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TOPICS TO BE COVERED
NATURE OF ACCOUNTING
SINGLE ENTRY BOOKKEEPING
DOUBLE ENTRY BOOKKEEPING
THE ACCOUNTING EQUATION
DEBITS AND CREDITS
THE ACCOUNTING CYCLE
PREPARATION OF THE BALANCE SHEET
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BASICS OF BOOKKEEPING
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NATURE OF ACCOUNTING
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Single entry accounting
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DOUBLE ENTRY ACCOUNTING
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MECHANICS OF BOOKKEEPING
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ASSETS = LIABILITIES + EQUITIES
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ASSETS = LIABILITIES + EQUITIES
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•The permanent equity accounts have a normal
credit balance
• Temporary accounts may have debit or credit
balances:
• Revenues and gains increase equity and have
normal credit balances
• Expenses and losses reduce equity and have
normal debit balances
• Dividends distributed, if recorded in a separate
account, have a normal debit balance
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Equity in a business
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COMPONENTS OF EQUITY OF A
CORPORATION
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•Dividends are a distribution of the after-tax profits of a
business to the shareholders (owners)
• the term dividend only applies to a corporation
• for a proprietorship and partnership, distributions
of profit to the owners are called drawings
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SHARE CAPITAL and RETAINED EARNINGS ( or
OWNER’S CAPITAL) are referred to as permanent
accounts because they carry forward on the Balance
Sheet from one year to the next
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THE ACCOUNTING CYCLE
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• simplification for the purposes of this course
• omit description and date (unless you are asked
to prepare entries for several dates at one time)
• Example
Heather contributes $10,000 cash to her business,
Heather’s Shoes, Ltd. and receives 1,000 shares
Debit Credit
Cash 10,000
Share Capital 10,000
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General Ledger
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Cash
10,000
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There should be a separate account in the general
ledger for each type of asset, liability, equity, revenue,
gain, expense and loss
• Example
• Assets:
• Cash
• Accounts receivable
• Inventory
• Prepaid expenses
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• Land
• Building
• Equipment
• Furniture
• Goodwill
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• Liabilities
• Demand loan payable
• Accounts payable
• Salaries payable
• Interest payable
• Income tax payable
• Unearned revenue / Deposits from customers
• Current portion of long term debt
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• Loans payable
• Bonds payable
• Deferred Tax Credits / Future Tax Payable
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• Revenues
• Sales revenue
• Service revenue
• Interest revenue
• Gains (Losses)
• Gain (Loss) on sale of fixed assets
• Gain (Loss) on sale of investments
• Gain (Loss) on repurchase of bonds
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• Expenses
• Cost of goods sold
• Salaries expense
• Rent expense
• Repairs and maintenance
• Office Supplies expense
• Utilities expense
• Interest expense
• Income tax expense
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End of Period Procedures
• Trial Balance
• a listing of all general ledger accounts, with
balance
• total debits must equal total credits
• if not, must correct errors before proceeding
further
• Adjusting journal entries
• record end of period adjustments that are not
supported by transactions
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• Adjusted trial balance
• another listing of general ledger accounts and
balances
• same purpose, to ensure total debits equal total
credits
• done to ensure accounts are in balance prior to
preparation of the financial statements
• done twice to make identification of the error
easier - fewer steps to review
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• Preparation of the financial statements
• Income Statement prepared first
• Statement of Retained Earnings prepared second
• need net income from income statement
• Balance Sheet prepared third
• need retained earnings balance at end of
period
• Cash Flow Statement prepared last
• uses information from other statements
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Closing Journal Entries
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Loblaws Consolidated Balance Sheet
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Loblaws Consolidated Balance Sheet
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Loblaws Consolidated Balance Sheet
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Loblaws Consolidated Balance Sheet
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Loblaws Consolidated Balance Sheet
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Loblaws Consolidated Balance Sheet
• Retained earnings
• this is the balance at the end of the year, in this
case January 3, 1998 (even though it is noted as
1997 in the column above the amounts reported)
• this only agrees to the actual amount in the
Retained Earnings account in the general ledger
immediately after the temporary accounts are
closed, before any transactions for the next year
are recorded
• agrees to the amount reported on the
Consolidated Statement of Retained Earnings
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BOOKKEEPING EXAMPLE
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Heather’s Shoe Store Ltd.
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Heather’s Shoe Store Ltd.
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Solution - Heather’s Shoe Store Ltd.
2) Fixtures 4,000
Accounts payable 4,000
4) Cash 4,000
Bank loan payable 4,000
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Solution - Heather’s Shoe Store Ltd.
Debit Credit
5) Accounts payable 4,000
Cash 4,000
6) no entry is required - no liability until shoes are
received
7) Inventory 5,500
Accounts payable 5,500
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Solution - Heather’s Shoe Store Ltd.
Debit Credit
9) Prepaid rent 4,400
Cash 4,400
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Solution - Heather’s Shoe Store Ltd.
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Solution - Heather’s Shoe Store Ltd.
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Solution - Heather’s Shoe Store Ltd.
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Solution - Heather’s Shoe Store Ltd.
Cash Inventory
(1) 10,000 500 (3) (7) 5,500
(4) 4,000 4,000 (5)
2,400 (8)
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Solution - Heather’s Shoe Store Ltd.
Unearned revenue
100 (!0)
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Solution - Heather’s Shoe Store Ltd.
Cash Inventory
(1) 10,000 500 (3) (7) 5,500
(4) 4,000 4,000 (5)
(10) 100 2,400 (8)
4,400 (9)
2,800
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Solution - Heather’s Shoe Store Ltd.
5,500
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Solution - Heather’s Shoe Store
Ltd.
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Solution - Heather’s Shoe Store Ltd.
Trial Balance
Debits Credits
Cash 2,800
Inventory 5,500
Prepaid insurance 2,400
Prepaid rent 4,400
Fixtures 4,000
Incorporation costs 500
Bank loan payable 4,000
Accounts payable 5,500
Unearned revenue 100
Common shares 10,000
19,600 19,600
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Heather’s Shoe Store Ltd.
Balance Sheet
as at December 31, 1999
ASSETS
CURRENT
Cash $ 2,800
Inventory 5,500
Prepaid insurance 2,400
Prepaid rent 4,400
15,100
CAPITAL
Fixtures 4,000
LIABILITIES
CURRENT
Bank loan payable $ 4,000
Accounts payable 5,500
Unearned revenue 100
9,600
SHAREHOLDER’S EQUITY
SHARE CAPITAL
Common shares 10,000
$ 19,600
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TIPS TO HELP LOCATE ERRORS
Chapter 1 6,13,14,15,17
Exercises E1-8, E1-9,
Problems P1-1, P1-4, P1-7, P1-9
Chapter 2 4,7,9,10,15,18
Exercises E2-3, E2-6, E2-8, E2-11
Problems P2- 2, P2- 4, P2- 6, P2- 8, P2-10
The problems listed always go from least to most
difficult.
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