are investments and revenue.

Decreases in Own
, etc.
not
a formal financial statement. See the sample on page 49.
Because it is not aform
ecrease capital.
TRIAL BALANCEThis statement is a listing on a certain
date that shows all accounts and their
balances.This usually occurs at the end of the month, but
it could be any time.T
his is
not
a formal financial statement. See the sample on page 49.
Because it is not aform
al statement, no dollar signs are needed.
*
Even though the debits and credits equal, there could
still be errors. Check car
accounts and thei This usually occurs at the end of the
month, but it could be any time.T
his is
not
r
not

a formal financial statement. See the sample on page 49.

Because it is not aform

efully tosee that you have used the correct amounts.For

each account you must fi
nd a balance. This is called
Footing
. For each account, addthe debits together, and then add
the credits. Subtract t
he two amounts and list thedifference on the same line
and side as the balance.
Use a pencil (pencil footings). Besure to look carefully at
the examples in your
book.
The Normal Ba the entries are not l
eft out. Thedate of the transaction will be needed on the
first line. The very f
irst entry on a page to anaccount will show the year,
month, and day. Remember t
o show indenting of the creditaccount lance of Accounts
An account normally has more increases than decreases,
so usually the balance is
on thenormal balance side of the ac accounts and their
balances.This usually occurs count.
ASSET = DEBITLIABILITY = CREDITOWNERS
EQUITY = CREDITDrawing DebitExpenses DebitR
evenue Credit
Introduction to Accounting I Lecture Notes Page 5 of 25
Chapter 3Starting the Accounting Cycle for a Service

Be sure to read the chapter carefully and work through

the exercises andexamples
given in the textbook. Study the examples to show the
order of recording your t
ransactions. This needs to become a habit so that parts
of the entries are not l
eft out. Thedate of the transaction will be needed on the
first line. The very f
irst entry on a page to anaccount will show the year,
month, and day. Remember t
o show indenting of the creditaccount name when
recording in the Journal on the
line below the debit entry. Youshould also write a very
short, but descriptive e
xplanation of the transaction on the thirdline of the
transaction in the General
Journal. Be aware, too, of the column that you
areentering the amounteither left
or right. Do not show dollar signs in the Journal. Skip
aline between each entr
y.
Notice that you are not completing all exercises and
caseproblems. Be sure to fo
llow your assignment sheet. Be sure that you are reading
theentire exercise or c
ase problem. Some of the directions are at the end!
THE ACCOUNTING CYCLE

1.
Analyze transactions2.
Record in a journal3.
Post from the journal to the ledger 4.
Prepare a trial balance of the ledger
ANALYZE
Decide debits and credits and in which accounts they
will be entered
RECORD
in journal (diary of inf THE ACCOUNTING CYCLE
ormation of day-to-day transactions)
Double entry
in chronological order by date
Book of original entry
(first formally recorded place)SEE PAGE 691.
Journal pages numbered2.
Date3.
Account Title4.
Posting reference column5.
Debit and Credit columns
JOURNALIZING

is the recording of transactions in a journalSEE PAGE

70 for format THE ACCOUNTING CYCLE
Debits are ALWAYS written before credits
NO dollar signs
MUST INDENT credits to differentiate from debits
Must enter either zeroes (00) or a dash in the cents
columnA
Provides a chronological record of transactions
A place is provided for an explanation
Lessens the chance of errordebits and credits are
recorded together
Easier to locate errors
POST
FROM THE JOURNAL TO THE LEDGER with care
Must transfer to individual accounts to be able to
summarize activity and obtain
balance
Can post at the end of the day, week, month, or
whenever
CHART OF ACCOUNTS
directory(The order for the names is taken from the
financial statementsBalance S
heet, then theIncome Statement.)ASSETS,
LIABILITIES, OWNERS EQUITY, REVENUE, EXPE

NSESThe number identifies the account and its location

in the ledger.4-column ac
count form or balance form of account
DEBIT/CREDIT/DEBIT BALANCE/CREDIT BALANCE
Advantages on Page 77
POSTING PAGE 77
1.
DATE2.

