UNIT 1: 1.1 Evolution of accounting 1.

2 Accounting Concepts and Principles:

The Entity Concept -

An organization is a separate entity from the owner(s) of the organization.

The Reliability (Objectivity) Accounting records and statements should be based on the Principle most reliable data available so that they will be as accurate and useful as possible. The Cost Principle Acquired assets and services should be recorded at their actual cost not at what they are believed to be worth. The assumption that the business will continue operating for the foreseeable future. Accounting transaction are recorded in the monetary unit used in the country where the business is located.

The Going-Concern Concept The Stable-Monetary Concept 1.3 W ! stud! Accounting Unit

The primary purpose of accounting is to provide information that is useful for decision making purposes. rom the very short! we emphasize that accounting is not an end! but rather it id the mean of end. The final product of accounting information is the decision that is ultimately enhanced by the use of accounting information weather that decision are made by owner! management! creditor! government regulatory bodies! labor unions! or the many other groups that have an interest in the financial performance of an enterprise.

1." Accounting Infor#ation $!ste# Infor#ation user ". #nvestors. $. %reditors. &. 'anagers. (. )wners. *. %ustomers +. ,mployers. -. .egulatory. /,%! #./! ,0A. Cost and %evenue &eter#ination ". 1ob costing. $. 0rocess costing. &. Activity based costing. (. /ales. Assets and lia'ilities ". 0lant and equipment. $. 2oan and equity. &. .eceivable! payable and cash. Cas flo(s ". rom operation. $. rom finance. &. rom investing. &ecision supporting ". %ost 3volume3 profit analysis. $. 0erformance evaluation. &. #ncremental analysis. (. 4udgeting. *. %apital allocation. +. ,arnings per share. -. .atio analysis

1.) 1.,

*anual and co#puteri+ed 'ased accounting

-asic Accounting *odel 1. %ecording (All transaction should be recorded in 5ournal). 2. Classif!ing (After recoding entries should be transfer to ledger). 3. $u##ari+ing ( 2ast stages is to prepare the trial balance and final account with a view to ascertaining the profit or loss made during a trading period and the financial position of the business on a particular data). Transaction -alance s eet .ournal

/inal account Trial 'alance 1.1 /inancial state#ents

0edger

inancial statements are declarations of information in financial terms about an enterprise that are believed to be fair and accurate. They describe certain attributes of the enterprise that are important for decision makers! particularly investors (owners) and creditors. We discus t ree pri#ar! financial state#ents 1. /tatement of financial position or balance sheet. 2. #ncome statement. 3. /tatement of cash flow. /tatement of owners equity. Income Statement - a summary of a company6s revenues and e7penses for a specific period of time .evenue - Amounts earned by delivering goods or services to customers. ,7pense - The using up of assets or the accrual of liabilities in the course of delivering goods or services to the customers.

#ncome /tatement ormat8

.evenues - ,7penses : ;et #ncome

977!777 77!777 9 7!777

Statement of Owners Equity - a summary of the changes that occurred in the companys owners equity during a specific period of time.

/tatement of )wner6s ,quity ormat8 %apital! 1an " $<<< Add8 #nvestments by owner ;et #ncome for the period /ubtotal =educt8 >ithdrawals by owner ;et 2oss for the period %apital! =ec &" $<<< 977!777 97!777 7!777 97!777 7!777 7!777 977!777 7!777 977!777

Balance Sheet - a summary of a company6s assets! liabilities! and owner6s equity on a specific date. 4alance /heet ormat8 Assets %ash Accounts .eceivable /upplies 977!777 7!777 7!777 2iabilities Accounts 0ayable 977!777 ;otes 0ayable 7!777 Total 2iabilities 977!777 )wner6s ,quity %apital 977!777 Total 2iabilities and )wner6s ,quity 977!777

Total Assets 1.2

977!777

C aracteristics of financial state#ents 1. -alance s eet Assets %ash ;otes payable =ebtors 2and! building etc i7ed assets 2. Inco#e state#ent lia'ilities notes payable accounts payable creditors capital

.evenue 2ess all e7penses ;et profit 3. Cas flo( state#ent 1.3 Constraints on relevant or relia'le infor#ation 1.14 Users of accounting s!ste# 1. #nvestors 2. %reditors 3. 'anagers ". )wners ). %ustomers ,. ,mployees 1. .egulatory agencies 2. Trade associations 3. ?eneral public 14. 2abor union 11. ?overnment agencies 12. /uppliers. 1.11 *a5or fields of accounting 1. 2. 3. ". ). ,. inancial accounting 'anagement accounting %ost accounting Ta7 accounting )perational accounting Advance accounting %ash from operating activities %ash from inverting activities %ash from financing activities

