Accounting 20
Module 1
Lesson 1
Accounting 20
1
Lesson 1
Accounting 20
2
Lesson 1
Lesson 1 - Review of Accounting 10 (Lessons
1 through 11)
Introduction
Accounting 20 assumes an understanding of accounting concepts covered
in Accounting 10. A comprehensive review of the accounting cycle, as well
as other important topics covered in Accounting 10, will be given in
Lessons 1 and 2. These lessons should prepare you for the rest of this
course.
As you progress through these two lessons, references will be given to
further study content you may need or wish to undertake.
Objectives for the Lesson
To review:

using the Accounting Equation

preparing a Balance Sheet

analyzing Transactions

journalizing

posting from the Journal to the General Ledger

preparing a Trial Balance

interpreting a Balance Sheet
Accounting 20
3
Lesson 1
Accounting 20
4
Lesson 1
The Accounting Equation
People go into business to make a profit. In order to make a profit, the business requires
economic resources as well as human resources.
While human resources are the people who work in the business, economic resources are
those items which have cash value and are necessary to establish a business. Some
examples include cash, office supplies, office equipment, building and land. These
represent what the business owns; they are called the Assets of the business.
Claims against the assets are called Equities. These claims may be made by creditors or
by the owner of the business.
Claims of the creditors against the assets are called Liabilities. These are the debts or
unpaid obligations of a business. They usually consist of accounts or bills which have
fallen due but which are not paid (Accounts Payable). Liabilities are the debts of the
business or what the business owes.
The owner’s equity or interest in the business is called Capital which is the claim of the
owner against the assets. This equity is based on what the owner has invested in cash
and other assets into the business.
If you take what the business owns, and subtract what it owes, the difference will be the
owner’s interest in the business. Capital is the owner’s net worth.
Thus we can show:
What is Owned
=
What is Owed
+
Owner’s Equity
Economic Resources
=
Creditor’s claims
+
Owner’s Claim
ASSETS
=
LIABILITIES
+
CAPITAL
A
=
L
+
C
A = L + C is known as the Accounting Equation.
Liabilities are listed before the owner’s equity on the right side of the equation. The
claims of the creditors take precedence over those of the owner. For example--if the
Accounting 20
5
Lesson 1
business were to be declared bankrupt (incapable of paying its debts)--then in any sale of
the assets, the creditors’ claims on the total assets would have to be satisfied before the
claims of the owner.
The Balance Sheet
One way of determining the profitability of a business is to compare the net worth of the
proprietor at the beginning and at the end of a period of time.
In order to make such a comparison, it is necessary to produce a statement which shows
the financial position of an individual or a business by means of a formal statement called
a balance sheet. The balance sheet reports assets, liabilities and owner’s equity at a
certain date.
In addition, a balance sheet is simply the fundamental accounting equation in tabular
form. The left-hand total of the balance sheet is always equal to the right-hand side.
When the totals of the equation are equal, they are "in balance". For further information,
refer to pages 14 to 19 of the text.
An example of a formal balance sheet statement follows:
Sunshine Motel
Balance Sheet
As At December 31, 20__
Assets
Cash
Supplies
Liabilities
$ 5 000.00
800.00
Accounts Payable:
Acme Plumbing Supplies
Furniture & Fixtures
5 000.00
Bank Loan Payable
Equipment
3 000.00
Total Liabilities
$ 2 000.00
3 000.00
$ 5 000.00
Owner’s Equity
T, SummersCapital
Total Assets
Accounting 20
$13 800.00
6
Total Liabilities & Owner’s
Equity
8 800.00
$13 800.00
Lesson 1
The T Account
The T account derives its name from its shape. The T account
is the simplest form of a ledger account and is a convenient
way to analyze a transaction before journalizing.
In its simplest form, an account has three main elements a:
•
title
•
debit side (left)
•
credit side (right)
An amount entered on the left-hand side is called a debit entry.
An amount entered on the right-hand side is called a credit entry.
The words debit and credit do not mean increase and decrease or good and bad. They
simply mean left and right respectively.
Increase/Decrease Rules for Assets, Liabilities and Capital
Balance Sheet Accounts
Assets
Balance
+
Liabilities
–
Balance
+
–
Capital
–
Balance
+
The increase side of any account is the side that is the normal balance side--the same
side that the account appears in the beginning accounting equation. The decrease side
of an account is the side opposite to that on which the account appears in the accounting
equation.
Accounting 20
7
Lesson 1
Assets usually have debit balances:

