Introduction to Accounting 120

Introduction to Accounting 120 Midterm Review April 19, 2010 Mr. Binet

Midterm Format • Cumulative test based on chapter 1, 2, 3 and 4. • Online test style again + practical. • 40-60 Multiple Choice Questions.

Practical Portion • Know how to do the following in Excel: • Make a properly formatted balance sheet. • Do a completed transaction analysis sheet. • Translate a balance sheet into T-Accounts and Balance.

Review: Chapter 1 • Accounting is an information system that identifies, measures, records and communicates relevant, reliable, consistent information about an organization’s economic activities. • Its objective is to help people make better decisions. It also helps people better assess opportunities, products, investments, and social and community responsibilities. • In addition, to reporting on the performance of a business, what the business owns, and what it owes, accounting opens our eyes to new and exciting possibilities. • Accounting can provide you with important and interesting learning experiences. You will acquire knowledge and skills that will help you in both business and everyday life. For example, you can use accounting knowledge to make better investment decisions or to help you get a loan for a house.

Review: Chapter 1 • Accounting affects many parts of life. Some examples of common contacts with accounting are through credit approvals, chequing accounts, tax forms and payroll • These experiences are limited and tend to focus on the recordkeeping (or bookkeeping) parts of accounting. • Recordkeeping, or bookkeeping, is the recording of financial transactions and events, either manually or electronically, for the purpose of creating reliable bank of data. Accounting involves the recordkeeping process but is much more.

Review: Chapter 1 • A sole proprietorship, or single proprietorship, is a business owned by one person. No legal requirements must be met in order to start this form of business, other than to file for a business license and register a business name. • A partnership is owned by two or more persons called partners. Like a proprietorship, no special legal requirements must be met in order to start a partnership, other than to register the business name and obtain a business license. • A corporation is a business that is a separate legal entity chartered (or incorporated) under provincial and federal laws. A corporation is responsible for its own acts and its own debts.

Review: Chapter 1 • External users of accounting information are not directly involved in running the organization. They include shareholders, lenders, directors, customers, suppliers, regulators, lawyers, brokers and the press. • Financial accounting is the area of accounting aimed at serving external users. Its primary objective is to provide external reports called financial statements to help users analyze an organization’s activities.

Review: Chapter 1 • Internal users of accounting information are those individuals directly involved in managing and operating an organization. The internal role of accounting is to provide information to help internal users improve the efficiency and effectiveness of an organization to delivering products and services. • Managerial accounting is the area of accounting aimed at serving the decision-making needs of internal users. Managerial accounting provides special-purpose reports customized to meet the information needs of internal users. An example of such a report is a listing of credit customers who are late in paying their accounts.

Review: Chapter 1 Professional certifications in Canada: • Certified General Accountant (CGA) • Certified Management Accountant (CMA) • Chartered Accountant (CA)

Review: Chapter 2 • One of the most important uses of accounting data is to show the financial position of a person, business or other organization. • 3 Steps to Determine Financial Position • Step 1 – List Assets (things you own) • Step 2 – List Liabilities (things you owe) • Step 3 – Calculate Owner’s Equity • Assets – Liabilities = Owner’s Equity

Review: Chapter 2 • Assets – listed in order of liquidity, or the order assets are converted to cash. • Liabilities - listed in order in which they are normally paid. • Debtor – anyone who owes money to the business. • Creditor – anyone who is owned money by the business. • Accounts Receivable – the money owed to the business by its customers. • Accounts Payable – the money that a business owes to its trade creditors.

Review: Chapter 2 • A balance sheet is a statement showing the financial position of a person, business or other organization. • The name of the business appears in the first line of the heading of the balance sheet. • The assets are listed on the left side of the balance sheet. The liabilities are listed on the right side of the balance sheet. • The full cost of the automobile is listed as an asset, and the amount owed on the automobile is listed as a liability. • When using columnar paper, one may omit dollar signs, commas, decimal points, and replace two zeros with a dash for even dollar amounts. • A creditor appears under the liabilities on the right-hand side of the balance sheet.

Review: Chapter 2 • A single ruled line under a column of figures means that the column is to be totaled. • The financial information prepared by an accountant must not be misinterpreted and therefore must be perfectly legible. • A double ruled line in a column of figures is drawn beneath a final total. • A short form may be used when it is part of the company’s formal name. • Cash is the most liquid asset because it is cash already. It does not have to be converted.

Review: Chapter 2

Review: Chapter 3 • On any given day, many events occur that cause the financial position of a business to change. • Each of these events is called a business transaction. • For example, suppose the business buys a new truck for which it pays $20,000 cash. This event is a transaction because it causes the financial position of the business to change.