CALCULATE NEW BALANCERecord the same way for

all account transactionsLedger is r
eferred to as book of final entry.
LOCATING AND CORRECTING ERRORS
page 82-85
add twice going in different directions
find difference in debits and creditsdivide by 9/ divide
by 2/ double the amount
COMPUTER ASSIGNMENT
Ask your instructor for a copy of the directions for the
accounting program, if
you did not buy a personal copy. If you have a copy of
the software, install it
on your computer athome and you may do the work
there. Be sure that you are alwa
ys clicking on NEXTTRANSACTION button before
going onto the next item. It will bec
ome more importantas you continue this class work.The
transactions are saved aut
omatically as you work through the assignment. Be sure
to print out the necessar
y forms and turn them in to your instructor.
Introduction to Accounting I Lecture Notes Page 7 of
25There are many other assi
gnments on the computer that you may complete for
review or extra practice.

Chapter 4The Accounting Cycle ContinuedWork Sheet,

Financial Statements, andAdju
sting Entries
NOTE: Remember that these notes are just a summary
of the chapter. Take time to
readthe chapter carefully and work th
RECORD AMOUNT3.
RECORD CODE (GJ1) FOR GENERAL JOURNAL AND
PAGE NO.4.
POST ACCOUNT NUMBER BACK IN JOURNAL5.
rough the exercises and quizzes. For this
assignment, itwould be helpful to use scotch tape to put
together the two sheets
for the worksheetcarefully aligning the rows. Be sure to
finish each set of col
umns completely beforegoing on the next.
STEPS IN THE ACCOUNTING CYCLE:
1.
Determine the adjustments needed2.
Prepare a worksheet3.
Prepare financial statements4.
Journalize and post adjusting entries
ADJUSTING ENTRIES

Adjustments are a planned part of the accounting cycle.

For some accounts like o
fficesupplies, it would be impractical to make entries on
a daily or frequent ba
sis. An entry ismade at the end of the accounting period
to show usage.Changes i
n accounts happen because of passage of time, use of
items, etc.Adjustments are
internal, never involve cash.Adjusting entries affect both
the balance sheet and
the income statement.
EXAMPLES:
OFFICE SUPPLIES USED:
Take the original balance; take an inventory to find
outwhat is on hand; subtrac
t to find the balance on hand.The adjusting entry
transaction: DEBIT Office Supp
lies ExpenseCREDIT Office SuppliesWhen this
transaction is posted, you will have
the current amount of office suppliesshowing in the
asset account, and the corr
ect amount of expense for the supplies usedduring the
past year.
INSURANCE EXPIRED:
Insurance is paid in advance and debited to an asset
accountnamed Prepaid Insura

nce. When Prepaid Insurance has expired, it then

becomes anexpense. To figure th
e adjusting entry, calculate the monthly premium and
multiply asneeded for the m
onths used.The adjusting entry transaction: DEBIT
Insurance ExpenseCREDIT Prepai
d Insurance

Introduction to Accounting I Lecture Notes Page 8 of 25

UNPAID SALARIES:
This adjusting entry must be made if the end of the pay
periodand the end of the
accounting period are not exactly the same. Calculate the
amount of pay for on
e day and multiply by the number of days needing to be
paid.The adjusting entry
transaction: DEBIT Salaries ExpenseCREDIT Salaries
PayableSome other accounts th
at could need to be adjusted are: utilities and taxes.
DEPRECIATION
This is a term used to describe the
nly summarizes the cash usage.At the end of the month,
if the balance is a debit
, it is considered an expense; if its balance is a credit, it is
considered misc
ellaneous income.Cash Short and Over is closed to the
Income Summary account at
the end of theaccounting period. Miscellaneous Income
if overage; Miscellaneous
Expense if shortage.
BANK CHECKING ACCOUNTS
Be sure to read about checking accounts, writing checks,
and endorsements in the
chapter.

