Exam Review

Types of Business

Service Business: sells services to the public.
Ex. hairdressers, dental clinics.

Merchandising Business: buys goods and resells them at a higher price to make a profit.
Ex. retail clothing stores, supermarkets

Manufacturing/Producing Business: buys raw materials and converts them into new products, which are then sold to earn a profit.
Ex. farms that produce milk, forestry, fishing.

Non-Profit Organization: carries out activities to meet social needs and does not operate for profit.
Ex. charities, the Cancer Society.

Forms of Business Ownership

• Sole proprietorship: The owner is in the business by themself.

• Partnership: More than one owner.

• Corporation: Owned by shareholders.

accounting cycle

The step-by-step process used to record, summarize, and report financial information during an accounting period.

Fiscal Period:

A set of accounting procedures carried out during a specific time period (usually one year in length) It can also be quarterly or monthly, but for tax purposes it is typically yearly.

Nature of Accounting:

Accounting work can be divided into 3 categories

1. Routine - Ex. preparing cheques, daily banking, recording transactions

2. Periodic - Ex. pay cheques (every two weeks), bank accounts (checked monthly, financial reports - yearly)

3. Miscellaneous - activities that cannot be predicted Ex. Employee resigns, bank loan, buy new equipment

Assets:

things that we own ex. bank (money), equipment, building

Liabilities:

things that we owe ex. bank loan, mortgage

Owner’s equity:

difference between assets and liabilities

What is another term that means the same thing as equity:

capital, net worth, owner’s equity

Fundamental Accounting Equation: 

Assets - Liabilities = Owner’s Equity OR Assets = Liabilities + Owner’s Equity

Balance Sheet

1. The balance sheet shows the financial picture as of a certain point in time. (specific day)

2. The company name and date must appear in the title (3-part heading)

   1. Who - Name of Company

   2. What - Name of Statement

   3. When - Date

3. Assets are on the left - in order of liquidity

4. Listed on the right side

   1. Liabilities - listed in terms of due dates

   2. Owner's Equity (Sometimes they are listed one after the other on a page)

5. Assets = Liabilities + Owner's Equity.

A balance sheet ALWAYS balances

 liquidity

(ease of conversion to cash - from most liquid to least liquid (if you need money, where would u go first))

Accounts Receivables (A/R)

assets

Customers who owe money to the business

debtor - anyone who owes money to the business

Accounts Payable (A/P) -

liabilities

1. Suppliers that are owed money from the business

2. Creditors - anyone to whom the business owes money

Debtor

anyone who owes money to the business

Creditors

anyone to whom the business owes money

Claims Against the Assets

If the business were to close:

• The creditors would be paid first

• Then the owner would receive the difference 

GAAP:

Generally Accepted Accounting Principles

• It’s a set of rules, practices, and procedures

• It was established by the Canadian Institute of Chartered Accountants

• It was published in the CICA Handbook

• This was before Canada adopted International Financial Reporting Standards in 2011

IFRS, + Start Date + What is it

International Financial Reporting Standards

January 1st, 2011: start date for IFRS

IFRS is a set of accounting rules that tells companies how to prepare and present their financial statements.

ASPE

Accounting Standards for Private Enterprises

Canadian Accounting Standards (Before & After 2011)

• Before 2011 → Canadian GAAP (for everyone)

• After 2011 →

  • Public companies = IFRS

  • Private companies = ASPE

The Business Entity Concept:

Accounting for a business must be kept separate from personal affairs of the owner.

Balance sheets must reflect the financial position of the business alone; no personal assets or liabilities are included.

The Continuing Concern Concept: (2)

Business decisions are made on the basis that the business will continue to operate unless it is known that it will not.

When a company is going out of business, the values of assets usually suffer because they are sold under unfavorable circumstances.

The Cost Principal:

Assets should be recorded at their original purchase price, not their current market value.

The Principal of Conservatism:

• Accounting for a business should be fair and reasonable

• Assets should not overstated nor understated

Objective Principal:

Accounting will be recorded in the basis of objective evidence (proof ie. receipts)

Current Assets:

• Assets that will be converted to cash within the year (Ex. accounts receivable)

• Assets that will be used up within the year (Ex. supplies)

Long-term Assets + another word

• (Fixed Assets) (also known as Property, Plant, and Equipment):

• Assets that last longer than one year (Ex. land, building, equipment)

Current Liabilities: (3 examples)

• Debts or obligations that must be paid within one year.

