Class Notes (838,987)
Canada (511,153)
Commerce (1,911)
Lecture 3

Class Notes - WEEK 3 (Sept 23, 24, 26) - COMM 2AA3
Premium

6 Pages
164 Views
Unlock Document

Department
Commerce
Course
COMMERCE 1BA3
Professor
Aadil Merali Juma
Semester
Fall

Description
LECTURE 3 COMM 2AA3 The Accounting Cycle and Income Statement September 23, 2013 Accounting Information System  I, F, O = Investing, Financing, Operating The Accounting Cycle  Daily Activities  Accounting transaction – see whether it affect assets, liabilities or shareholders equity; choose whether to deal with transaction Transaction Analysis: Business Transactions vs. Accounting Transactions  Business transactions that affect the accounting equation are also accounting transactions  There are two sets of transactions – business transactions and accounting transactions o Accounting transactions – a subset of business transactions; those that affect the elements of financial statements; not al business transactions meet the recognition criteria o All accounting transactions are business transactions; not all business transactions are accounting transactions o Eg/ Purchase of equipment for cash – accounting transaction o Eg/ Hiring or firing of employees – business transaction; if there is a signing bonus or severance payment, accounting transaction o Eg/ Sale of merchandise on account – accounting transaction o Eg/ Signing a sales contract – business transaction  Three Steps 1. Determine affected accounts and classify them (at least two accounts should be affected) a. Revenues and gains affect RE (retained earnings) positively b. Expenses, losses and dividends affect RE negatively 2. Determine the amount of change on each affected account 3. Determine the direction of the change for each account  The accounting equation must be balanced after analyzing each transaction  Eg/ Purchase of equipment for $50,000 cash o Affected accounts  Equipment – Assets  Increase $50,000  Cash – Assets  Decrease $50,000 o Assets = Liabilities + Shareholders Equity  A – L = S +50,000 – 50,000 = 0 0 = 0  Eg/ Provides services for $3,000; customers paid $2000 and the remaining balance is due in 30 days 1 LECTURE 3 COMM 2AA3 o Affected accounts  Service Revenue – RE; Shareholders Equity  Increase $3000  Cash – Assets  Increase $2000  Accounts Receivable (A/R) – Assets  Increase $1000  A = L + S  +$2000 + $1000 = $3000 Journalizing Transactions  Daily record of accounting transactions  Debit and Credit Rules o Debits reflect  Increases in assets  Recording expenses, losses and declared dividends  Decreases in liabilities and shareholders equity o Credits reflect  Decreases in assets  Recording revenues and gains  eventually affects SE, which is on the right side of equation  Increases in liabilities and shareholders equity o Assets = Liabilities + SE SE = Shareholders Equity Assets = Liabilities + (Capital + RE) RE = Retained Earnings Assets = Liabilities + (Capital + Beg RE + NI – Dividends) NI = Net Income Assets = Liabilities + (Capital + Beg RE + Rev – Exp – Div) Assets + Exp + Div = Liabilities + (Capital + Beg Re + Rev) o Left is Debit and Right is Credit  Accounts on the left – increase is debit and decrease is credit  Accounts on the right – increase is credit and decrease is debit  Notice: o Debit come first in the journal entry and they are aligned to the left o Credits come last in the journal entry and they are aligned to the right o No dollar sign before the amounts because that would be redundant because all amounts in the journal entry are in dollars o Use debit and credit rules to determine which accounts go on which side Dr. Account (A) XX Cr. Account (B) XX  Eg/ Purchase of equipment for $50,000 cash o Affected accounts  Equipment – Assets  Increase $50,000  Debit (asset that increased)  Cash – Assets  Decrease $50,000  Credit (asset that decreased) o Journal Entry Dr. Equipment 50,000 Cr. Cash 50,000  Eg/ Provided service for $3,000; customers paid $2,000 and the remaining balance is due in 30 days o Affected accounts  Service Revenue – RE; Shareholders equity  Increase $3,000  Credit  Cash – Assets  Increase $2000  Debit (asset that increased)  A/R – Assets  Increase $1000  Debit (asset that increased) o Journal Entry Dr. Cash 2,000 Dr. A/R 1,000 Cr. Service Revenue 3,000  Ledger – a book that has a separate page for each account each account has a debit and a credit side o Keeps the balances of all the accounts  T-Account o Left side is debit; right side is credit 2 LECTURE 3 COMM 2AA3 o Account in center of T o Balancing a T-Account  Total Debits = 1700  Total Credits = 900  Balance = 800 Debit D Cash C 100 500 700 400 300 600 _ Balance 800  Trial Balance – list of all accounts and their balances at a given time (typically at the end of the accounting period) o The only guarantee of a balanced trial balance is that debits equal credits o Error detection techniques o Eg/ o Eg/ Error Detection – suppose that A/R is added to the Credit side instead of the debit side; total Debits would be $30,800 and total Credits would be $39,800  Difference = 39,800 – 30,800 = 9,000  Divide difference by 2 9,000/2 = 4,500 which is the balance of A/R o Eg/ Error Detection – support that A/R is posted at $450 instead of $4,500; total Debit would be $31,250 and total Credits would be $35,300  Difference = 35,300 – 31,250 = 4,050  Divide difference by 2 4,050/2 = 2,025 We do not have $2,025  Divide difference by 9 4,050/9 = 450 Look for the account with 45 in the first two digits and make sure it has the right number of zeros o Eg/ Error Detection – suppose that A/R is posted at $5,400 instead of $4,500; total Debits would be $36,200 and total Credits would be $35,300  Difference = 35,300 – 36,200 = 900  Divide difference by 2 900/2 = 450 We do not have 450  Divide difference by 9 900/9 = 100 Look for the account with 1 in the first digit and make sure it has the right number of zeros  If that does not worklook for any number where the difference between the two adjacent digits is 1 and make sure you did not switch the digits  iClicker – which of the following would not cause the trial balance to be out of balance a) An entry recorded as two debits b) An entry recorded without a debit c) An entry recorded twice  still balanced; mistake same on credit and debit side d) An entry where the debit and the credit are unequal  Mistakes that won’t make trial balance unbalanced 1. Omitting recording an account transaction 2. Posting a transaction twice 3. Debiting and crediting the wrong accounts  Common Errors o Switching digits (9 95) o Posting an account under the wrong heading (deb
More Less

Related notes for COMMERCE 1BA3

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit