Unit 1 - Fundamentals of Business

● Transactions cause a change in financial position

● Cost Principle
○ The cost principle requires that assets be recorded at the cash amount (or the
equivalent) at the time that an asset is acquired
● Fair Market Principle
○ the amount for which the asset could be bought or sold, in a transaction
between a willing buyer and a willing seller
● Business Entity Principle
○ The business entity concept states that the transactions associated with a
business must be separately recorded from those of its owners or other
businesses

Unit 2 - Recording Transactions

● Trial balances may be incorrect, even though dr=cr

Unit 3 - Owner’s Equity and Accounting Principles

●
● Ending Equity = Beginning Equity + ​Owner, Investment​ + Revenue - Expenses (Or
group and say Net Income/Loss) - Owner, Drawings
● Four Components of O/E: Investment, Drawings, Revenue, Expenses
● Accrual Basis of Accounting
○ Follows rev rec and matching, cash doesn’t need to exchange hands
● Cash Basis of Accounting
 ○ Revenue is only recorded when cash exchanges hands

Unit 4 - Recording Journal Entries

● Principle of Objectivity
○ Accounting is recorded on the basis of objective evidence (all people looking
at evidence will reach the same conclusion)
○ Transactions are based on fact, not opinion
● Opening Entry: Debit all assets, and then Credit Owner’s Equity
● Four Types of Source Documents
○ Cash Sales Slip (Dr. Cash, Cr. Sales)
○ Sales Invoice (Dr. A/R, Cr. Sales)
○ Purchase Invoice (Dr. Asset or Expense, Cr. Cash or A/P)
○ Cheques (could be multiple, treat as cash payment for receipt of invoice)

Unit 5 - Adjusting & Closing Entries

● Journal Entries
○ Done on a daily basis for regular business transactions
● Adjusting Entries:
○ Done at the end of a period for repetitive, immaterial transactions that are too
time consuming to record daily
○ Entries recorded to ensure accounting records are accurate and up-to-date at
period-end.
○ Specifically ensures proper following of rev rec and matching principles.
○ Recorded at period-end. Each entry affects one Balance sheet account and one
Income statement account.
○ Two Types: Estimates, Prepaid Expenses
○ Estimates:
■ Depreciation
● Straight-Line Method - carrying amount of a fixed asset evenly
over its useful life
○ Annual depreciation Exp. = Cost (value) / Useful Life
● Declining Balance Method
○ Net Book Value = Cost of asset - Accumulated
depreciation
○ Annual depreciation = NBV (beginning of period) x
Rate (1/Useful life)
● Entries
○ Dr. Depreciation Expense
○ Cr. Accumulated Depreciation - _______
○ Note: Accumulated dep’n is a contra-asset
○ Prepaid expenses
 ■ Supplies Expense
■ Prepaid Insurance
■ Prepaid Rent
■ Initial Entry: Debit Prepaid/Supplies, Credit Cash
■ Adjusting Entry: Debit Expense, Credit Prepaid/Supplies
● Be careful when assessing how much of the prepaid you
actually used up (eg; you purchased 3 months of rent, but only
one month has passed)
● Closing Entries
○ Final entries recorded at the end of a period to close temporary accounts and
update final owner’s equity
○ Ensure proper following of time period principle
○ Update owner’s equity balance on the balance sheet
○ Nominal (Temporary) Accounts
■ Only relate to a single accounting period
■ They are closed
■ Include all income statement accounts and drawings
○ Real (Permanent) Accounts
■ May cross over into more than one accounting period
■ Not closed
■ Includes all balance sheet accounts (except drawings)
○ Actual Entries:
■ Revenue
● Dr. Revenue, Cr. Owner, Capital ​or​ Income Summary
■ Expenses
● Dr. Owner, Capital ​or ​Income Summary, Credit Expenses
■ Drawings
● Dr. Owner, Capital ​or​ Income Summary, Cr. Owner, Drawings

● Principle of Materiality
○ any material (important) information that could affect the decisions of the
users of financial statements must be included when the financial statements
are prepared

● Principle of Conservatism
○ Where there are acceptable alternative accounting treatments for an item,
accountants must choose the one that will result in lower net income and net
assets.

Unit 6 - Accounting in Merchandising Businesses

● How do you know if it’s periodic or perpetual by looking at the transaction?
○ Cost detail must be provided for perpetual system
 ○ If not, periodic
● Choosing Between Periodic and Perpetual Inventory Method:
Perpetual: Periodic:

● Sales transactions include cost of

merchandise details
● Only inventory account is used in ● Temporary accounts used for
relation to purchases purchases
● Sales also include sales, sales R & ● Sales include Sales, Sales R & A,
A, sales discount + COGS & Sales discounts
inventory ● Requires a formula to calculate
● No formula needed to calculate COGS
COGS
○ But a loss of inventory will
arise a physical count value
is less than inventory G/L
value
● HST payable applies on sales
● HST payable applies on sales transactions
transactions ● HST Refundable applies on
● HST Refundable applies on purchases transactions
purchases transactions

Formula to calculate net income in a merchandising business

● Revenue - COGS = Gross Profit - Expenses = Net Income/Loss

HST
● HST Payable is a liability since it is money collected by the business from the
customer that is owed to the government
○ Eg: Dr. Cash, Cr. Sales and HST Payable
● HST Refundable is a contra-liability since the government reimburses businesses for
HST paid on purchases (government only wants to tax the final customer)
○ Eg; Dr. Purchases and HST Refundable, Cr. Cash
● If HST Payable > HST Refundable
○ Dr. HST Payable, Cr. Cash and HST Refundable
● If HST Refundable > HST Payable
○ Dr. Cash and HST Payable, Cr. HST Refundable