To increase an asset--debit

To decrease an asset--credit
Liabilities usually have credit balances:

To increase a liability--credit

To decrease a liability--debit
Capital always has a credit balance:

To increase capital--credit

To decrease capital--debit
Revenue is an inflow of assets resulting from the sale of goods or services. Revenue is an
increase in capital resulting from business operations. The most important of these is the
Sales account.
Expenses are costs incurred by a business in earning revenue. Expenses are a decrease in
capital resulting from business operations. Examples include Salaries Expense, Rent
Expense, Utilities Expense, and so on.
Increase/Decrease Rules for Revenues and Expenses
Income Statement Accounts
Revenue
–
Accounting 20
Expenses
Balance
+
Balance
+
8
–
Lesson 1
Revenues have credit balances:

To increase a revenue--credit

To decrease a revenue--debit
Expenses have debit balances:

To increase an expense--debit

To decrease an expense--credit
Capital increases from:
•
the realization of net income by the business
•
additional investment by the owner of the business
Capital decreases as a result of
•
expense transactions
•
withdrawals of assets made by the owner
The Income Statement
Periodically a business needs to evaluate its performance. The statement that shows the
revenues and expenses and the resultant net income or net loss is the income statement.
Speedy Cleaning Service
Income Statement
For Year Ended December 31, 20__
Revenue
Cleaning Income
$14 900.00
Expenses
Advertising Expense
$300.00
Salaries Expense
850.00
Utilities Expense
750.00
Total Expenses
1 900.00
Net Income
Accounting 20
$13 000.00
9
Lesson 1
Net income results when revenue is greater than expenses.
Net loss results when expenses are greater than revenue.
A simple income statement consists of four main parts:
•
The heading shows the who, what, and when of the statement. The when for an
income statement shows a period of time rather than one specific date.
•
The revenue section lists all of the incomes for the period.
•
The expense section lists all of the expenses for the period.
•
Net Income (or net loss) shows the difference between the total revenue(s) and the
total expenses.
For more information on the income statement, refer to pages 46 to 50 of the text.
As a result of the calculation of net income/loss in the income statement, changes must be
made in owner’s equity to reflect the true amount of the account.
Speedy Cleaning Service
Balance Sheet
As At December 31, 20__
Assets
Cash
Accounts Receivable
Cleaning Supplies
Liabilities
$3 000.00
1 500.00
400.00
Cleaning Equipment
2 000.00
Automobile
3 100.00
Apex Supply Co.
$800.00
Bank Loan Payable
2 300.00
Total Liabilities
$ 3 100.00
Owner’s Equity
Building
12 500.00
S, Taylor Capital Jan. 1
Land
18 000.00
Net Income
Less Drawings
$26 000.00
13 000.00
1 600.00
Net Increase in Capital
11 400.00
S, Taylor Capital, Dec. 31
Total Assets
$40 500.00
Total Liabilities & Owner’s Equity
37 400.00
$40 500.00
The new capital figure is equal to the old capital figure plus the net income, less the
drawings.
If a loss had occurred, the new capital would be equal to the old capital less the net loss,
less the drawings.
Accounting 20
10
Lesson 1
Net Income
Net Loss
Old Capital
Old Capital
+ Net Income
– Net Loss
– Drawings
– Drawings
= Net Capital
= New Capital
For more information on the detailed balance sheet, refer to pages 50 to 53 of the text.
Recording Capital Transactions
Whenever the owner invests cash into her/his business, Cash and Capital are both
increased. As an example, Mary Saks invests $30 000 into her business.
Cash
Mary Saks Capital
30 000
30 000
Drawings is a capital account. Whenever the owner of the business takes an asset out of
the business for personal use, the Drawing account is debited. As an example, Mary Saks
withdraws $2 000 from her business for personal use.
Mary Saks, Drawings
Cash
2 000
2 000
.