THE BANK STATEMENT

The bank will send out bank statements each month. It
is important that this sta
tementand the checking account balance balances. There
are certain items that th
e bank is notaware of: outstanding checks, deposits in
transit, and others. The
business may not beaware of some items from the bank:
service charges, bank fees
, bank collections, andothers.These items will either be
added or subtracted fro
m the bank statement or the checkbook.See the form on
page 201. The two balances
must balance.Any adjustment to the checkbook balance
needs to have a journal en
try. (See page 203.)This amount then will be posted to
the correct account.
Introduction to Accounting I Lecture Notes Page 13 of
25

CHAPTER 7ACCOUNTING FOR A MERCHANDISING

BUSINESSPURCHASES AND CASH
PAYMENTSMERCH
ANDISING ACTIVITYRetail businesses
sell directly to consumers
.
Wholesalers
purchase goods in bulk from manufacturers and sell
them to retailers,other whol
esalers, schools and other nonprofit institutions, and
sometimes directly tocons
umers.
Purchasing Procedures
a large company would use a purchasing agent
whoheads the purchasing department. S
mall companies would use the owner/manager, etc.
Purchase requisition (written request for goods to be
ordered)
is sent to purchasing department
Purchasing department chooses a vendor and prepares a
purchase order
. (p. 223)
Seller receives the order and sends an
invoice

(document that shows the name of the buyer and seller,

date, terms of sale, desc
ription, price, delivery, and total owed)
salesand purchase invoice
and the merchandise
When merchandise is received, it is checked against the
purchase order.
DISCOUNTS
list price is usually printed, given, etc
.
Trade discounts

percentage reduction from the list price of the

merchandise. Theseare
not recorded
in the accounting records of the buyer or the seller. The
buyer alwaysrecords go
ods at their actual cost. The seller records items sold at
their actual selling
price.
Cash discounts
offered to encourage prompt and early payment by a
buyer. Cashdiscounts
are recorded

in the accounting records of both the seller and the

buyer.
Salesor purchases discounts.
A common discount is 2/10,n/30. (2 percent discount if
paid in10 days; total due
in 30 days)To figure the discount using the calculator:1.
Be sure that the decimal selector is on 2 decimal places2.
Key in the amount of the sale3.
Multiply by the percent (use the percent key)4.

The amount that shows in the window is the discount

amount5.
Press the minus sign and you will have the actual
amount of the check to be writte
n(original price, minus the discount)You can also use
the complement method to fig
ure the sale price.1.
Key the amount of the sale2.
Multiply by the complement (100 percent minus the
discount percent)3.
The amount that shows in the window is the actual sale
amount4.
Press the minus sign and you will the discount
amount
Introduction to Accounting I Lecture Notes Page 14 of
25
RECORDING PURCHASES
The source document for recording a purchase of
merchandise is the purchase invo
ice.
o
An example of a transaction of purchasing merchandise
on account:Debit to
PURCHASES
Credit to
ACCOUNTS PAYABLE

and the
NAMED COMPANYPurchased merchandise on account
o
An example of a transaction of purchasing merchandise
for cash:
Debit to
PURCHASES
Credit to
CASH
Purchased merchandise for cash
THE PURCHASES ACCOUNT
keeps a record of the cost of merchandise purchasedfor
resale during an accounti
ng period. Assets are recorded as assetsnot purchases.
PURCHASES JOURNAL (SPECIAL JOURNAL)
Used to record only credit purchases of merchandise
may be only one column that is
postedD KEEPING
The employer must maintain payroll records that will
supply the name, address, s
ocialsecurity number, gross earnings for each payroll,
period of employment, tax
es anddeductions, and the date of each payroll.
THE PAYROLL REGISTER

