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GENERAL ACCOUNTING CHEAT SHEET©
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Table of Contents
1. Balance Sheet & Assets, Liabilities & Shareholder’s Equity (Pages 2 and 3)
2. Forms of Business Organization (Page 4)
3. Use of Financial Statements by Outsiders (Page 5 )
4. Simple Ledger (Page 6)
5. Cash Control & Management (Page 7)
6. Petty Cash (Page 9)
7. Accounts Receivable (Page 10)
8. Notes Receivable (Page 13)
9. Accounting for Merchandising Activities (Page 15)
10. Classified Financial Statements (Page 17)
11. Financial Ratios (Page 18)
12. Income Statement Classification (Page 19)
13. Perpetual Inventory System (Page 21)
14. Merchandising Sales Transactions (Page 23)
15. Accounting Information Systems (Page 25)
16. Internal Control (Page 27)
17. Net Business Income (Page 29)
18. Adjusting Entries (Page 31)
19. Completion of Accounting Cycle (Page 33)
The Balance Sheet
Used to show the financial position of a business entity on a specific date. They are always prepared at the end of the year and often more often. A balance sheet lists the businesses' assets, liabilities and owner's equity. The balance sheet is dated because the financial position can change quickly.
Features: Heading Three Sections: assets, liabilities and owner's equity.
Business Entity - business finances must be kept separate from personal affairs of the owner.
Assets
Assets are economic resources that are owned by a business and are expected to benefit future operations. Examples: buildings, machinery, accounts receivable. Valued at cost value... that is what you paid for the asset, not what it is worth today.
Generally Accepted Accounting Principles (GAAP)
Cost Principle Valued at cost value... that is what you paid for the asset, not what it is worth today.
Going-Concern Assumption (assets are acquired for use not resale) Objectivity Principle
Objective - factual and can be verified by others. Stable Dollar Assumption - even though inflation may have changed value of old dollars, they are thought of as new dollars.
Forms of Business Organization
Sole Proprietorship
A business owned by one person. The most common form of ownership in our economy. E.g stores, farms, service businesses. From an accounting viewpoint, it is a business entity separate from the affairs of the owner. From a legal standpoint, they are not separate entities and the owner is personally liable for the debts of a business. If the business fails, creditors may force the owner to sell personal assets to pay off debts.
Partnerships an unincorporated business owned by two or more persons. not legally an entity separate from its owners (owners are personally responsible for debts of the business). accounting practices sees the business as separate from personal affairs.
Corporations the only type of business recognized legally as separate from its owners (owners are not personally responsible for debts). limited liability - you can only lose what you have invested in the business. owners are shareholders and hold transferable shares of capital stock (the stock can be sold). most large businesses are organized as corporations.
Reporting Ownership Equity in the Balance Sheet
Sole Proprietorship - the equity section contains only the equity of the proprietor.
Partnership - Partner's Equity is used instead of Owner's Equity and the amount of each partner's equity is listed separately.
Corporation - use the title Shareholders Equity Shareholders equity is divided into capital stock (amount originally invested in the business) and retained earnings (the amount of increase in shareholder's equity that has resulted from profitable business transactions).
The Use of Financial Statements by
Outsiders
financial statements are used outside of the business to make investment decisions. creditors and investors are concerned with the solvency and profitability of the business.
Solvency - the ability of a business to pay debts when they come due. If a business can meet its obligations it is called solvent. If a business cannot pay debts, it is insolvent and may face bankruptcy. A bankrupt business may have to stop operations, sell its assets to pay creditors and end its existence.
Profitability - a business is profitable when revenue exceeds expenses for an accounting period. This increases the value of the owner's equity.
Cash Control & Management
cash is money on deposit or any items that a bank will accept for deposit. The cash account is a controlling account for perhaps many bank accounts.
Cash on the balance sheet
listed first because it is available to meet obligations. it is the most liquid asset, assets are listed in order of liquidity. some short term investments are so liquid that they are combined with cash on the balance sheet. creditors are interested in how cash compares with accounts payable. Is the company able to pay debts as they become due? This is called solvency.
Statement of Changes in Financial Position
this statement summarizes all of the cash activity during the accounting period.
Cash Management
planning, controlling, and accounting for cash transactions and cash balances. the objectives of cash management include:
- provide accurate accounting for cash receipts, cash disbursements, and cash balances.
- prevent losses from theft or fraud.
- anticipate the need for borrowing and make sure there is enough cash to conduct business operations.
- make sure large amounts of cash are not left idle but instead are generating revenue.
Internal Control of Cash
Those who handle cash should not have access to accounting records. These jobs should be separate. A cash budget with planned cash receipts, cash payments and cash balances should be prepared for each department. A control listing should be prepared for all cash receipts at the time and place money is received. All cash receipts should be deposited daily. All payments should be made by cheque. All expenditures should be verified before the cheque is issued. These jobs should be separate. Bank statements should be reconciled.
Cash Receipts
A/R received through mail. cheques should be stamped "For deposit only." they should be recorded on a control listing.
Cash received over the counter.
all cash received is recorded on the cash register. Tape keeps track of all transactions. Someone from accounting will remove the tape. the cash register could be a point-of-sale terminal connected to accounting records.
Cash Over and Short
in handling cash, mistakes are made when giving change. the difference between recorded cash receipts and the money in the cash register are recorded in an account called "Cash Over and Short." debit for a shortage/ credit for an overage.
Cash Disbursements all disbursements should be made by prenumbered cheques. Signing cheques, approving payment and making accounting entries should be different jobs.
The Voucher System
every transaction that results in a cash payment must be verified, approved in writing, and recorded before a cheque is issued. a written authorization called a voucher is prepared for every transaction that will require a cash payment.
Preparation
- The appropriate blanks are filled in with information from the invoice (name, number, date, amount).
- The Voucher is sent to an employee who verifies information
- The voucher is then sent to employee in accounting who indicates the credit and debit
- All verification is checked
- The voucher is then entered in the Voucher Register
Accounts Receivable
selling goods or services on credit is important to business. however, businesses realize that when sales are made on account, some of these accounts receivable will be uncollectible. once an A/R is determined to be uncollectible, it is no longer an asset. the loss of an asset is an expense (uncollectible accounts expense). accounting principles require that in measuring income, revenue should be matched with the expenses incurred in raising the revenue. because the A/R may not become uncollectible until sometime later, the uncollectibles must be estimated and then matched.
Uncollectible Accounts Expense 5000. Allowance for Doubtful accounts 5000. Allowance for Doubtful Accounts will appear on the balance sheet as a deduction from A/R. Balance Sheet Accounts Receivable 75, Allowance for doubtful accounts 5, Final A/R Amount 70,
Allowance for Doubtful Accounts Assets there is no way of telling which A/R will turn out to be uncollectible. crediting the controlling account for A/R would throw the individual accounts out of balance with the controlling account. therefore, Allowance for Doubtful Accounts is credited. it is a contra asset account. it must be estimated in a conservative manner. the account must be adjusted monthly.
Writing Off an Uncollectible A/R when an A/R from a specific customer is determined to be uncollectible it is no longer an asset and should be written off.
Allowance for Doubtful Accounts 700. Accounts Receivable (JJ Jackson) 700. this is not a debit to an expense because the expense has already been estimated. write-offs will seldom agree with estimates. if an A/R previously written off is recovered, then the opposite entry is made.
Accounts Receivable (JJ Jackson) Allowance for Doubtful Accounts
Monthly Estimates of Credit Loss
At the end of each month, uncollectible accounts should be estimated and an adjustment should be made to Allowance for Doubtful Accounts. If some accounts have been written off and the balance is the allowance account hsould be higher, then an entry to increase the balance must be made Estimate for Credit Loss are base on:
- The balance sheet approach based on aging schedule.
- The income statement approach based on a percentage of net credit sales
- Direct Write-off method Monthly Estimates - Credit Losses At the end of each month, credit losses should be estimated and Allowance for Doubtful accounts adjusted.
Balance Sheet for Aging Method Most widely used Each A/R is classified according to its age
Aging Schedule
Total Not yet Due
1 - 30 Days past due
31 - 60 days past due
61 - 90 days past due
Over 90 days past due Jackson Machine Co.
XYX Co. 24000 24000 ABC Co 4000 3000 1000 600 1000 Spade Wholesale
Richmond Supply
Buggy stores 70000 32000 22000 9600 2400 4000 Totals 100000 51000 29000 12000 3000 5000
The schedule is used to review that status of individual accounts and as the basis of estimates of uncollectible accounts The longer an account is past due, the greater the chances it won't be collected.