Accounting 20
11
Lesson 1
Analyzing Common Transactions
To analyze any transaction before journalizing, follow these steps:
Step 1:
What accounts are involved in the transaction?
Step 2:
Make the appropriate number of T-accounts.
Step 3:
What type of accounts are they? (assets, liabilities, owner’s equity)
Step 4:
Decide whether there is an increase or decrease in each account and apply
the rules given above.
Step 5:
Journalize the T accounts.
Study the six entries given below and apply the five analysing steps
•
Bought a new desk for $500 cash
(Asset)
Office Furniture
(Asset)
Cash
500
•
500
Sold an old desk for $200 cash
Cash
Office Furniture
200
Accounting 20
200
12
Lesson 1
•
Received $1 000 cash from revenue
Cash
Revenue
1 000
•
1 000
Paid telephone bill, $150 cash
Telephone Expense
Cash
150
•
150
Owner, T. Summers, invested an additional $5 000 cash
Cash
T. Summers, Capital
5 000
•
5 000
Owner, T, Summers withdrew $400 cash for personal use
T. Summers, Drawings
Cash
400
400
For more information, refer to pages 24 - 29 and 33 - 39 of the text.
Accounting 20
13
Lesson 1
Opening Entry
Once the financial position of a business is determined in the form of a balance sheet,
there is a need to record it in permanent form.
The journal is the book of original entry. The journal is a record in which accounting
information is recorded in chronological order.
A source document is the business paper from which a journal entry is made. These may
include sales slips, receipts, cash register tapes, cheque stubs, invoices, purchase orders,
or vouchers.
An opening entry is the entry that records the beginning balance sheet in the general
journal.
Posting to the Ledger
An efficient method must be used to record day-by-day changes which affect a company’s
financial position.
An account is a form used by business to sort and summarize changes caused by
transactions.
A ledger is a group of accounts arranged in account number sequence.
The chart of accounts is a list of account titles and numbers showing the location of the
accounts in the ledger.
Opening an account is writing the account title and number on the heading of an account
form.
Posting is transferring information from journal entries to ledger accounts. Posting sorts
the information, so that all activities affecting a single account are brought together in one
place.
Post referencing in the journal indicates the account number to which the entry was
posted in the ledger. Similarly, the post reference column in the ledger shows the page
number of the journal to which the entry was posted.
Remember: post referencing is done only when an item in the journal is actually posted
to a ledger account.
Accounting 20
14
Lesson 1
A detailed example follows of the journalized opening entry being posted into the ledger
account for the asset, Cash. This example also shows the opening entry as it would
appear in the ledger for a liability account, Bank Loan Payable; and a capital account, T.
Summers, Capital.
General Journal
DATE
20__
Dec. 31
Page 1
POST
REF.
EXPLANATION
Cash
DEBIT
11
CREDIT
5 000.00
Supplies
800.00
Furniture & Fixtures
5 000.00
Equipment
3 000.00
Acme Plumbing Supply
2 000.00
Bank Loan Payable
22
3 000.00
T. Summers, Capital
31
8 800.00
Dec. 31, balance sheet
Account Cash
DATE
20__
Dec. 31
Account No. 11
EXPLANATION
Balance
POST
REF.
DEBIT
GJ1
CREDIT
5 000.00
BALANCE
5 000.00
(Dr)
Account Bank Loan Payable
DATE
20__
Dec. 31
EXPLANATION
Balance
Account No. 22
POST
REF.
DEBIT
GJ1
CREDIT
3 000.00
BALANCE
3 000.00
(Cr)
Account T. Summers, Capital
DATE
20__
Dec. 31
EXPLANATION
Balance
Account No. 31
POST
REF.
DEBIT
GJ1
CREDIT
8 800.00
BALANCE
8 800.00
(Cr)
Accounting 20
15
Lesson 1
Transactions
A transaction is a normal business activity that changes assets, liabilities, or owner’s
equity. Every time a transaction takes place, two or more of the basic elements in the
accounting equation change.
Double-Entry Accounting
