Accounting is the gathering and preparing of financial information for financial decision-making

An account stores specific information eg. Cash, Supplies, etc.

An asset is something of value owned by the company, eg. Cash, Equipment.

A liability is a debt owed to another company, eg. Bank Loan.

Equity represents the owner's net worth, eg. Capital.

The Fundamental Accounting Equation is Assets = Liabilities + Equity.

A Balance Sheet shows the financial position of a company at one point in time. A single line means add or subtract while a double underline is reserved for major totals.

Assets are listed, if current (less than a year) in liquidity order, meaning how soon they will be turned to cash or be replaced; if fixed or long-term, assets are listed by length of life, eg. Land first.

Liabilities are listed by which are paid soonest.

A debit is the left side of an account. Assets increase with an entry to the debit side and normally have a debit balance.

A credit is the right side of an account. Liabilities and Capital accounts increase with a credit and normally have a credit balance.

Assets decrease with credits while Liabilities and Capital decrease with debits.

A transaction is an exchange of value involving at least two accounts and the amounts of the debits must equal the amounts of the credits.

Revenues represent the generation of income to a company and normally have credit balances and increases.

Expenses represent costs of doing business and normally have debit balances and increases.

An Income Statement shows revenues minus expenses and the net income for a period of time, eg. Three months ending September 30, 1998.

The "Owner, Drawings" account represents the owner's withdrawals of assets from the company and normally has a debit balance and increases.

The Journal is a book of entry. After the date, debit entries are made first, followed by credit entries, indented. Do a brief explanation back at the margin and include relevant numbers for invoices, cheques, etc.

The Ledger is another book where each account's information is accumulated and held. Assets numbers may be 100's, beginning with Cash. Liabilities 200's,
Equity 300's, Revenues 400's, Expenses 500's.

PR is post-reference. When transferring information from the Journal to the Ledger, use the Journal page number, eg. J23. In the Journal use the account number posted to, eg. 200 for Accounts Payable.

A trial balance is created when a period is over to check the accuracy of the Ledger and prior to preparing the Balance Sheet and Income Statement.

A worksheet helps organize data prior to preparation of financial statements. Extend the account balances from the trial balance columns to the income statement and balance sheet columns. Add the net income to the bottom to show equal totals for both and double underline.

A classified Balance Sheet includes sub-sections for Current Assets (due or run out within a year), Long-term or Fixed (Last more than a year), Current Liabilities and Long-term Liabilities. The Owner's Equity section may include only the final Capital figure if a Statement of Owner's Equity is performed; it includes the Beginning (of the period) Capital, add Net Income (or less Net Loss) and less Drawings to arrive at the final, period-ending Capital figure.

Adjustments are made at the end of the fiscal year to make account balances accurate; examples include Supplies (dr Supplies Expense, cr Supplies), Prepaid Insurance (dr Insurance Expense, cr Ppd Insurance), and Depreciation, which is the decline in value of fixed assets (dr Depreciation Expense, Auto cr Accumulated Depreciation, Auto which is a "contra" account deducted from Auto on the balance sheet asset side)

Depreciation Methods include:
Straight-line: (Cost-Salvage Value)/Years of Life
Declining-balance: (Cost - Accumulated Dep'n) x % (Gov't created)
Declining-balance uses rates given by the government called Capital Cost Allowance (CCA)
Some companies keep two sets of books, one using Straight-line for internal purposes and another for Government tax purposes using CCA.
Double-declining balance is simply twice the rate in the formula.
Sum-of-the-years Digits is another accelerated method. E.g., asset last five years, 5+4+3+2+1=15. First year's depreciation is Book Value x 5/15.
Second year Book Value x 4/15, etc.

Adjustments are first created in a new two columns in the worksheet then added to the original trial balance columns in the adjusted trial balance columns to yield a ten-column worksheet.

Closing entries are necessary to allow the year-end to be completed and a new year to begin. The entries are (REID):
Close revenues: dr Revenues (all) cr Income Summary
Close expenses: dr Income Summary cr Expenses (all)
Close Income Summary (if income): dr Income Summary cr Owner, Capital or
(if loss): dr Owner, Capital cr Income Summary
Close Drawings: dr Owner, Capital cr Owner, Drawings

The Income Summary account is temporary to store revenues and expenses.

Lastly, prepare a Post-Closing Trial Balance where the last account should be Equity and debits equal credits. Now you can begin the new fiscal year.