This is a summary of the gross earnings, deductions, and

net pay for all employe
es for aspecific payroll period. The register shows all
amounts and thenis proved
by cross-footing the column totals. The totals MUST
equal.
uctions and then passing them on to the proper agency.
The employer is liable fo
r each amount withheld until it is passed on to the
appropriate agency. Each ded
uction isrecorded in a liability account.
Salaries Expensedebit
(This can be Office Salaries Expense and Sales
SalariesExpense if more than one
account is needed to keep track of the salary expense.)
This isBUSS1030 Notes
Accounting is an information system that measures business activities, processes
information and communicates financial information
Framework of Accounting

Income and balance sheet are based on cash and credit

Cash flow is only cash (mainly small businesses)
Income statement shows profit
Balance sheet shows A = L + OE
You can have profit but 0 cash because profit is calculated by revenue and
expenses

Management and Financial Accounting

Financial Accounting
Financial accounting is the preparation
and presentation of financial
information to allow users to make
economic decisions about the entity
External User Focus
Includes:
Statement of Comprehensive
Income
(The Income Statement)
Statement of Financial Position
(The Balance Sheet)
Statement of Changes in Equity
Statement of Cash Flows (Cash
Flow Statement)

Management Accounting
Management accounting provides
economic information for internal
users
Core activities include
formulating plans and budgets
Information used in monitoring
and control within the entity

The Accounting

The Accounting profession in Australia

Lecture Notes Page 23 of 25

STATE AND LOCAL INCOME TAXES
Some states also withhold state income taxes. Texas does not. If the state withh
olds taxes,there will be form similar to the federal one to determine the amount
withheld from
)
Gross earnings minus deductions equals net earnings.

PAYROLL RECORshows profit

Conceptual Framework

CF is a set of concepts defining the nature, purpose and content of generapurpose financial reporting
It is used by both preparers and standard setters
A bit of history
o Prior to 1970s, no GAAP
o Resulted in inconsistencies between accounting standards and
practices
o As a result, US, UK, NZ, Australia started developing normative
theory of financial accounting
o Prior to 2005, CF in Australia was developed by AASB and AARF
o From 1 Jan 2005, Australian standards converged with international
accounting standards
o Following Sep 2010, the IASB issued CF but Australia continues to
use a mixture of this new CF and Australias own CF
o IASB issued an exposure draft on 28 May 2015 for revised CF

CF (Amendments and Statement of Accounting Concepts 1) consists of

Objective of General Purpose Financial Reports (GPFR)

o Includes cash flow statement, balance sheets
o Needs to communicate to users organise info in a way that people
can understand
Qualitative characteristics
Definition of elements in financial statements

Users of Accounting

Primary users (resource providers)

Equity investors (shareholders)
Lenders (banks) shown by the Cash Book. Obj: to know the difference & pass
necessary correcting, adjusting entries in the books.
21. Matching concept: Matching means requires proper matching of expense with the
revenue.
22. Capital income: The term capital income means an income which does not grow out
of or pertain to the running of the business proper.
23. Revenue income: The income, which arises out of and in the course of the regular
business transactions of a concern.
24. Capital expenditure: It means an expenditure which has been incurred for the
purpose of obtaining a long term advantage for the business.
25. Revenue expenditure: An expenditure that incurred in the course of regular business
transactions of a concern.
26. Differed revenue expenditure: An expenditure, which is incurred during an accounting
period but is applicable further periods also. Eg: heavy advertisement.
27. Bad debts: Bad debts denote the amount lost from debtors to whom the goods were
sold on credit.
28. Depreciation: Depreciation denotes gradually and permanent decrease in the value of
asset due to wear and tear, technology changes, laps of time and accident.
29. Fictitious assets: These are assets not represented by tangible possession or
property. Examples of preliminary expenses, discount on issue of shares, debit balance
in the profit And loss account when shown on the assets side in the balance sheet.
30. Intangible Assets: Intangible assets mean the assets which is not having the physical
appearance. And its have the real value, it shown on the assets side of the balance
sheet.
31. Accrued Income: Accrued income means income which has been earned by the
business during the accounting year but which has not yet been due and, therefore, has
not been received.
32. Outstanding Income: Outstanding Income means income which has become due
during the accounting year but which has not so far been received by the firm.
Other creditors (employees, suppliers, customers)