The system of recording accounting transactions most commonly used today is known as
the "double-entry system". Very simply it means:
For every debit entry to one account
there is a corresponding credit entry to
another account.
Analyzing Transactions into Debit and Credit Parts
Account balance is the difference between the totals of the amounts recorded on the two
sides of an account.
Debit balance is the account balance determined when the total debits exceed the total
credits.
Credit balance is the account balance when the total credits exceed the total debits.
Temporary owner’s equity accounts are revenue and expense accounts used to store
information until they are transferred to the capital account at a later date.
Accounting 20
16
Lesson 1
Journalizing
The process of recording transactions in a two-column general journal can be referred to as
recording, entering, or journalizing.
Combined entry is a journal entry which includes more than two lines. An example would
be the opening entry from a balance sheet. Another example would be:
Bought office equipment worth $27 000.00 from Lang’s Furniture Company. Paid
$15 000.00 cash; the balance is to be paid on 60 days.
The general journal entry would be:
General Journal
DATE
20__
Page 1
POST
REF.
EXPLANATION
Office Equipment
DEBIT
CREDIT
27 000.00
Cash
15 000.00
Accts. Pay./Lang’s Furniture
12 000.00
Purchased office equipment on account.
Analyzing the transaction: the asset Office Equipment is increased, so it is debited; the
asset Cash is decreased, so it is credited; and the liability Accounts Payable/Lang
Furniture is increased so it is credited.
When preparing journal entries, remember that total debits must equal total credits for
every transaction. In other words, the Double Entry Accounting Rule must apply.
For more information, refer to pages 116 to 123 of the text.
Accounting 20
17
Lesson 1
Posting From the Journal to the Ledger
Once the debits and credits have been recorded in the journal, accounting information
must be transferred from the journal to the individual accounts in the ledger. The ledger
is a group or file of accounts. The process is called posting.
The importance of the post reference column is that it not only cross references the
journal to the ledger; but, it also serves as a record of those entries that have, or have not,
been posted. Do not complete the P. R. column in the journal until you have completed
posting that entry to the ledger. After an interruption, you will be able to return to your
work quickly and accurately by examining the Post Ref. column.
For more information, refer to pages 127 to 138 of the text.
The Trial Balance
The Trial Balance is a listing of all the general ledger accounts and their balances on the
stated date to prove the mathematical accuracy of the ledger by showing:
Total Debit Balances = Total Credit Balances
For an example of how a trial balance is produced from a ledger, refer to page 140 to 147
of the text.
Self Test
1.
Problem 1 attached
2.
Problem 2 attached
Accounting 20
18
Lesson 1
Problem 1
T. Turner established the Financial Consulting Firm by investing $12 000 cash on June
1. After operating the business for twelve months, Bell reported items within his final
accounting equation as follows:
Cash
Accounts Receivable
Furniture
Office Equipment
Accounts Payable
Bank Loan Payable
T. Turner, Capital
T. Turner, Drawing
Fees Earned
Expenses
$12 600
2 300
3 700
4 800
3 000
2 000
12 000
12 000
68 000
49 600
In addition, he revealed as his accounts receivable the following customers and their
amounts owing to the business as at June 1:
W. Edwards
M. Jackson
B. McMillan
$
500
800
1 000
For individual amounts owing to creditors, he reported the following:
Western Furniture Co.
Wildwood Office Suppliers
$ 1 900
1 100
Finally, he listed the following individual expenses incurred during his accounting year:
Advertising Expense
Miscellaneous Expense
Office Supplies Expense
Rent Expense
