Accounting Unit 4

Classified Balance Sheet

An expansion of the report form balance sheet. It separates the assets into current and long term assets, and provides additional details about the net worth and liabilities of your business

Format of Classified balance sheet

1. Current Assets

2. Long term Assets

3. Current Liabilities

4. Long Term Liabilities

Steps to creating a classified balance sheet

1. Who, What, When

2. Current assets - items that can be converted into cash within a year (Cash, AR, Supplies, Prepaid Insurance)

3. Long Term Assets - Items that can last longer then a year (Equipment, land, building)

4. Current Liabilities - Due within a year (HST payable or AP)

5. Long Term Liabilities - Take more then a year to pay off (Mortgage or Bank Loan)

6. Equity Section - List same as previous unit (initial capital, net income - drawings, increase in capital based off net income - drawings, new capital)

Adjustment Process

Makes sure that…

1. Account balances are up to date

2. Late transactions are accounted for

3. Accounting Gapps have been followed correctly

4. Calculations have been made correctly

Adjusting Entry

A journal entry that divides a revenue or expense over several fiscal periods

Adjusting Entry for Prepaid Expense

1. initially recorded as an asset then changed to expenses once used

2. Insurance, Advertising, Rent, Supplies

Adjusting Entries for Late-Arriving Purchase Invoices

1. Goods and services are sometimes bought near the end of a fiscal period and are billed during the next fiscal period (matching principal)

Adjusting Entry for Unearned Revenue

1. A liability as its a service owed to a customer

Worksheets

We use a worksheet to help organize all accounts

Used as an informal business paper to organize and plan data used for creating financial statements

Depreciation

When a long term asset loses its value. Another name is Amortization when its value is reduced to nothing

Methods for calculating Depreciation

1. Straight line method:

   Depreciation per year = Cost of asset - salvage value /2

2. Sometimes a product can be bought on April 1st in which case it would first have to be depreciated 9 months:

   Depreciation per year/12 the x 9

Accumulated depreciation & Depreciation expense

Depreciation expense (Income Statement) (DR)- Represents the depreciation in this year

Accumulated depreciation (Balance sheet) (CR) - represents all the depreciation of an asset from the previous fiscal year

Declining Balance Depreciation

Assumes an asset. was used more during the early stages of its life (first year)

Formula:

Capital Cost x CCA rate

CCA - Capital Cost Allowance

Use Accumulated depreciation & Depreciation expense the same as on the straight line method

Why use declining Balance Depreciation

1. More accurate for assets used more during first years

2. Less net income in early years (less taxes) but more income later years (More taxes)

The half year rule

Allows for companies to take half of an assets depreciation. (Only declining balance depriciation)

Real Accounts

Accounts that will transfer into the next fiscal period:

• Assets

• Liability

• Capital

Nominal Accounts

Accounts that will not transfer into the next fiscal period:

• Revenue

• Expenses

• Drawings