Accounting - The Basics
Know the accounting Cycle
Step 1
Step 2
Step 3
Step 4
Prepare Journal
entry
Post to TAccounts
Prepare Trial
Balance
Step 5
Prepare
Adjusting Entries
Analyze
Transaction
Step 8
Step 7
Step 6
Prepare Closing
Entries
Prepare Financial
Statements
Prepare adjusted
trial balance
Where do transactions really go?
Transaction
Revenue
XXXX
Accounts Receivable
XXXX
Cost of Goods Sold
Inventory
XXXX
XXXX
Understand this and you will never go wrong…
Income Statement
Revenues
Cost of Goods Sold
Gross Margin
Other Expenses
Other Income
Net Income
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
Balance Sheet
Assets
Accounts Receivable
Inventory
Total Assets
XXXX
XXXX
XXXX
Liabilities
Bank Loan
XXXX
Shareholders Equity
Common Share
XXXX
Retained Earnings
XXXX
Total Liabilities
And Shareholders Equity XXXX
Practice, Practice, & More Practice….
Source: http://planet.tvi.edu/mcollins/Handouts.htm
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Accounting – Not So Basic
Adjusting entries and why you need them
Why do we need adjusting entries?
Canadian accounting standards follows the Accrual basis of accounting
So what does this mean to you?
Basically, you need to understand and know how to apply two principles:
Matching Principle – Expenses have to be recorded in the period in which they
helped earned revenue.
Revenue Recognition Principle – Revenue can only be recognized when it is:
1) Earned, 2) Measurable, 3) Collectable
This leads to Adjusting Entries relating to Accruals and Deferrals.
Accruals
Deferrals
Recognition of expenses or revenue that
have occurred without the actual
transactions taking place
The recognition of revenue or expense is
postponed even though the actual
transaction has taken place.
Accrual Examples
• Salaries yet to be paid
• Past-due Expenses
• Interest Income or Expense
• Unbilled Revenue
Deferral Examples
• Prepaid Insurance or Rent
• Supplies
• Depreciation / Amortization
• Unearned Revenue
Other Principles you may want to be familiar with
Historical Cost Principle – Most Assets and Liabilities are recorded at their historical cost, in
most cases this is the purchase price.
Lower of Cost or Market (LCM) –Inventory is recorded at the lower of the Cost or Market Value
Contra Asset – It is a Negative Asset account, used to reduce an asset accounts. For Example,
Accumulated Amortization is netted out against a Capital Asset Account
General Course Tips
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Start early: there is a lot of
material to digest
Understanding the basics is key,
accounting builds on itself
Don’t try to memorize,
understand the material –
Ask yourself why?
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Ask for help, the school has
many resources available
Perfect study and test-writing
techniques, they’re just as
important
Study smarter, not harder
Finally, practice, practice and
more practice
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