• Examples: Accounts payable, wages payable, taxes payable

Long-Term Liabilities:

• Debts or obligations that are due after more than one year.

• Examples: Bank loans, mortgages, bonds payable

Classified Balance Sheet Vs. Statement of Financial Position (IFRS)

Classified Balance Sheet:

• Assets: Current Assets → Long-Term Assets

• Liabilities & Equity: Current Liabilities → Long-Term Liabilities → Owner’s Equity

IFRS Statement of Financial Position:

• Assets: Long-Term Assets → Current Assets

• Liabilities & Equity: Owner’s Equity → Long-Term Liabilities → Current Liabilities

Business Transaction:

a financial event that changes the value in certain accounts and therefore affects the financial position of the business

What side is Debit and Credit on?

Debit: Left

Credit: Right

Side of Origin for Assets, Liabilties and Owner’s Equity

Assets: Debit

Liabilities & Owner’s Equity: Credit

Account

Page designed to record changes in each individual item

Ex. Bank, Accounts Receivable, Supplies, etc.

Ledger

Group of file of accounts

Debit

Left side of an account

Credit

Right side of an account 

Pin Totals/Pencil Footings:

Tiny totals in the T-Accounts

Accounts Balance

Totals in the t-account, indicates if the number is a debit or credit

Exceptional Account

• An Account total that is one the opposite side of origin

  • Ex. Bank Balance is a credit balance

Reasons for Exceptional Account (2)

• Overpayment of an accounts receivable or accounts payable

• Return of merchandise

On Account

1. If an item is purchased on credit, this means that it is not paid for at the time of purchase. This is a purchase on account.

2. When an item is sold on credit, cash is not received at the time it is sold. This is a sale on account.

3. If money is paid out to a creditor to decrease the amount owed, it is a payment on account.

4. When money is received from a debtor to reduce the amount owed, it is a receipt on account

Equity Accounts:

Capital, Revenues, Expenses, and Drawings

Capital (4) (includes, origin of balance, capital affects)

• the owner’s investment in the business

• Includes: Beginning equity, Any new investments by the owner

• Normally has a credit balance

• If the business is profitable, capital increases

Revenue (includes, definition, normal balance, affect on capital)

• (Fees Earned/Sales): Sales of Goods or Services

• Includes: Beginning equity, Any new investments by the owner

• Normally has a credit balance

• If the business is profitable, capital increases

Expenses, examples, what does it do to equity, normal balance. puropose

• Cost related to generating sales

• Causes a decrease in equity

• Normal balance: Debit

• The purpose of an expense is to operate the business and help generate revenue.

.

Drawings, what does it do to the equity, and what side would you record it on?

• Money taken out of the business by the owner for personal use

• Decreases equity

• Normal balance: Debit

The Income Statement structure

• Three part heading (who, what, when)

• List revenues

• List expenses (alpha order)

• Net income or net loss

who is the income statement used by?

Owners & Managers

• To see if the business is profitable

• To make decisions

• To compare years and identify trends

Bankers

• To decide whether to approve loans

• To see if the business can repay money

Investors

• To decide whether to invest

• Shareholders = part owners

• Bondholders = lenders (creditors)

Income Tax Authorities

• Businesses must prepare an income statement yearly

• Net income is used to calculate tax owed

Chart of Accounts

• Is a list of all ledger accounts and their numbers

• Organizes accounts in order

• Helps identify account types by number

Asserts	100 -199	Asserts
Liabilities	200 - 299	Liabilities
Owners Equity	300 - 399	Owners Equity
Capital	300 - 399	Capital
Drawings	300 - 399	Drawings
Revenue	400 - 499	Revenue

The first digit tells you the type of account.

Gaps are left between numbers in case new accounts are added later.

What is the most important question that a ledger with just one equity account (i.e., Capital) fails to answer?

It fails to answer whether the business earned a profit (net income) or suffered a loss.

Identify three things that an income statement does.

An income statement: Shows total revenues, Shows total expenses, Shows net income or net loss

Which two equity accounts are not included on the income statement?

Capital, Drawings

How does the date on an income statement heading differ from that on a balance sheet?