UNIT 2: 2.1 -usiness event and 'usiness transaction 6ent: #n ordinary language event means anything that happen. There are two types of event. 'onetary event ;on monetary event *onetar! event: ,vent which are related with money e.g.! which change the financial position of the person known as monetary event .e.g.! shopping marriage etc. Non #onetar! event: ,vent which is not related with money! which do not change the financial position of the position of the person are known as non monetary event e.g.! winning a game! delivering a lecture in a meeting etc. #n business accounting only those events which change the financial position of the business and which call for accounting are recognized as ,@,;T. #n other words all monetary events are regarded business transaction. -usiness transaction: Any dealing between two persons or thing is called transaction. #t may relate to purchase and sales of goods! receipt! payment of cash and rendering service by one part to another. Transaction is of t(o 7inds. %ash transaction %redit transaction 2.2 Evidence and aut entication of transaction 2.3 T e recording process

&e'its and Credits: A business6 debits must equal their credits. Applying this to the accounting equation! which states that a business6 assets must equal their liabilities and owner6s equity! shows how the normal balances for the accounts are determined.

2."

%ecording Transactions in t e .ournal

.ecording transactions in a 5ournal is similar to how they are recorded in the T-accounts

Posting fro# t e 5ournal to t e ledger: 0osting - the transferring of amounts from the 5ournal to the ledger accounts /tep "8 ,nter the date from the 5ournal entry into the date column of the ledger account /tep $8 ,nter the 5ournal page number in the 5ournal reference column of the ledger account /tep &8 Transfer the amount for the first account in the entry to its ledger account as it is in the 5ournal. =ebits in 5ournal are recorded as debits in the ledger and the same for credits /tep (8 Apdate the account balance. #f there is no beginning balance! then 5ust transfer the amount to the appropriate balance column (=r B =r! %r B %r). #f there is a beginning balance! then add or subtract the

amount from the current balance and enter the new balance. #f the transaction amount and the current balance are both in the same columns (=r B =r! or %r B %r)! then add the amounts together for the new balance and enter the result in the same column. #f the transaction amount and the current balance are in different columns! then subtract the amounts and enter the result in the column that has the larger amount. /tep *8 ,nter the ledger account number in the 5ournal6s 0ost .ef. column. .epeat these steps until all amounts have been posted to the ledger accounts.

2.) -alancing t e accounts 2., C art of accounts %hart of accounts - a list of all the accounts and their assigned account numbers in the ledger Accounts are assigned numbers consisting of $ or more digits. The number of digits used is dependent on how many accounts a company has in their ledger. A small company may use only $ digits while a large corporation may use * digit account numbers. The first digit is used to identify the main category in which the account falls under.

" is used for Asset accounts $ is used for 2iability accounts & is used for )wnerCs ,quity accounts ( is used for .evenue accounts * is used for ,7pense accounts The second digit indicates the sub classification of the account if there are any. Asset Accounts " is used to represent %urrent Assets $ is used to represent 0lant Assets & is used to represent #nvestments ( is used to represent #ntangible Assets 2iability Accounts " is used for %urrent 2iabilities $ is used for 2ong Term 2iabilities ,7pense Accounts " is used for /elling ,7penses $ is used for ?eneral and Administrative ,7penses All other digits are used 5ust to indicate the order in which the accounts are listed in the chart of accounts. 2.1 0i#itations of trial 'alance The trial balance provides proof that the ledger is in balance. The agreement of the debit and credit totals of the trial balance gives assurance thatD 1. ,qual debits and credits have been recorded for all transaction. 2. The debit or credit balance of each account has been correctly computed. 3. The addition of the account balances in the trial balance has been correct performed.

2.2 Concept of accrual and deferrals 2.3 Need for ad5usting entries The purpose of ad5usting entries is to allocate revenue and e7penses among accounting periods in accordance with the realization and matching principles. These end-of-period entries are necessary because revenue may be earned and e7penses incurred in periods other than the one in which the related transactions are recorded. The four basic types of ad5usting entries are made to (") convert assets to e7penses! ($) convert liabilities to revenue! (&) accrue unpaid e7penses! and (() accrue unrecorded revenue. )ften a transaction affects the revenue or e7penses of t o or !ore accounting periods. The related cash inflow or outflow does not always coincide with the period in which these revenue or e7pense items are recorded. Thus! the need for ad5usting entries results from ti!ing "i##erences between the receipt or disbursement of cash and the recording of revenue or e7penses. 2.14 to 2.1" Ad5usting Entries: Ad5usting entries can be divided into five categories8 819 =eferred (0repaid) ,7penses 829 =epreciation of assets 839 Accrued ,7penses 8"9 Accrued .evenues 8)9 =eferred (Anearned) .evenues Euestions to ask yourself when doing ad5usting entries8 819 >hat is the current balanceF 829 >hat should the balance beF 839 Gow much is the ad5ustmentF

&eferred 8Prepaid9 E:penses - includes miscellaneous assets that are paid for in advance and then e7pire or get used up in the near future. #n the 5ournal entry you would debit an e7pense account and credit the prepaid asset account. (,7amples include .ent! #nsurance! and /upplies) $"j%sting &o%rnal entry' F ,7pense 9777 0repaid Asset the value of the asset 9777 that was used up