Review: Chapter 3 • Your next step in the study of accounting is to learn how various business transactions affect and change the financial position. • Balance Sheet vs. Equation Analysis Sheet • Assets = Liabilities + Owner’s Equity • $53,300 = $20,120 + $33,180

Review: Chapter 3 • 1. Identify all items (assets & liabilities) that must be changed and make all necessary changes • 2. See if the owner’s equity has changed • 3. Make certain that at least two of the individual items have changed • 4. Make sure that the equation is still in balance • Remember the accounting equation: Assets = liabilities + owner’s equity

Review: Chapter 3 • A Source Document is a business paper, for example a bill. It is the original record of a transaction and it provides the information needed when accounting for the transaction • For example: Hydro Bills, telephone bills, Cheque copies, credit card statements, cash register summaries. • All source documents must be kept on file for reference purposes and as proof of transactions

Review: Chapter 3

Changes to Owner’s Equity You may have difficulty determining if and when owner's equity is affected by a transaction. Examine the list of some possible events and the resulting change to owner's equity: Examine the following transaction: A truck originally purchased and recorded for $10 000 is sold for $7 000 cash.Analysis

An Account • An account is a page specifically designed to record the changes in each individual item affecting the financial position. There is one account for each item.

The Ledger • All the accounts together are called the ledger. A ledger is a group or file of accounts.

Types of Ledgers: Loose-Leaf • Loose Leaf: In the pre-computer era, accounting personnel had to record each change by hand. The pages were actual pieces of paper and were normally housed in a large ledger book. These books, designed specifically for accounting, provide rulings for money items and other necessary notations.

Types of Ledgers: Rolodex • Card Ledger: Another pre-computer ledger system was the card ledger. Account information was recorder on individual cards and housed on a device similar to a rolodex. Envision accounting records of a dental office with each customer having their own card displaying the date, the amount of each bill and the receipt of any payment.

Types of Ledgers: Computer Ledger • Computer Ledger: Today, most businesses use some type of computerized accounting software. These programs automatically adjust the account when a transaction is entered. Individual accounts can be viewed and printed at any time.

The General Ledger • View the following display. It is important to understand that each balance sheet account has its own "page" in the ledger, holding information specific to it.

The T-Account • The T-Account is in fact shaped like the letter T and divides information onto its two sides: the left and the right. • As information is entered, the T-Account displays: • The account name • The opening or beginning balance • Individual entries • Possibly an ending or updated balance • This unit will use the T-Account as the account "page." Each account will have its own T and the assembled T-Accounts will make up the general ledger.

Establishing the T-Account Ledger • The first steps to establishing T-Accounts and developing a ledger is to record individual account names and opening balances. The account names and opening balances are obtained from a company's opening balance sheet. • Examine the balance sheet for Atlantic Fleet, a rental company owned by Charles Stanson in Campbellton, New Brunswick. The preliminary (opening) balance sheet contains the assets acquired, the costs incurred and the owner's net worth when establishing the business. The company is about to open its door and begin operations. The data from this statement will be used to set up the accounts of the ledger in T-Account form.

The Opening Balance • The opening balance for an Asset account is recorded on the left side of the T-Account. The opening balance for a Liability account or an Owner's Equity account is recorded on the right side of the T-Account. • Initially, it may be difficult to recall on which side of the T-Account the opening balance is recorded. An easy way to remember is to envision a balance sheet with a T-Account drawn on top. • When the T-Account is drawn on top of the balance sheet: • The assets fall on the left side; thus, the opening balance falls on the left side. • The liabilities and owner's equity fall on the right side; thus, their opening balances fall on the right side.

Features of the T-Account Ledger • Examine the T-Accounts ledger of Atlantic Fleet with their opening balances:

Features of the T-Account Ledger • Note the following important features of the T-Account ledger: • Each balance sheet item is given its own page (T-Account). • The name of the account is centered at the top. • The opening dollar figures for assets are recorded on the left side of the T-account. • The opening dollar figures for liabilities and capital are recorded on the right side of the T-Account. • The sum of the left sides equalsthe sum of the right sides. • Both the ledger and the balance sheet display the financial position of the business.

Rules of Debit and Credit • Now that you understand that the left side of the account is the debit side and the right side of the account is the credit side, we can examine how changes to accounts are recorded. • The rules are fairly basic:

Rules of Debit and Credit • Accounts increase on the same side as their opening balance and decrease on the opposing side:

Let's Review • Did you remember that when a transaction occurs, at least two accounts are affected? • Did you remember that for each transaction, the sum of debit entries always equals the sum of credit entries? This is known as double entry accounting. • Double Entry Accountingmeans at least two accounts are affected in every transaction and the debit entries must equal the credit entries. • Finally, did you remember that for each transaction, the debits are listed first?

Introduction to Accounting 120