Salaries Expense
Telephone Expense
Utilities Expense
Accounting 20
600
360
1 830
7 200
$ 37 575
110
1 925
19
Lesson 1
Instructions:
(a)
Set up an expanded accounting equation to classify the financial data for this
business.
(b)
Prepare an income statement for the accounting period.
(c)
Prepare a related balance sheet (account form) as at the end of the accounting
period.
Problem 2
S. Small is a practising physician and you have been asked to maintain the doctor’s
accounting records for the next three weeks while the regular bookkeeper is on holidays.
Your duties will commence on July 13, 20--.
Instructions:
(a)
Open the T-account ledger for the doctor’s accounting records. The balances are as
at July 13, 20--: Note: All balances below are normal account balances.
Cash
Accts. Rec./T. Mack
Accts. Rec./Y. Rawlings
Accts. Rec./R. Robbins
Office Supplies on Hand
Medical Supplies on Hand
Office Equipment
Medical Equipment
Accts. Pay./Obstanski Office Suppliers
Accts. Pay./Bluevale Medical Supply House
Bank Loan Payable
Medical Library
S. Small, Capital
S. Small, Drawing
Medical Services Revenue
Rent Expense
Telephone Expense
Heat & Cooling Expense
Utilities Expense
Salaries Expense
Accounting 20
20
$ 1 000
50
0
80
250
600
5 000
12 000
100
5 000
1 500
3 000
13 630
6 000
42 000
4 800
250
1 300
900
27 000
Lesson 1
(b)
Analyze each of the following transactions and record them in the T-accounts
established for S. Small, M.D. for the month of July. Identify each transaction by
date.
July 13
S. Small saw patients in the office during the day and received cash
totalling $600.
14
Paid the monthly rent of $600 by cheque.
14
S. Small saw patients in the office during the day and received cash
totalling $500.
15
Bought office supplies from Obstanski Office Suppliers on account,
$200.
16
S. Small saw patients in the office during the day and received cash
totalling $700.
17
Paid the two employees their weekly pay of $270 each.
20
S. Small saw patients in the office during the day and received cash
totalling $400.
21
S. Small saw Y. Rawlings at the office and billed her $80.
22
Paid Obstanski Office Suppliers in full. (Check the account for the
balance owing.)
22
S. Small performed services for patients during the day and received
cash totalling $300.
23
Bought additional medical equipment for the office from Bluevale
Medical Supply House on account, $2 000.
24
Made a partial payment to the bank on the bank loan, $500.
24
Received on account from Y. Rawlings, $50.
24
S. Small performed services for patients during the day and received
cash totalling $600.
24
Paid the telephone bill for the office, $30.
24
Paid the two employees their weekly pay. Total cash issued, $540.
Accounting 20
21
Lesson 1
July 27
S. Small saw patients in the office during the day and received cash
totalling $400.
28
S. Small saw patients in the office during the day and received cash
totalling $800.
29
S. Small saw patients in the office during the day and received cash
totalling $200.
29
Paid the heating and cooling expense bill, $40.
30
S. Small saw patients in the office during the day and received cash
totalling $1 200.
31
S. Small had you pay her personal telephone and utilities bills
totalling $230.
31
Paid the utilities bill for the business, $220.
31
Received in the mail payment in full from T. Mack.
31
Paid $1 000 on account to Bluevale Medical Supply House.
31
Paid the two employees their weekly pay. Total cash issued, $540.
(c)
Calculate the balance of each account at the close of business on July 31. Show
each balance on the correct side of the account.
(d)
Prepare a summary of ledger account balances as at July 31, 20--, to prove that the
accounting equation is in balance within the ledger. (See page 78 of the text for an
example.)
Accounting 20
22
Lesson 1
Problem 1
Accounting 20
23
Lesson 1
Problem 1
Accounting 20
24
Lesson 1
Problem 2
Accounts Receivable/
T. Mack
Accounts Receivable/
Y. Rawlings