&epreciation of Plant Assets - the allocation of a plant assetCs cost to an e7pense account as it is used over its useful life. #n the 5ournal entry you would debit an e7pense account and credit a contra-asset account. >hy use Accumulated =epreciation instead of 5ust crediting the original asset accountF (") #f the original asset account was used then the original cost of the asset would not be reflected in any of the asset accounts. ($) The original cost is needed when assets are sold or disposed (&) The original cost of the asset must be reported on the income ta7 return of the company $"j%sting &o%rnal entry' =epreciation ,7pense! Accumulated =epreciation! 9777 9777

Accrued E:penses - ,7penses that a business incurs before they pay them. #n the 5ournal entry you would debit an e7pense account and credit a liability account (,7amples include >ages and #nterest) $"j%sting &o%rnal Entry' F ,7pense F 0ayable 9777 for the amount 9777 owed

Accrued %evenues - revenues that a business has earned but has not yet received payment for. #n the 5ournal entry you would debit an asset account and credit a revenue account. (,7amples include #nterest) $"j%sting &o%rnal Entry' Accounts .eceivable .evenue 9777 9777

&eferred 8Unearned9 %evenues - cash collected from customers before work is done by the business. The business has a liability to provide a product or service to the customer. #n the 5ournal entry you would debit a liability account and credit a revenue account. $"j%sting &o%rnal Entry' Anearned .evenue .evenue 9777 9777 for the value of services or products provided

Ad5usted Trial -alance - a list of all ledger accounts with their ad5usted balances. These amounts are used in creating the financial statements. The totals for the debit and credit columns should balance. #f the totals are not the same then an error was made either in the 5ournal entries! the posting! or in transferring the amounts to the trial balance.

2.1) T e Wor7s eet:

&eter#ination of Net Inco#e or Net 0oss fro# t e Wor7s eet: #f the company has a ;et #ncome! then (") The %r column total for the #ncome /tatement must be more than the =r column total. ($) The =r column total for the 4alance /heet must be more than the %r column total. #f the company has a ;et 2oss! then (") The =r column total for the #ncome /tatement must be more than the %r column total. ($) The %r column total for the 4alance /heet must be more than the =r column total. Co#pleting t e Wor7s eet: /tep "8 2ist the accounts and enter their balances from the general ledger into the appropriate trial balance column (=r or %r). Total both columns. /tep $8 ,nter in the amounts for the ad5ustments. ,ach ad5ustment should contain at least one debit entry and at least one credit entry! 5ust as if you were entering these ad5ustments in a 5ournal. Total both columns.

/tep &8 %arry the balances from the Trial 4alance columns to the Ad5usted Trial 4alance if there is no ad5ustment for the account. #f an account has an ad5ustment then either add or subtract the ad5ustment to get the ad5usted balance for the account. Total both columns. Tip on knowing when to add or subtract8 (") #f the amount in the Trial 4alance column and the amount in the Ad5ustments column are both in the same columns (=r B =r! or %r B %r) then add the two amounts together and place the result in the same column in the Ad5usted Trial 4alance. ($) #f the amount in the Trial 4alance column and the amount in the Ad5ustments column are in different columns (=r B %r! or %r B =r) then subtract the amounts and enter the result in the column that has the larger amount (=r or %r) in the Ad5usted Trial 4alance. /tep (8 %arry the balances for all of your revenue and e7pense accounts to the #ncome /tatement columns. Total both columns. Note8 These columns won6t balance because the difference between the columns represents your ;et #ncome or 2oss. /tep *8 %arry the balances for all other accounts (assets! liabilities! and owners equity) to the 4alance /heet columns. Total both of these columns. Note8 The difference between the columns should be the same as the difference between the #ncome /tatement columns. #f they are not the same then you have made a mistake. /tep +8 ,nter in the difference between the =r and %r columns under the column which has the smaller balance for both the #ncome /tatement and 4alance /heet. Total these four columns again. The =r and %r column totals should balance now on both the #ncome /tatement and the 4alance /heet. Tips on determining if you have a net income or loss8 (") #f there is a ;et #ncome! then you should have the difference entered in the =r column of the #ncome /tatement and in the %r column of the 4alance /heet. ($) #f there is a ;et 2oss! then you should have the difference entered in the %r column of the #ncome /tatement and in the =r column of the 4alance /heet.