Notes Receivable
promissory note: promise to pay on demand on or before a future date, a definite sum of money. Maker: person who promises to pay - borrower of the money (L) Payee: person to whom payment is to be made - lender of the money s (A) Interest Charge made for the use of money Interest = Principle * Rate * Time Rate (interest rate annual) rate is on an annual basis time is in days, months or annual 3 days grace from when due (use this to calculate exact days) When initially lending money: Note to pay A/R: Dec I Notes Receivable 30000. A/R 30000.00 90 days 12%
Adjust for interest earned at end of year: Dec 31 Interest Receivable 295. Interest Revenue 295.89 30,
When paid: March 4 Cash 30917. Notes Receivable 30, Interest Receivable 295. Interest Revenue 621. 30,000 * 12% * 93/
Accounts Receivable TurnOver Rate indicates how quickly a company converts its accounts receivable into cash. The Accounts Receivable turnover rate is determined by dividing net sales by the average of accounts receivable. The number of days required to collect accounts receivable then may be determined by dividing the number of days in a year (365) by the turnover rate.
Net Sales / Avg of Accounts Receivable 50,000 / 11000 = 4. Average of accounts receivable: Start (10,000) + End (12,000) = 22,000 / 2 = 11,000 For instance: 365 / 4.455 = about 81
the interpretation of the average age of receivables depends upon the company's credit terms and the seasonal activity immediately before year-end.
Basic Formula Net Credit Sales = Turnover Rate Monthly Average Receivables 365 = Days required to collect
Turn over rate
Average Receivable = (Beginning + Ending ) / 2
Posting any entry that affects a subsidiary ledger also effects the controlling account and must be posted twice. post first to the sub ledger and then to the controlling account. a check mark shows it is posted to sub journal.
Classified Financial Statements
Classified Balance Sheet
Assets are presented in three groups:
- Current Assets "liquid" capable of being turned into cash within a short period of time (one year) examples are: cash, inventory, accounts receivable.
- Plant and Equipment fixed assets examples: land, building
- Other assets
Liabilities are grouped into two categories:
- Current liabilities existing debts that must be paid within the same time period as current assets. examples: notes payable, accounts payable.
- Long term liabilities example: mortgage. The current ratio a widely used measure of short-term debt-paying ability. total current assets divided by total current liabilities. Example: total current assets $400,000.00 total current liabilities $280,000. Current ratio: = $400,000.00 / $280,000.00 = 1. The current ratio is 1.43 to 1. this means the current assets are 1.43 times greather than current liabilities. The higher the current ratio, the more solvent the company appears to be. 2 to 1 is considered good for credit ratings.
Working Capital The excess of current assets over current liabilities (how much more c u r re n t a s s et s y o u h a ve t h an cu r ren t l ia b il i t i e s ). $400,000.00 - $280,000.00 = $120,000. The amount of working capital needed to remain solvent depends on the size and nature of the organization
Income Statement Classifications
income statements are set up as single step or multiple step.
Multiple-Step Income Statement uses a series of steps to deduct costs and expenses from revenue.
1. Cost of goods sold is deducted from revenue to determine gross profit
(income). Revenue
- Cost of goods sold = Gross Income
2. Operating expenses are deducted to obtain operating income.
3. Other expenses are subtracted to arrive at net income e.g income tax.
Revenue Section
usually has one line- Net sales the trend in net sales from one period to another is a key indicator of future prospects. prices increase over time due to the rate of inflation. Therefore, an increase in dollar value of sales does not necessarily mean an increase in quantity.
Cost of goods sold
the matching principle requires revenue be offset by the costs and expenses incurred in generating that revenue. In a merchandising business you must offset the sales with the cost of goods sold. Gross Profit
the difference between sales revenue and the cost of goods sold. analysts look at gross profit as a percentage of net sales called gross profit rate. (gross profit divided by net sales). gross profit rate is observed over successive accounting periods. A rising GPR shows strong demand for products. GPRs lie between 30% and 50%. low on fast moving merchandise (groceries). high on low-volume goods.
Operating Expense
sometimes subdivided into functional classifications: selling expenses, administrative expenses. this is useful for management.
Operating Income (Net Income)
shows the relationship between revenue earned from cust omers and the expenses incurred in producing that revenue. it shows the profitability of basic business operations.
Non-operating items revenue and expenses not directly related to the company's primary business activities are listed in the final section of the income statement. Interest expense, corporate income taxes expenses.
Single-Step Income Statements all costs and expenses are deducted from total revenue in a single step format.
Evaluating the adequacy of Net Income
Sole Proprietorship there is no salary expense for the value of the personal services performed by the owner. Anything paid to the owner is a withdrawal. Net income represents compensation for time and effort of the owner. It must also represent a return on capital investment. Net income must be adequate to compensate the owner for taking risks.