Inventory Shortages:
● Dr. Inventory Loss (or COGS)
● Cr. Inventory
NOTE: ​Sales are the same in both periodic and perpetual since they don’t affect inventory,
but there are added steps in Perpetual (See below)

Sale Return of Merch

● Dr. Sales R&A
● Cr. Cash/AR
● Sales R&A acts as a contra revenue account, therefore dr balance

Sales Discounts
● Only apply to credit sales when cheque for payment is received within discount
period (3/10, n/30 means 3% discount given if payment received in 10 days, with the
payment being due without discount in 30 days)
● Dr. Cash, Sales Discount
● Cr. A/R
● Acts as contra revenue

Net sales = Sales - Sales R&A - Sales Discounts

Delivery Expense
● Cost of delivering merchandise to customers
● Not a part of COGS (it’s an operating expense)
● Dr. Delivery Expense, Cr. Cash or A/P

Periodic
● Purchase
○ Dr. Purchase, Cr. Cash or A/P
● Purchases R&A acts as a contra-purchase account, (credit balance)
○ Initially: Dr. Purchases, Cr. A/P or Cash
○ Dr. Cash or A/P, Cr. Purchase R&A
● Purchases Discounts acts as a contra-purchase account, (credit balance)
○ Initially: Dr. Purchases, Cr. A/P
○ Dr. A/P, Cr. Purchase Discounts and Cash
● Transportation-In
○ Cost incurred by the company to have merchandise shipped to them from
suppliers (NOT THE SAME AS DELIVERY EXPENSE which is shipping to
customers)
○ Has a debit balance since it increases the cost of a purchase
○ Dr. Transportation-In, Cr. Cash or A/P
● Calculating COGS in Periodic
○ Beginning Inventory
○ Add: Purchases
 ○ Less: Purchases R&A
○ Purchase Discounts
○ Add: Transportation-In
○ = COMAS
○ Less: Ending Inventory
○ = COGS
● Purchases, Purch. R&A, Purch. Discounts, and Transpo-in are all temporary accounts
opened to track inventory in a periodic system

Perpetual
● Purchase
○ Dr. Inventory, Cr. Cash or A/P
● Purchase R&A
○ Dr. Cash or A/P, Cr. Inventory
● Purchase Discount
○ Dr. A/P, Cr. Cash and Inventory
● Sales transactions are the same as periodic but
○ SALE: Dr. COGS, Cr. Inventory
○ R&A: Dr. Inventory, Cr. COGS
○ Discount: The same since it doesn’t affect inventory***

Unit 7 - Cash Controls

● Entries for Petty Cash:
○ Opening a Petty Cash:
■ Dr. Petty Cash
■ Cr. Cash
○ Replenishing a Petty Cash fund through getting rid of vouchers:
■ Dr. Expense, etc
■ Cr. Cash
○ Increasing Petty Cash:
■ Dr. Petty Cash
■ Cr. Cash
● Entries for Cash Short & Over
○ Cash on hand - Cash Float (change fund) - sales = Cash Over
○ Sales - Cash on Hand - Cash Float (change fund) = Cash Short
● If Cash > Sales, Dr. Cash, Cr. Cash Short & Over and Sales
● If Sales > Cash, Dr. Cash, Cash Short & Over, Cr. Sales

Unit 8 - Financial Analysis

● Financial analysis, including ratios, will only be seen in the multiple choice section
 Comparative Statement Analysis

- Dollar amounts
- Compares balances in accounts from one year to another
- Can be used to compare with other businesses

Condensed Statement Analysis

- Compares amount of the key items on statements to a base figure (net sales for
income statement and total assets for balance sheets)
- Shows the percentage of what makes up the base figure
- Divide dollar amount by base figure and convert to percentage

Common Size Statements

- A type of Condensed statement analysis that only shows percentages without

dollar amounts

Trend Analysis

- Compares the financial change in the business over several years

- Compares everything to a base year and shows if the amount has increased or
decreased
- Used to forecast future results
- Shows a percentage change in relation to the base year

Liquidity Ratios

- Working Capital (dollar figure) current Assets - current Liabilities

- Current Ratio (Ratio) Current assets / Current Liabilities
- Quick Ratio (Ratio) Quick Current assets / current liabilities
- Inventory Turnover (times per year) COGS / average inventory (Beg. Inv. +
end. Inv) / 2
- Accounts receivable collection period (days) average A/R / credit sales (365)

Solvency Ratios

- Equity Ratio (%) Total owner’s equity / total assets

- Debt Ratio (%) Total Liabilities / total assets

Profitability Ratios

- Rate of return on net sales (%) net income / net sales

- Rate of return on Owner’s Equity (%) net income / average owner’s equity

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● AJEs
 ○ Depreciation
○ Closing Entries
● Study Inventory journal entries stuff onwards
○ Inventory Periodic and PErpetual
○ HST
○ Petty Cash Entries
○ Cash Short and Over
○ Debit Memos
○ Credit Memos
● Study Owner’s Equity stuff
○ Beginning plus all the stuff and ending
● No Bank Rec (M/C fair game)
● No cash journals
● No financial statements of any sort to be prepared
○ Doesn’t mean he won’t ask how things impact income, impact of ___ on trial
balance, etc.
● No unit 8 stuff, other than on multiple choice (Financial analysis, including ratios,
will only be seen in the multiple choice section)
● Accounting principles
● No posting to ledger
● No worksheets (Doesn’t mean AJEs won’t be on, Doesn’t mean no M/C about
worksheets)
● Pay attention if he asks for no explanations in journal entries