2.1, Closing Entries:

The information needed to complete the closing entries can be obtained from the #ncome /tatement and 4alance /heet columns of the worksheet. These entries are made at the end of each accounting period. The closing entry process consists of four 5ournal entries8 (") Close all revenue accounts - by debiting your revenue account and crediting #ncome /ummary. 1ournal ,ntry8 .evenue Account Total of all .evenues #ncome /ummary Total of all .evenues ($) Close all expense accounts - by debiting #ncome /ummary and crediting each individual e7pense account. 1ournal ,ntry8 #ncome /ummary .ent ,7pense 'isc. ,7pense Total of all ,7penses Account balance Account balance

(&) Close the Income Summary account - by either debiting #ncome /ummary and crediting the %apital account if there is a ;et #ncome or by debiting the %apital account and crediting #ncome /ummary if there is a ;et 2oss. 1ournal ,ntry (if net income)8 #ncome /ummary )wner! %apital 1ournal ,ntry (if net loss)8 )wner! %apital #ncome /ummary ;et #ncome ;et #ncome ;et 2oss ;et 2oss

(() Close the withdrawals account - by debiting the %apital account and crediting the >ithdrawals account. 1ournal ,ntry8 )wner! >ithdrawals )wner! %apital UNIT 3: 3.1 >ithdrawals account balance >ithdrawals account balance

&ifference 'et(een #anufacturing and #erc andising 'ost merchandising companies purchase their inventories from other business organization in a ready to sell-condition. %ompanies that manufacture their inventories! such as ?eneral motors! #4' are called manufacturers! rather than merchandisers. The operating cycle of a manufacturing company is longer and more comple7 than that of the merchandising company! because the first transaction is purchasing merchandising is replaced by the many activities involved in manufacturing the merchandise. The operating cycle is the repeating sequence of transactions by which a company generates revenue and cash receipts from customers. #n a merchandising company! the operating cycle consists of the following transactions8 (") purchases of merchandise! ($) sale of the merchandise - often on account! and (&) collection of accounts receivable from customers.

UNIT ":

".1 $teps in Perfor#ing a -an7 %econciliation: /tep "8 #dentify outstanding deposits and bank errors that need to be added to the current bank statement balance. /tep $8 #dentify outstanding checks and bank errors that need to be subtracted from the current bank statement balance. /tep &8 #dentify amounts collected by the bank (notes)! amounts added to our balance by the bank (interest on account)! and any errors made by the company! when recording the transactions! that need to be added to the current book balance. /tep (8 #dentify bank service charges! ;/ checks! and any errors made by the company that need to be subtracted from the current book balance. -an7 %econciliation for#at:

1ournal entries must be done to record all ad5ustments made to the book balance. or all of the ad5ustments made to increase the book balance cash will be shown as a debit in the entries. or all of the ad5ustments made to decrease the book balance cash will be shown as a credit in the entries.

Cas $ ort and ;ver: Any differences between the cash register tape totals and the actual cash receipts is charged against the cash short and over account. #f the ending balance of the account is a debit! it is shown on the #ncome /tatement as a 'iscellaneous ,7pense. #f the ending balance of the account is a credit! it is shown on the #ncome /tatement as )ther .evenue. 1ournal ,ntries8 (or a cash shortage8 %ash %ash /hort and )ver /ales .evenue (or a cash overage8 %ash %ash /hort and )ver /ales .evenue Pett! Cas : 0etty cash is a fund containing a small amount of cash that is used to pay for minor e7penses. The amount of the petty cash fund is dependent on how much a company feels it needs to have on hand to pay for this e7penses. The fund is replenished on a regular basis! normally at the end of the month unless it is necessary to replenish it sooner. The amount of the fund may be increased or decreased after it is setup! if necessary. 1ournal ,ntries8 (or the set%p o# Petty Cash8 Actual cash received =ifference %ash register tape totals Actual cash received =ifference %ash register tape totals

The 0etty %ash fund is established by transferring money from the %ash account to the 0etty %ash account for the amount of the fund. The size of the fund can always be read5usted at a later time! either up or down depending on whether you wish to increase or decrease the fund. 0etty %ash %ash in bank Amount of fund Amount of fund

To increase the fund! you would use the same entry as above and debit the 0etty %ash and credit %ash for 5ust the amount of the increase. To decrease the fund! you would reverse the above entry! by debiting %ash and %rediting 0etty %ash for the amount of the decrease. (or replenish!ent o# petty cash8

>hen the 0etty %ash fund needs to be replenished! you would debit each individual e7pense or asset account! not 0etty %ash! for the amount spent on each one and credit %ash for the total. 0etty %ash is only used in the 5ournal entries when you are either establishing the fund or changing the size of the fund. )ffice /upplies =elivery ,7pense 0ostage ,7pense 'isc. ,7pense %ash in bank Amount spent Amount spent Amount spent Amount spent Total of receipts

".2 %eceiva'les: Accounts .eceivable - amounts to be collected from customers for goods or services provided ;otes .eceivable - a written promise for the future collection of cash Accounting for Uncollecti'le Accounts: Allowance Method: - recording collection losses on the basis of estimates. There are two methods that can be used to estimate the Ancollectible Accounts e7pense8 (") 0ercent of /ales - referred to as the #ncome /tatement approach because it computes the uncollectible accounts e7pense as a percentage of net credit sales. $"j%sting Entry8 Ancollectible Accounts ,7p ;et credit sales H I

Allowance for =. A. ;et credit sales H I ($) Aging of Accounts .eceivable - referred to as the 4alance /heet approach because this method estimates bad debts by analyzing individual accounts receivables according to the length of time that they are past due. )nce separated by past due dates! each group is then multiplied by the percentage that each group is estimated to be uncollectible (as shown in the display below).