Accounts Receivable/
R. Robbins
Office Supplies
on Hand
Office Equipment
Medical Supplies
on Hand
Medical Equipment
Medical Library
Accounts Payable/
Obstanski Office Supplies
Cash
Accounting 20
25
Accounts
Payable/Bluevale Medical
Supply House
Lesson 1
Bank Loan Payable
S. Small, Capital
Medical Services Revenue
Rent Expense
Telephone Expense
Heat Expense
Utility Expense
Salaries Expense
S. Small, Drawings
Accounting 20
26
Lesson 1
Accounting 20
27
Lesson 1
Answers For Self Test
Financial Consulting Firm
Balance Sheet
as at May 31, 20__
Assets
Cash
Accounts Receivable:
W. Edwards
M. Jackson
B. McMillan
Furniture
Office Equipment
Liabilities
$ 12 600
$ 500
800
1 000
Accounts Payable:
Western Furniture Co.
Wildwood Office Supply
Bank Loan Payable (on demand)
2 300
3 700
4 800
Total Liabilities
Owner’s Equity
T. Turner, Capital
Add: Net Income
Deduct: T. Turner, Drawing
Total Assets
$1 900
1 100
_______
$23 400
3 000
$2 000
$5 000
$12 000
18 400
30 400
12 000
Total Liabilities and Owner’s Equity
18 400
$23 400
Problem 1
Assets
=
Liabilities
+
Owner’s Equity
$12 600 + $2 300 + $3 700 + $4 800 = $2 000 + $3 000 + $12 000 +
$68 000 – $49 600 – $12 000
$23 400
=
$5 000
+
$18 400
$23 400
=
$23 400
Accounting 20
28
Lesson 1
Financial Consulting Firm
Income Statement
For the Month Ended May 31, 20__
Revenue:
Fees Earned
$68 000.00
Expenses:
Rent Expense
Telephone Expense
Office Supplies Expense
Salaries Expense
Utilities Expense
Advertising Expense
Miscellaneous Expense
$7 200.00
110.00
1 830.00
37 575.00
1 925.00
600.00
360.00
Total Expenses
49 600.00
Net Income
Accounting 20
$18 400.00
29
Lesson 1
Problem 2
Accounts Receivable/
T. Mack
Cash
20__
July 13
13
14
16
20
22
24
24
27
28
29
30
31
1 000
600
500
700
400
300
50
600
400
800
200
1 200
50
20__
July 13
17
22
24
24
24
29
31
31
31
31
Balance 2 260
Office Equipment
20__
July 13
5 000
Balance 5 000
600
540
300
500
30
540
40
230
220
1 000
540
20__
July 13
50
Balance
0
20__
July 13
Accounts Receivable/
Y. Rawlings
50
20__
July 13
21
0
80
Balance
30
Accounts Receivable/
R. Robbins
20__
July 13
80
Balance
80
600
Balance
600
50
Office Supplies
on Hand
Medical Supplies
on Hand
20__
July 13
20__
July 24
20__
July 13
15
250
200
Balance
450
Medical Equipment
20__
July 13 12 000
15 2 000
Balance 14 000
Medical Library
20__
July 13
3 000
Accounts Payable/
Obstanski Office Supplies
Accounts
Payable/Bluevale Medical
Supply House
20__
July 22
20__
July 21
300
20__
July 13
15
100
200
0
Balance
0
Balance 3 000
Balance
Accounting 20
30
Balance
1 000
0
20__
July 13
23
5 000
2 000
Balance 6 000
Lesson 1
Bank Loan Payable
20__
July 24
500
20__
July 13
S. Small, Capital
1 500
20__
July 13 13 630
Balance 1 000
Balance 13 630
S. Small, Drawings
20__
July 13
31
6 000
230
Balance 6 230
Medical Services Revenue
20__
July 13 42 000
13
600
14
500
16
700
20
400
21
80
22
300
24
600
27
400
28
800
29
200
31 1 200
Balance 47 780
Rent Expense
20__
July 13
14
Telephone Expense
Heat Expense
4 800
600
20__
July 13
24
250
30
20__
July 13
29
Balance 5 400
Balance
280
Balance 1 340
Utility Expense
20__
July 13
29
900
220
Balance 1 120
1 300
40
Salaries Expense
20__
July 13 27 000
17
540
24
540
31
540
Balance 28 620
Accounting 20
31
Lesson 1
S. Small, M.D.
Summary of Ledger Account Balances
as at July 31, 20__
Total Debit (Left) Balances
Cash
Accts. Rec./T. Mack
Accts. Rec./Y. Rawlings
Accts. Rec./R. Robbins
Office Supplies on Hand
Medical Supplies on Hand
Office Equipment
Medical Equipment
Medical Library
S. Small, Drawing
Rent Expense
Telephone Expense
Heat & Cooling Expense
Utilities Expense
Salaries Expense
Total Debits
Accounting 20
Total Credit (Right) Balances
$ 2 260
0
30
80
450
600
5 000
14 000
3 000
6 230
5 400
280
1 340
1 120
28 620
Accts. Pay./Obstanski Office Suppliers $
0
Accts. Pay./Bluevale Medical Supply
6 000
Bank Loan Payable
1 000
S. Small, Capital
13 630
Medical Services Revenue
47 780
______________
_____________
$ 68 410
Total Credits
32
$ 68 410
Lesson 1