Accounting measurement concepts and principles

Accounting Entity and Legal Entity

Sole trade
Two entities are separate
(accounting)
Legally are the same
entity therefore
unlimited liability
- Owner is
personally
responsible for
the businesss
debts

Partnership
Accounting all partners
and businesses
Legally the same entity
unlimited liability

Company
Accounting
shareholders separate
from business
Legal also separate,
thats why limited
liability for shareholders

Different costs

Historical cost what you first pay when you buy an item
Market value what is it worth now in the market
Replacement cost cost of replacing the item at this moment

** we focus on historical cost in accounting (most objective/accurate since there

are source documents
Fair Value buy a computer which is supposed to last 3 years for $300. 1 year
has past, fair value is $200

Qualitative characteristics of Accounting Information

The Accounting Equation

Assets = Liabilities + Owners Equity (=

capital + revenue expenses drawing
dividends)
Assets: a resource owned/controlled by the entity as a result of past events and
from which future economic benefits are expected

Cash, land, building, goodwill, accounts/bills receivable

Difference between accounts and bills receivable

-

Accounts people must pay within e.g. 50 days (Fixed)

Bills receivables - negotiate one on one to pay later e.g. if someone cant
pay, call up to pay later

Accounts receivable are amounts a company has a right to collect because

it sold goods or services on credit to a customer.
Supplies: physically usable (physically diminishes e.g. pen, paper)

Liability: debts that are payable to outsiders (creditors)

Money, service, accounts/bills payable, accrued liabilities

o Current liability must pay within 12 months
o Non-current over 12 months e.g. mortgage

Accounts payable: amounts a company owes because it purchased goods or

services on credit from a supplier
Bills payable: the amount a business must pay because it signed bills of
exchange to borrow money, G&S. obligation to pay cash + interest
Accrued liabilities: expenses incurred by not paid, revenue received
Owners Equity: what is left after liabilities have been deducted from assets

Also called net assets

Purpose of business is to increase OE (though investments or revenue)
Owners claim on the entitys assets
Equal to = capital + revenue expenses drawing dividends

Capital: the owners claim to the net assets of the business (total assets total
liabilities = capital)
Drawings: money taken out e.g. for personal use (decreases OE)
Revenue: the income from providing G&S, interest, dividends
Revenue either increases assets or decreases liabilities
-

This means owners share of business increases

Revenue can be from sales, service, dividend, interest

Expenses: Expenses decrease OE by using up assets/increasing liabilities

Something becomes an expense when you finish consuming/using it
Item goes from asset to owners equity

Buy a book
o Cash goes down 50
o Book goes up 50
o Finish using
o Book goes down 50
You buy a book for $50, sell for $30
o Cash goes down $50, Book goes up $50
o Sell, cash up $30, Revenue up $30, OE up $30
o Book down $50, Expense $50 (finished using)
o Revenue Expense = -$20
o A financial transaction that would have no effect on owners equity
and liabilities would be using the current asset of cash within a
business to purchase a non-current asset of land in the businesss
name. The level of current assets in the business would decrease
and the level of non-current assets within the business would
increase, not affecting liabilities or owners equity.

NOTE
-

Income refers to ALL increases in equity (other than investments by

owner)
Owners withdrawals decreases owners equity when the owner takes
assets out of the business (opposite of owners investments)
Transaction is an event that involves at least 2 parties exchanging
resources

Example
Smart Touch Learning Business
1. Sheena invests $30,000 into business

EQUAL
Assets
S
30,000

Liabilities
0
PLUS
Owners Equity
(owner
30,000 investment)

Total
Assets
30,000

Total Liabilities
and OE
30,000

2. Smart touch buys land ($20,00 in cash)

Assets

(1
(2

Cash
+
Land
30,000
-20,000
20,000

EQUAL
S

Liabilities
0
PLUS
Owners Equity
30,000

Total
Assets
30,000

Assets
Cash
Land

EQUAL
S
10,000
20,000

Total
Assets
30,000

Total Liabilities
and OE
30,000

Liabilities
0
PLUS
Owners Equity
30,000 (owner investment)
Total Liabilities
and OE
30,000

3. Purchase office supplies (agreed to pay $500 in 30 days)

(3

EQUAL
Assets
S
Cash
Office
+
supplies +
Land
10,000
500 20,000
Total Assets
30,500

Owners
Liabilities
+
Equity
Accts. Payable
Sheena,
+
Capital
500
30,000
Total Liabilities
and OE
30,500

4. Earn service revenue ($5,500 in cash)

(3
(4

EQUAL
Assets
S
Cash
Office
+
supplies +
Land
10,000
500 20,000
5,500
Total Assets
36,000

Owners
Liabilities
+
Equity
Accts. Payable
Sheena,
+
Capital
500
30,000
Service
revenue
5,500
Total Liabilities
and OE
36,000

 5. Service revenue on credit ($3,000 in a month)

Cash
+
(3

10,000

(4

5,500

EQUA
LS

Assets
Office
supplies +

Land Accts
+
Receive
20,0
500
00

(5

Liabilities
+
Accts. Payable
+
500

3,000

Owners
Equity
Sheena,
Capital
30,000
Service
revenue
5,500
3,000

Total Liabilities
and OE
39,000

Total Assets
39,000

6. $3,300 in cash expenses ($600 computer, $1100 rent, salary $1200,

gas/electricity $400)

Cash
+
(3
(4
(6

Assets
Office
supplies +

Land Accts
+
Receive
20,0
500
00
3,000

10,000
5,500
-3300

Liabilities
+
Accts. Payable
+
500

Owners
Equity
Sheena,
Capital
38,500
Expenses
600
1100
1,200
400

Total Assets
35,700

Income Statement
Revenue

EQUA
LS

Total Liabilities
and OE
35,700

Service
revenue

(5500 + 3000)

Expenses
Salary
Rent
Computer
Electricity
Total
expenses
Profit

8500

1200
1100
600
400
3300
5200

7. Payment of account (pays $300 of $500 office supplies)

o This is recorded on account
o Decrease asset/cash and on liabilities (accts payable)
EQUA
LS

Assets
Office
supplies +

Cash
+

Land Accts
+
Receive
20,0
500
00
3,000

12,200
-300

Total Assets
35,400

Liabilities
+
Accts. Payable
+

Owners
Equity
Sheena,
Capital

500
-300
Total Liabilities
and OE
35,400

38,500

8. Someone pays for service on credit $1000

o This is paid on account

8)

Cash
+
11,90
0
1,000

Assets
Office
supplies +

EQUA
LS

Land Accts
+
Receive
20,0
500
00
3,000
-1000

Liabilities
+
Accts. Payable
+
200

Total
Assets
35,700

Owners
Equity
Sheena,
Capital
38,500

Total Liabilities
and OE
35,400

9. Sells land for $9000

9)

Assets
Cash
Office
Land Accts
+
supplies + +
Receive
12,90
20,0
0
500
00
3,000
9,000
9000
-1000

EQUA
LS

Liabilities
+
Accts. Payable
+
200

Owners
Equity
Sheena,
Capital
38,500

Total
Assets
35,400

Total Liabilities
and OE
35,400

10. Withdrawal of cash ($2000 for personal use)

o This is drawings and decreases the OE

Cash
+
12,90
0
9)
10
)

9,000

Assets
Office
supplies +

Land Accts
+
Receive
20,0
500
00
3,000
9000
-1000

EQUA
LS

Liabilities
+
Accts. Payable
+
200

Owners
Equity
Sheena,
Capital
38,500
Drawings

-2000

2,000
Total
Assets
33,400

Total Liabilities
and OE
33,400