$"j%sting Entry8 Ancollectible Accounts ,7p 4al. Allowance for =.A ,nd 4al. - %urrent 4al. )riting o## an Uncollectible $cco%nt8 Allowance for =.A. uncollectible Amount uncollectible =esired Amount Acct. .ec. - %ustomer name =esired ,nd 4al. - %urrent

&irect Write<off *et od - accounts are written off when determined to be uncollectible )riting o## an %ncollectible acco%nt' Ancollectible Accounts ,7p Amount Ancollectible Acct. .ec. - %ustomer name Amount Ancollectible %ecoveries of Uncollecti'le Accounts:

Two entries are required8 (") reverse the write off of the account ($) record the cash collection of the account (*) Reinstating the $cco%nt8 Acct. .ec. - %ustomer name Amount written off Allowance for =.A. Amount written off (+) Collection on the $cco%nt8 %ash Acct. .ec. - %ustomer name Credit Card and -an7card $ales: ;on 4ank %redit card sales - cash is not received at point of sale (Amer. ,7.! =iscover) &o%rnal Entry #or Cre"it Sale8 Acct. .ec. - credit card name =ifference %redit card =iscount ,7p. /ales Amount H I /ales /ales amount &o%rnal Entry #or Collection o# ,on -an.car" sale8 %ash Amount owed Acct. .ec. - credit card name Amount owed 4ankcard sales - cash is considered to be received at the point of sale (@isa! 'aster%ard) &o%rnal Entry #or -an.car" Sale' %ash =ifference %redit card discount ,7p. /ales Amount H I /ales /ales amount Notes %eceiva'le: =etermining the maturity date of a note8 /tep "8 /tart of with the term (length) of the note /tep $8 /ubtract the number of days remaining in the current month /tep &8 /ubtract the number of days in the following month. Jeep repeating this step until the result is less than the number of days for the ne7t full month. This resulting number will be the day in which the note matures in the ne7t month. ,7ample8 ind the maturity date for a "$< day note dated on /eptember "(! "KKK Amount received Amount received

'aturity date would be the "$th day of 1anuary $<<<. Co#puting Interest on a note: 0rincipal of note H #nterest I H Time : #nterest Amount Time can be e7pressed in years! months or days depending on the term of the note or the date on which the interest is being calculated. #f time is e7pressed in months! then time is should as a fraction of a year by dividing the number of months the interest is being calculated for by "$. Time : (L of months) 3 "$ #f time is e7pressed in days then time is shown as a fraction of a year by dividing the number of days the interest is being calculated for by &+<. N;TE: Ase &+< instead of &+*. Time : (L of days) 3 &+< %ecording Notes %eceiva'le: #f note was received because we lent out money8 ;otes .eceivable %ash ace @alue of ;ote ace @alue of ;ote

#f note was received as a payment on an accounts receivable8 ;otes .eceivable Accounts .eceivable The collection of the note at maturity8 ace @alue of ;ote ace @alue of ;ote

%ash ;otes .eceivable #nterest .evenue Accruing of #nterest on a ;ote8 #nterest .eceivable #nterest .evenue &iscounting of Notes %eceiva'les:

'aturity @alue of ;ote ace @alue of ;ote #nterest .eceived

0rincipal H #nterest I H Time 0rincipal H #nterest I H Time)

There are five basic steps involved when discounting a note8 /tep "8 %ompute interest due on the note . . . . . . . . . . . . . . . . . . . . . 0rincipal H #nterest I H Time /tep $8 %ompute maturity value ('@) of the note . . . . . . . . . . . . . . 0rincipal M #nterest (from /tep ") /tep &8 %ompute the number of days the bank will hold the note . . . Term of ;ote number of days past /tep (8 %ompute the bank6s interest on the note . . . . . . . . . . . . . . . '@ H #nterest I H Time /tep *8 %ompute the proceeds to be received . . . . . . . . . . . . . . . . . '@ - 4ank6s #nterest (from /tep () 1ournal ,ntry if the proceeds N maturity value8 %ash ;otes .eceivable #nterest .evenue 1ournal ,ntry ff the proceeds O maturity value8 %ash #nterest ,7pense ;ote .eceivable Accounting for &is onored Notes: #f a note is dishonored (not paid on time) by the maker of the note! then the note receivable must be transferred to accounts receivable for the maturity value of the note. Accounts .eceivable ;ote .eceivable #nterest .evenue 'aturity @alue ace @alue #nterest ,arned 0roceeds =ifference ace @alue 0roceeds ace @alue of ;ote =ifference

#f the note was discounted to a bank and was then dishonored by the maker! then we must pay the bank the maturity value of the note plus a protest fee. This amount will then be charged to the person who gave us the note as an accounts receivable. Accounts .eceivable %ash /inancial %atios: Acid-Test (Euick) .atio : (%ash M /T #nvestments M ;et current receivables) 3 Total %urrent 2iabilities =ay6s /ales in .eceivables : (Average ;et .eceivables H &+*) 3 ;et /ales 'aturity @alue M 0rotest fee 'aturity @alue M 0rotest fee