Standards for Financial Analysis include:
Current Ratio: Current Assets/Current Liabilities - 2 is healthy
Quick Ratio: (Cash + Receivables)/Current Liabilities which should be close to 1
Debt Ratio: Liabilities/Total Assets: which should be less than ).5
"Return On" ratios focus on profit (or net income):
Return on Equity: Net Income/Equity - higher the better.
Return on Assets: Net Income/Assets - higher the better.
Trend Analysis includes comparing financial figures from previous years: eg.
Return on Equity 1995 13% 1996 12% 1997 9% would indicate a decline in profitability.

Merchandising Accounting relates to companies that sell goods.

Merchandise Inventory account represents value of goods and is below A/R in the current asset section of balance sheet.

"Cost of Goods Sold" section is created for income statement.
Sales - Cost of Goods Sold (COGS) = Gross Profit and
Gross Profit - Expenses = Net Income

Sales may have returns, allowances and discounts.

Sample Income Statement:

Some Merchandising Company
Income Statement
Month ending September 30, 2002

Sales                                                 1000                Rev-cr
Less: Sales Returns & Allowances                60                        Rev-dr
Sales Discounts                                 40     100                Rev-dr
Net Sales                                                      900

Cost of Goods Sold

Merchandise Inventory, Beg.                            500                Asset-dr
Add: Purchases                                  600                       COGS-dr
Less: Purchase Returns & Allowances        50                             COGS-cr
Purchase Discounts                         25    75                       COGS-cr
Net Purchases                                   525
Add: Transportation-in                           15                       COGS-dr
Cost of Merchandise Purchased                          540
Cost of Merchandise Available for Sale                1040
Less: Merchandise Inventory, End                       550
Cost of Goods Sold                                             490
Gross Profit                                                   410
Expenses                                                       210
Net Income                                                     200
                                                               ===

Returns and Allowance accounts are created to record such transactions. They are contra accounts.

Discounts are given when company or customer pay early, eg. With terms such as 2/10, n30 meaning a 2% discount when payment received or paid early.
Eg. dr. Cash 98 dr. Sales Discounts 2 Cr. A/R 100

Cost of Goods Sold accounts are in between Revenues and Expenses in ledger; eg. COGS 500 & Expenses 600's.
Sales Tax is collected for the various governments and remitted:
Sale: dr. Cash/AR cr. GST or PST Payable cr. Sales
Remit: dr. GST or PST Payable cr. Cash

Delivery Expense relates to cost of delivery on sales; Exp-dr

Inventory Systems:

1. Perpetual: update inventory every time goods bought or sold.
Eg. Buy goods: Dr. Inventory (Asset) 100 Cr. Cash/AP 100
Sell goods: Dr. Cash/AR 150 Cr. Sales 150
Dr. Cost of Goods Sold 100 Cr. Inventory 100
- this method is now done easily with computers

2. Periodic: update inventory at the end of a period, record all goods bought to the Purchases account, do a physical count or estimation at the end of the period and update the inventory account in the worksheet and with adjusting entries. Move old inventory from worksheet trial balance debit column to income statement debit column; then place new inventory into income statement credit column; close! New inventory will be placed in balance sheet debit column.

Inventory Valuation Methods:

1. Average Cost: (Quantity x Cost for all purchases) / Total Quantity
2. FIFO: First-in-First-out: Earliest inventory purhased and sold included in COGS, last inventory purhased and unsold included in Ending Inventory
3. LIFO: Last-in-Last-out: Latest inventory purchased and sold included in COSG, earliest purchased and unsold included in Ending Inventory
4. Specific Identification: COGS calculated by identifying each item sold

Sales Tax is also paid on purchases of goods and is creditted agianst collection to avoid double counting. Eg.
Buying good to resale: Dr. Purchases (or Inventory) 2000
Dr. GST Recoverable (Liability) 140
Cr. A/P or Cash 2140
Companies then subtract GST Recoverable (dr balance) from GST Payable (cr balance) and send amount owing to the
Federal Government. It's possible to have an amount owing if a company pays more GST on purchases than it charges
on Sales.

Some provinces provide a commission to the retailer to collect PST:
Remit: dr. PST Payable 100 cr. Cash 97 cr. Sales Tax Commission 3 (rev)

Credit cards provide convenience but at a cost to the company:
Bank Fee: dr. Visa Discount Expense cr. Cash