2. What type of account (A,L,OE)
3. Increasing/decreasing
4. Is it DR/CR

Working Capital

Current Assets-Current Liabilities

Current Ratio

Current Assets/Current Liabilities : 1
2:1 is acceptable

Quick Ratio

Current Easy Assets/ Current Liabilities : 1
1:1 acceptable

Turnover Ratio

COGS / Average Inventory

A/R Collection Period

Average AR/ Net sales on credit
45 < acceptable

Equity Ratio

Owners Equity / Total Assets x 100%

Debt Ratio

Total debt / Total Assets x 100%

Rate of Return on Net Sales

% of net income in term of net sales

Rate of Return on Average OE

Net Income/ Average OE x 100%

Financial Position of an Individual

Total value of items owned - Total value owed = Personal net worth

Financial Position of a business

The purpose of accounting is to provide financial information for decision making

Steps to preparing a balance sheet

1. Prepare the heading (who, what, when)
2. List assets
3. List liabilities
4. Do Owner's Equity

Limitations of the trail balance

the TB can only indicate mathematical results, but there could be mistakes in the transaction analysis

Net Income/ Loss

Revenue - Expenses

Income Statement

shows revenue, expenses, and the net income/ loss over a given period of time

Preparing the Income Statement

1. Statement heading
2. Revenue section
3. Expenses section
4. Determine Net Income/Loss


withdrawing cash, products, and equipment for personal use

Debit vs. Credit

debits increase OE and credits decrease OE

4 steps to journalizing

1. the date (year, month, day)
2. record the debit (name + amount)
3. record the credit (name + amount)
4. explanation

Balance Column Ledger Account

a form of a ledger that has all the debit and credit values for a certain accounting period for one account and the balances of these values
Different that T-Accounts because it shows it for more than one transaction and has the balances
Dr/CR column refers to the balance

6 Steps to journal posting

1. Account name
2. The date
3. The amount
4. Calculate new balance (DR/CR)
5. Complete P.R. (Posting Reference) in ledger
6. Complete P.R. in Journal

Possible errors

- didn't complete a transaction
- didn't post the debit or credit
- Posted to wrong account
- Posted to the wrong side
- Calculated balances incorrectly
- Transposition mistake (i.e. you wrote 65, when it's supposed to be 56)

Steps to locate the errors

1. Find the difference (how much out of balance)
2. If difference is a multiple of 10, its a calculation error
3. Look for difference in ledger/journal (ensure its correct)
4. Divide difference by 2 then look in ledger/ journal again
5. Check if difference is divisible by 9 (means a transposition error)
6. Go back over all work (transaction, journal, ledger, trial balance)
7. Skip, go back to later

Source Documents

Why are they used- (see principle of objectivity) source documents provide this evidence to support the transactions


All source documents are numbered for record keeping. This helps to prevent FRAUD ( that cashiers don't take money from the register. If a # is missing, then they will know something is up)

Cash Sales Slip

prepared for all cash sales for a business

Sales Invoice

Bill completed by seller and given to the buyer for a CREDIT sale (on account)

Purchase Invoice

Bill received by the other purchaser as proof of purchase. ON ACCOUNT

Cheques issued

To make a cash purchase and to pay bills on what is owed

Cheques Received

Payment for amount owed

Bank Credit Memo

giving notice of an increase in a customer's back account

Bank Debit Memo

giving notice of a decrease (its decrease for banks, which is why its a debit)

7 Steps in Preparing

1. Write heading
2. Enter TB accounts
3. Transfer amounts to BS section
4. Transfer amounts to IS section
5. Complete IS section (net income/ loss)
6. Complete BS section
7. Rule underlines

Suuporting schedules

provide detail on specific items of the financial statements

Book Value

Cost of the asset - the accumulated depreciation

Service companies

provide and sell services

Merchandising companies

sell products (wholesale, retailers)

Manufacturing companies

make products and convert raw materials into sellable products


the account used to record the cost of merchandise for resale

Purchase Returns and Allowances

Returned items (decrease purchases)

Purchase Discounts

discounted items (decrease purchases)


Transportation on merchandise in (not out, because that's delivery expense). It increases the cost of goods sold

Sales Returns and Allowances

records merchandise returned by the customer

Sales Discounts

encourages early payment

Terms of Sale

COD- cash on delivery
Receipt of invoice- payment when invoice is received
Net 30- full payment in 30 days
EOM- End of Month
10th following- due on the 10th day after the month
2/10, n/30- 2% discount within 10 days or full payment within 30 days
1/10, n/30- 1% discount within 10 days, net 30 after End of month

Goods and Services (GST)

Federal (5%)

Provincial Sales Tax (PST)

specific to province. Paid on tangible goods, on final sellers. (8%)

Harmonized Sales Tax (HST)

combination of PST and GST (13%)

HST Payable

The amount of HST that a business collects from their customers

HST Refundable

The amount of HST that the company owes to the suppliers (which is then owed to the government)

Bank Credit Cards

Why use them as a consumer- dont have to carry money with you, international, don't have any money
Why use them as a business- they get the money right away, allows consumers the option to buy. Credit card companies can also charge a lot of interest

Subsidiary Ledgers

a group of accounts of one type

Three-Ledger System

General, Accounts Receivable, Accounts Payable


Division of Labour and Accounting controls
DOL- can split jobs, more efficient, can specialize
AC- simplify, organized, individual responsibilities

Accounts Payable Clerk

Processes and Records purchase invoices, pay creditors , update creditor accounts, and prepares a schedule of accounts receivable

Accounts Receivable Clerk

Processes and records sales invoices, process cash received from customers, and prepares a schedule of accounts receivable

Accounting Supervisor

Supervise work of accounting clerks, prepare journal entries, post entries, create TB, records total amount of souce documents of one kind in a single entry (journalizing batch totals)

Merchandise Inventory

dollar value of goods on hand for sale (asset) Old Inventory- IS Debit column, New Inventory- IS credit column, BS debit column

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