UNIT ,: Inventor! $!ste#s:

Purc asing *erc andise under t e Perpetual Inventor! s!ste#: Euantity discounts

=iscounts given when purchasing large quantities of merchandise 0urchases are recorded at the net purchase price (0urchase Amount - Euantity =iscount) ;o special account is needed to record the quantity discount

0urchase discounts

=iscounts given for the prompt payment of the amount due 0urchases are recorded at the purchase price after taking any quantity discount but before deducting the purchase discount 0urchase discount will be recorded when payment is made =iscounts taken are credited to the #nventory account unless a special account (0urchases =iscounts) is used to keep track of the discounts taken

Credit ter#s: &3"*! n3&< means you get a &I purchase discount if payment is made within "* days or the net (full) amount is due in &< days n3eom means that the net amount is due at the end of the month

.ournal Entries for purc ases: P%rchase o# Merchan"ise on cre"it' #nventory Accounts 0ayable Pay!ent ithin the "isco%nt perio"' Accounts 0ayable %ash #nventory 0urchase amount Amount paid 0urchase amount H discount I 0urchase amount 0urchase amount

%ecording purc ase returns and allo(ances:

P%rchase ret%rn - where a business chooses to return defective merchandise to the seller in e7change for a credit for the value of the merchandise returned P%rchase allo ances - where a business chooses to keep defective merchandise in return for an allowance (reduction) in the amount owed to the seller 4oth are recorded the same way. Accounts 0ayable is debited and #nventory is credited. Accounts 0ayable #nventory Transportation Costs: )4 determines (") >hen legal title to merchandise passes from the seller to the buyer ($) >ho pays for the freight costs (O- /estination - legal title does not pass to the buyer until the goods arrive at the buyers place of business. The seller still owns the merchandise until delivered so the seller must pay the freight costs. (O- Shipping point - legal title passes to the buyer when the merchandise leaves the sellers place of business. The buyer now owns the goods so the buyer must pay the freight costs. %ecording t e freig t costs: Ander )4 =estination the seller records the following entry8 =elivery ,7pense %ash (or Accounts 0ayable) reight costs reight costs Amount of return or allowance Amount of return or allowance

Ander )4 /hipping point the buyer records the following entry8 #nventory %ash (or Accounts 0ayable) reight costs reight costs

Use of Purc ase %eturns = Allo(ances> Purc ase &iscounts> and /reig t In accounts: /ome businesses may want to use special accounts to keep track of their returns B allowances! discounts! and freight costs. 0urchase returns B allowances and purchase discounts both have credit balances and are contra accounts to the inventory account

The cost of inventory is determined as follows8 #nventory 2ess8 0urchases =iscounts 0urchases .eturns B Allowances ;et 0urchases of #nventory Add8 reight #n Total cost of #nventory .ournal Entries: Ret%rns 0 $llo ances Accounts 0ayable 0urchases .eturns B Allow. allowance P%rchase "isco%nt Accounts 0ayable %ash 0urchase discount (reight costs (b%yer) reight #n %ash (or Accounts 0ayable) $ales of Inventor!: >hen inventory is sold there are two 5ournal entries that must be done8 (") To record the actual amount ($) To record the cost we paid for the goods sold Recor"ing the sale %ash (or Accounts .eceivable) /ales Recor"ing the cost %ost of goods sold #nventory Recor"ing receipt o# pay!ent )riginal cost paid )riginal cost paid Total sales price Total sales price the goods were sold for reight costs reight costs Amount due Amount paid Amt due H discount I Amount of return or allowance Amount of return or 77777 (7777) (7777) (7777) 77777 777 77777

%ash Accounts .eceivable

Amount received Amount received

$ales discounts and $ales returns = allo(ances: /ales discounts and sales returns B allowances are contra accounts to /ales and have a normal debit balance. /ales discounts are always calculated after deducting any returns or allowances from the amount due from the customer ;et /ales : /ales - /ales .eturns B Allowances - /ales =iscounts Sales /isco%nt - an incentive given by the seller to the customer to encourage prompt payment %ash /ales =iscount Accounts .eceivable Amount .eceived Amount due H discount I Amount due

Sales Ret%rns 0 $llo ances - keeps track of defective merchandise returned to the seller by the customers /ales returns required two 5ournal entries 5ust like the sale of merchandise (") to record the reduction in the amount due by the customer /ales .eturns B Allowances Accounts .eceivable 9777 9777

($) to record the cost of the defective merchandise returned by the customer #nventory %ost of ?oods /old 9777 9777

or a sales allowance only the first 5ournal entry! to record the reduction in the amount due! is required since the merchandise was not returned and added back into the inventory of the seller. Ad5usting Inventor! for a P !sical Count: The inventory account will need to be ad5usted if the physical count does not match the balance for the inventory account shown in the ledger.

