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RSM219H1 (136)
Chapter 3

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Department
Rotman Commerce
Course
RSM219H1
Professor
Martin Ralph
Semester
Winter

Description
MGT201 Ch3 22/03/2013 6:26:00 AM Synotic journal: recording of transactions that only has a few things Double-Entry System utilizes debits and credits Debit and Credits : T accounts Debit Side Credit Side Asset debit balances L & SE balances Increases in Asset accounts Increases in L & SE Decreases in L & SE Decreases in Assets For Asset accounts; Debit: balances; increases in assets For liability and shareholders’ equity accounts; Credit: balances ; increases in L & SE Assets = Liabilities + Shareholders’ equity -Ensure that the sum of all the debits in the accounts equals the sum of all the credits XA- contr-asset; e.x. Accumulated Depreciation Statement of Financial Position -They are also called permanent accounts; e.x. retained earnings Recall: the change in retained earnings during a given period is the increase or decrease due to the net income or loss; the difference between revenue and expenses., and also the decrease due to the dividends declared. To keep track of the revenues, expenses and dividends; we use temporary accounts: subdivided by the retained earnings during the period. At the end of an accounting period, the balances in the temporary accounts are transferred into the retained earnings account UNDER RETAINED EARNINGS (SE) Revenues, expenses and dividends declared are all shareholders’ equity accounts For revenues: credit means increases and debit means decreases For expenses and dividends declared, debits mean increases while credits mean decreases To sum up: revenue accounts have credit blanaces whereas E & DD has debit balances Debit Credit Revenue accounts balance Expenses & D.D iaccounts balance Increases in revenue Decrases in revenue Decreases in expenses & D.D Increases in expenses & D.D 1. At the beginning of each new accounting period, the balance in each of the accounts is always zero. 2. At the end of each accounting period, the balance in each of the temp revenue and expense accounts is used to perpare the statement of earnings and is transferred into the permanent retained earnings account, along with the divdends -> the ending balance in the R.E. account 3. This methold allow the RE accounting to keep track of the cumulative accounts of revenues and expenses & the temp accounts are for current periods. E.x. A revenue box with a credit balance will increase the RE which has a credit balance. An expense or DD box with a debit balance will decrease the R.E. E.x. Since SE is represented by a credit balance, the decreases in the expense & DD accounts are decrease in the SE which will be debit balances 4. At the end of the period, after the balances in the account are transferred to retained earnings, the debit balances in the expenses and dividend accounts will be offset by the credit balances in the revenue accounts, leaving the retained earnings account with a credit balance. BUT, if expenses> revenues, it is possible to have a debit balance = negative R.E. = deficit. The Accounting Cycle · Accounting Cycle is the system by which transactions are first measured, recorded and summarized, and then communicated to users through financial statements · The Chart of Accounts is the starting point for the company’s accounting cycle. As new accounts are created, they are added to the company’s chart of accounts 1. The Opening Balances Recall: the permanent accounts are the statement of financial position accounts: A, L & SE (Share capital & retained earnings); Their period is carried forward from the end of the previous period. Where temp accounts will have zero balance 2. Transaction – Recognizing transactions; Evidence of a transaction is a source document such as invoices, cheques, cash , bank deposit slips…  Analyzing Transaction Decide which accounts are affected and by how much  Recording Transaction in a Jornal/ Journal Entries · Journal is a chronological listing of all the events that are recorded in the accounting sustem. · Jorunal entry is each compete entry made in the journal that shows the effect of an event on the company’s account - They are always dated and given a sequential entry number, name and amounts involved -Accounts being debited followed ny the accounts being credited Date & Entry number Name of account debited Amount debited Name of account credited Amount credited Explanation of the event The amount debited must equal the amount credited See: Section 2 3. Recording in jornal , ledger and Trial Balance The next step is to transfer the data in the individual accounts to the accounts in the ledger. · Ledger is the collection of all accounts used by a company · Posting is the process of transferring the information from the journal entries to the ledger accounts. Each account in the ledger represents a separate T account, it includes 1) The name of the account & its number 2) Its beginning balance (left or rigth depedning on the acct) 3) A list of all the postings that affected the account during the period Trial Balance · Trial Balance is a listing of all the account balances in the ledger at a specific point in time. Ensures that Total debit balances = total credit balances · Accrual Basis: Recognize revenues earned in a period and expenses incurred to generate those revenues. · Adjusting entry – made at the end of the accounting period, a journal entry that corrects an error. 1) Depreciation of capital assets 2) Recognizing the portions of prepaid expenses that have expired 3) Recording interest and other accrued liabilities 4) Recognizing the cost of supplies that were used up 5) Recording income tax -They are only updated at the end of the accounting period through adjusting entries Revenue regzonition principles to ensure that all the revenues earned in an accounting period are identified, recorded and reported in that period. Matching principle to ensure that all the expenses incurred to generate those revenues are identified, recorded and reported in that period. See Section 3-13 Preparing an Adjusted Trial Balance -When the closing entries are made, the balances in the temporary accounts will be transferred into the retained earning accounts and its balnace will be up to date Preparing financial statements and closing entries 1) The statement of earnings using the info for the revenue and expense accounts listed in the adjusted trial balance. 2) The statement of financial position is next Retained Earnings from before + Current Net Earnings/-Net Loss – Current D.D = Retained Earnings Current; Then the rest
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