The income statement covers a period of time. The balance sheet shows information at a specific date.

What is meant by the “bottom line”?

the net income or net loss of the business.

Why must a business produce an income statement for the government?

so the government can use the net income figure to calculate the tax owed.

Why are drawings not included on the income statement?

Drawings are not included because: They are not related to earning revenue, They do not affect net income.

ending capital =

beginning capital + net income - drawings

Revenue Recognition Principle:

Revenue must be recorded in the accounts at the time the transaction is completed.

Time Period Concept:

Provides that accounting will take place over specific time periods known as fiscal periods

Matching Principal:

Each expense item related to revenue earned must be recorded in the same period as the revenue it helped to earn

trial balance

A trial balance is a list of all the accounts in the ledger with their balances to check that total debits equal total credits.

Owners Equity Side of a balance sheet

Owner’s Equity:

G.Benvie, Capital

Balance, January 1, 2025  (start date)

Net Income

Less: Drawing

Inc/Dec in Equity

Balance, March 31, 2025 (end date)

Total Liabilities and Owner’s Equity

Journalizing Vs Journal Entry Vs Journal

Is the process of recording accounting entries in the journal.

Is made up of all the accounting changes for one transaction, in the form in which they are written up in the general journal

Book in which the accounting entries for all transactions are first recorded, before they are recorded in the ledger accounts. Also known as the "book of original entry"

Steps in Recording a Journal Entry:

1. The page number

2. Enter the day in the date column (year, month, day)

3. Enter the names of the accounts to be debited at the left side of the particular's column.

4. Enter the names of the accounts to be credited. They are indented in the particulars column.

5. Write a brief explanation for the entry beginning at the left side of the particulars column on the line beneath the last credit item.

Opening Entry:

• An opening entry is the first journal entry made at the start of a new accounting period.

• It is used to bring forward the balances of assets, liabilities, and equity from the previous period into the current ledger.

Source Documents: What they are what they credit and debit

fill in chart

Source Document	Definition	Debit	Credit

Source Document	Definition	Debit	Credit
Cash Sales Slip	Sales for goods/services for cash	Bank	Sales/Revenue HST payable
Sales Invoice	Goods/services are sold on credit	Accounts Receivable	Sales/Revenue HST payable
Purchase invoice	Purchase of goods/services on account	Expense / Assets  HST Recoverable	Accounts Payable
Cheque Copy	Paying an accounts payable Paid for cash purchase, wages, withdrawals, payments, etc.	Liabilities Assets/Expenses HST Recoverable Drawings	Bank
Cash receipt daily summary	Lists the amount of money that is coming in from customers	Bank	Accounts Receivables
Bank debit advice	Informing company of a decrease made in the business bank account Bank account decreases, bank charges fees	Bank Charge Expense Interest Expense or other account	Bank
Bank credit advice	Informing company of an increase made in the business bank account	Bank	Interest Revenue Interest Earned or other account

What Source Documents have HST Payable on them What Source Documents have HST Recoverable on them

Cash Sales Slip

Sales Invoice

Purchase invoice

Cheque Copy (for assets/expenses/liabilities only, not for drawings)

HST — Harmonized Sales Tax hst payable + recoverable, where do you find it in financial staements, whats one financial stament its not in +

As of July 1", 2010 the government of Ontario instituted this tax. Instead of the old 8% GST and 5% PST the province is harmonizing the taxes as one 13% HST.

The tax you collect from customers on sales that you owe to the government.
(It’s a liability because you haven’t paid it yet.)

The tax you pay on purchases that you can get back from the government.
(It’s an asset because you will recover that money.)

In formal financial statements, HST (Harmonized Sales Tax) appears under liabilities

• HST is not on the Income Statement, because it doesn’t belong to revenue or expenses.

Responsibilities of the Seller in terms of tax

1. Calculate the tax and add it on to the normal price of the goods

2. Collect the tax from the customer

3. Accumulate the sales tax charged to the customers in a special liability account called HST payable (Harmonized Sales Tax Payable)

4. Remit the accumulated sales tax to the government periodically. 

Posting + steps

•  Process of transferring information from the journal to the ledger

• Every individual amount recorded in the journal must be posted separately

1. Select proper ledger account

2. Record the date

3. Record the journal page - under PR - start the journal page with a “J” then the number –

4. Record the amount in the proper column (DR or CR)

5. Calculate and record the new balance

6. Go back to the journal and record the account number (ex. Bank 101 under (PR))

​​Cross referencing Why do we use Cross Referencing?

Recording the journal page number in the account and the account number in the journal

We use cross-referencing to trace transactions from the general journal to the ledger accounts and from the ledger accounts back to the general journal. It is also useful for continuing posting if all entries were not completed in the time given.

Forwarding

Process of continuing an account, on a new page by carrying forward the date and the balance from the completed page (balance column accounts)

Source Documents

Original records that provide proof a transaction happened and are used to record it in the accounting system.

Balance Column Account:

A type of ledger account that shows debits and credits for each transaction and includes a balance column to display the running total, so you can see whether the account currently has a debit (Dr) or credit (Cr) balance.

What does P. R. stand for?

A column in the journal and ledger used to track where each transaction was posted.

In the journal (post reference): shows the ledger account number the entry will go to

In the ledger (page reference): shows the journal page number the entry came from
This allows transactions to be traced back and forth between the journal and the ledger and helps continue posting if interrupted.

P.R. is like a tracking system connecting the journal and ledger.

What is a Nominal Account? + 3 examples

• Balances that DO NOT continue into the next fiscal period

  • Ex. Revenue, Expenses and drawings

Accounting Cycle (8 steps)

1. transactions occur 

2. transactions recorded in journal

3. journal enteries posted to ledger accounts

4. trial balance and interim financial statements prepared

5. worksheet prepared

6. formal financial statements prepared

7. ledger accounts adjusted and closed

• 8. post closing trial balance prepared

Business Functions (4)

Human Resources, Finance, Marketing, Operations

Operations

Handles production and supply.

Marketing

Responsible for promotion, pricing, packaging, and distribution.

Finance

Ensures adequate funds are available.

Human Resources

Employees are hired, trained, and compensated.

Internal Stakeholders deff + ex (6)

• individuals or groups that work within the business

  • Shareholders

  • CEO

  • Managers

  • Supervisors

  • Employee 

  • Union

External Stakeholders: (7)

• individuals or groups that are outside the business.

  • Government

  • Suppliers

  • Customers and consumers

  • Local community

  • Financiers

  • Pressure groups

  • Media

Concepts (5)

Big ideas that reach beyond the boundaries of Business

1. Change 

2. Creativity

3. Ethics

4. Sustainability

Real Accounts + 3 examples

The balance continues into the next fiscal period ex. Bank, equipment, Accounts Payable

Income Summary Account

An Income Summary account is a temporary account used only at the end of an accounting period to help close the books.

clearing account that gathers the revenues and expenses of the period

Closing an account

causes the account to have a zero balance

Closing entries:

Step 1: Close Revenue to Income Summary

Dec 31	Revenue	DR
	Income Summary		CR

Step 2: Close expenses to Income Summary

Dec 31	Income Summary	DR
	Expenses		CR
	Expenses		CR
	Expenses		CR

Step 3: Close Income Summary to Capital

Dec 31	Income Summary	DR
	Capital		CR

Step 4: Close Drawings to Capital

Dec 31	Capital	DR
	Drawings		CR

Step 5: Once you are finished closing your entries and posting them.

You would create a POST CLOSING TRIAL BALANCE

•   To make sure you balance

•   Accounts that are left after closing

(Asset accounts, Liabilities accounts and Capital).

Depreciation:

the decrease in value of an asset over time.

Name the two methods of calculating depreciation

Straight Line Method, Units of production depreciation

What is Salvage Value

estimation of what item can be sold for at the end of useful life

Advantages (3) and Disadvantages (2) (of straight line method)

Advantages

• Simple to calculate

• Same amount (expense) over a number of years

• Most suitable for less expensive items

Disadvantages

• Not as suitable for expensive assets ex plant and equipment as it does not cater to the loss in efficiency

• Does not consider the fact of changing technology environment that brings lots of fixed assets as obsolete very quickly

Accumulated Depreciation? What balance, (4)

Accumulated Depreciation is a contra-asset account that shows the total depreciation charged on an asset over its life. It reduces the value of the related asset on the balance sheet.

• It has a credit balance

• It increases each year as depreciation is recorded

• It helps calculate book value = Asset cost − Accumulated Depreciation