#f the physical count is less than the inventory account balance! then the difference is charged against the %ost of ?oods /old account. %ost of ?oods /old #nventory 9777 9777

#f the physical count is more than the inventory account balance! then the difference could indicate a purchase of inventory that was not recorded. #nventory %ash (or Accounts 0ayable) 9777 9777

#f the difference can not be identified then it is credit to the %ost of ?oods /old account. #nventory %ost of ?oods /old /inancial $tate#ent %atios8 ?ross 'argin 0ercentage : ?ross 'argin 3 ;et /ales #nventory Turnover : %ost of ?oods /old 3 Average #nventoryH HAverage #nventory : (4eginning #nventory M ,nding #nventory) 3 $ $ingle $tep Inco#e $tate#ent /or#at: .evenues8 Total ,7penses8 %ost >age Total ;et #ncome ,7penses 977!777 ;et #nterest .evenues of /ales .evenue ?oods ,7pense /old 977!777 7!777 977!777 977!777 7!777 977!777 9777 9777

*ulti<$tep Inco#e $tate#ent /or#at: /ales ;et %ost 2ess8 /ales /ales .eturns B /ales of ?oods /old =iscounts Allowances 7!777 977!777 97!777 7!777 977!777 77!777

?ross )perating

'argin 9

>age ,7pense /upplies ,7pense Total ,7penses )perating #ncome )ther .evenues #nterest .evenue #nterest ,7pense ;et #ncome

and 9 (7!777) 977!777

977!777 ,7penses8 7!777 7!777 77!777 977!777 ,7penses8 7!777 7!777

UNIT 1: C aracteristics of a Partners ip: Partnership agree!ent - A contract between partners that specifies such items as8 (") the name! location! and nature of the businessD ($) the name! capital investment! and duties of each partnerD and (&) how profits and losses are to be shared. 1i!ite" li#e - 2ife of a partnership is limited by the length of time that all partners continue to own a part of the business. >hen a partner withdraws from the partnership the partnership must be dissolved. M%t%al agency - ,very partner can bind the business to a contract within the scope of the partnership6s regular business operations. Unli!ite" personal liability - >hen a partnership can not pay its debts with the business6 assets! the partners must use their own personal assets to pay off the remaining debt. Co-o nership o# property - All assets that a partner invests in the partnership become the 5oint property of all the partners. ,o partnership inco!e ta2es - The partnership is not responsible to the payment of income ta7es on the net income of the business. /ince the net income is divided among

the partners! each partner is personally liable for the income ta7es on their share of the business6 net income. Partners o ners e3%ity acco%nts - ,ach partner has their own capital and withdraw account. Initial Invest#ent '! Partners: The Asset accounts will be debited for what the partners invests into the partnership and any 2iabilities assumed by the partnership from the partners will be credited. ,ach partner will have their own capital account and it will be credited for the amount that they invested. The 5ournal entry will look similar to the entry below. %ash Asset 2iabilities partnership 0artner A! %apital 0artner 4! %apital $ aring of Profits and 0osses: The profits or losses are allocated to each partner based on a fraction or percentage stated in the partnership agreement. #f there is no method mention in the agreement for the division of profits and losses then they are to be allocated equally to each partner. &o%rnal entry to recor" the allocation o# ,et 4nco!e base" on percentage' #ncome /ummary 0artner A! %apital 0artner 4! %apital ;et #ncome ;et #ncome H (*I ;et #ncome H **I Amount invested '@ of assets contributed '@ of liabilities assumed by the Total #nvestment by A Total #nvestment by 4

Accounts would be reversed if the partnership had a ;et 2oss instead of a ;et #ncome. $llocation o# ,et 4nco!e base" on the capital contrib%tions o# the partners' /tep "8 Add the capital account balances for all the partners together to find the total capital of the business 0artner A! %apital 0artner 4! %apital Total %apital 9$$P<< &($<< 9*-<<<

/tep $8 =ivide each partner6s capital balance by the total capital to find each partner6s investment percentage 0artner A! %apital 0artner 4! %apital 9$$P<< (Account 4alance) 3 9*-<<< (Total %apital) : (<I &($<< (Account 4alance) 3 *-<<< (Total %apital) : +<I

/tep &8 Allocate the net income or loss to each partner by multiplying their investment percentage to the amount of net income or loss 0artner A6s share 0artner 46s share Total 9-<<<< (;et #ncome) H (<I : 9$P<<< -<<<< (;et #ncome) H +<I : ($<<< 9-<<<<

/tep (8 ;ow enter the 1ournal ,ntry. #ncome 0artner 0artner 4! %apital /ummary A! %apital ($<<< 9-<<<< 9$P<<<

$llocation o# ,et 4nco!e base" on Salary allo ances an" 4nterest percentage' /tep "8 Allocate ;et #ncome between the partners! as below.

/tep $8 ,nter amounts in 5ournal entry #ncome 0artner 0artner 4! %apital A! /ummary %apital ((P<< 9K+<<< 9*"$<<

%ecording t e (it dra(s #ade '! partners: 0artner A! >ithdraws 0artner 4! >ithdraws %ash (or other asset) Ad#ission of Ne( Partners: 4y the purchasing of an e7isting partners interest8 The new partner gains admission by buying an e7isting partner6s capital interest with the approval of all other partners. #n this situation! the e7isting partnerCs capital balance is simply transferred to the new partnerCs capital account. )ld 0artner! %apital ;ew 0artner! %apital %apital balance of old partner %apital balance of old partner Amount withdrawn Amount withdrawn Total withdrawn

4y investing into the partnership8 %ase "8 The new partner invests assets into the business and receives a capital interest in the partnership that is less than the total market value of the investment. #n this case! part of the new partnerCs investment is given to the e7isting partners as a bonus. /tep "8 =etermine the bonus to the old partners 0artnership capital of e7isting partners ;ew partner6s investment Total partnership capital including new partner ;ew partner6s capital interest (total capital H partnership I) 4onus to e7isting partners (total cap. - new partner) 977777 /tep $8 Allocate bonus to e7isting partners based on percentage 4onus to e7isting partners 0artner A6s share (4onus H partnership 0artner 46s share (4ouns H partnership I) 77777 /tep &8 .ecord 5ournal entry I) 977777 77777 977777 77777 977777 77777

%ash 0artner %! %apital 0artner A! %apital 0artner 4! %apital

invested ;ew partner6s interest 0artner6s share of bonus 0artner6s share of bonus

Amount

%ase $8 The new partner invests assets into the business and receives a capital interest that is more than the market value of the assets invested. #n this case the e7isting partners must transfer part of their capital balances to the new partnerCs account /tep "8 =etermine the bonus for the new partner 0artnership capital of e7isting partners ;ew partner6s investment Total partnership capital ;ew partner6s capital interest (total part. %ap. H partnership I) 4onus to new partner (total cap. - new partner6s interest) /tep $8 Allocate the new partner6s bonus to the old partners 4onus to new partner 0artner A6s share (4onus H partnerCs I) 0artner 46s share (4onus H partnerCs I) 77777 /tep &8 .ecord 5ournal entry %ash 0artner A! %apital 0artner 4! %apital 0artner %! %apital Amount 0artner6s share 0artner6s share %apital interest received of of invested bonus bonus 977777 77777 977777 77777 977777 77777 977777

%evaluation of assets 'efore t e (it dra( of a partner: #f the value of the assets went down8 0artner 0artner 0artner Asset A! 4! %! %apital %apital %apital 2oss H partnerCs 2oss H partnerCs 2oss H partnerCs Amount of 2oss in asset value I I I

#f the value of the assets went up8 Asset 0artner A! %apital 0artner 4! %apital 0artner %! %apital Amount of in asset value ?ain H partnerCs I ?ain H partnerCs I ?ain H partnerCs I ?ain

Wit dra( of a partner fro# t e 'usiness: 0artner withdraws receiving an amount equal to their capital balance8 0artner %! %ash (or asset received) %apital %apital Amount received balance

0artner withdraws receiving an amount less than their capital balance8 0artner %! %apital %ash 0artner A! %apital 0artner 4! %apital %apital balance Amount received =ifference H partnerCs I =ifference H partnerCs I

Note: The difference between what the leaving partner receives and what their capital balance was is treated as a bonus to the remaining partners paid by the leaving partner. 0artner withdraws receiving an amount more than their capital balance8 0artner 0artner A! 0artner 4! %ash %! %apital %apital %apital %apital =ifference H =ifference H Amount received balance partnerCs I partnerCs I

Note: The difference between what the leaving partner receives and what their capital balance was is treated as a bonus to the leaving partner paid by the remaining partners. $teps in t e 0i?uidation of a Partners ip: /tep "8 /ell all of the noncash assets - any gain or loss recognized is split between the partners 1ournal ,ntry8 %ash ;oncash Assets 0artner A! %apital 0artner 4! %apital Amount received 4ook @alue of assets ?ain H partner6s I ?ain H partner6s I

Note: #f there was a loss on the sale of the noncash assets! then the partner6s capital account would have been debited for their share of the loss instead of credited. /tep $8 0ay off all partnership liabilities.

1ournal ,ntry8 2iabilities %ash Amount Amount owed owed

/tep &8 =istribute the remaining cash to the partners. 1ournal ,ntry8 0artner 0artner %ash A! 4! %apital %apital 0artner6s %apital 0artner6s %apital Total cash paid to partners balance balance

Note: #f there was not enough cash to pay off the liabilities! then the partners would have been responsible for investing more cash into the partnership so that the liabilities could be paid off. 4elow is an e7ample of the 5ournal entry needed to record the additional investment by the partners. 1ournal ,ntry8 %ash 0artner A! %apital 0artner 4! %apital Amount additional cash Amount 0artner A Amount 0artner 4 invested of needed invested

The information needed to complete the entries for these steps can be obtained from a liquidation worksheet like the one shown below. 0i?uidation $u##ar! Wor7s eet: