Accounting Activation Assignment.doc

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Accounting 11 Activation Assignment

Introduction to Accountancy

Introduction to Accountancy What are the Rules of Accounting?

Accounting is the mechanism used to record activities and transactions that occur

within a business. In its simplest terms, Accounting is the "language of business."However, in order to have an understandable record, a standard set of rules foraccounting within the U.S. has been established. These rules are called theGenerally Accepted Accounting Practices (GAAP), and all U.S. businesses areexpected to follow them.

The first general rule of accounting is that every transaction is recorded. Ithas been said that businesses that do not record transactions, or incorrectlyrecord transactions, are committing fraud, although this is not neccessarily thecase. Fraud is part of a much broader area called material mistatement whichalso can include error. An error is not neccessarily fraud under the law. While

there are exceptions to this rule, the guidance for applying those exceptions isspecifically defined by GAAP, and is applicable to all businesses.

The second general rule of accounting is that transactions are recordedusing what is called a "double-entry" accounting method. Originally developed inItaly in the 1400s, double-entry means that for a complete record of atransaction, two entries are made. For example, if you have $5 in cash, and wantto buy some gasoline for your lawn mower, you take your portable gas can andyour money to the gas station and exchange $5 in cash for $5 in gas. Thistransaction is recorded as an increase in the asset "gas" for $5, and a

corresponding reduction in the asset "cash" for $5. In this example, onetransaction contained two entries. This takes a little time to get used to, but it is acritical concept in basic accounting. Double entry is tied to the concept of Debitsand Credits, which you will learn about in the next section. The act of recordingtransactions is commonly referred to as making journal entries. In a few moreparagraphs, we'll discuss what a journal entry looks like.

The third general rule of accounting is that every recorded transaction iscaptured in a log called the "General Journal."


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In general, "Accounting is the art of recording, classifying, summarizing andinterpreting a business transaction."

Types of Accounts: DefinitionsAccount: An 'account' is a specific location for recording transactions of a likekind. For example, in the gas-for-cash transaction above, two accounts are used,a "Cash" account and a "Gas" account. Unused by that example, but described isan account for "Equipment" which would include the portable gas can and the

lawn mower.

The basic types of accounts are:'Assets:' items of value that the company owns or has right to. Examplesinclude: cash, real estate, equipment, money or services that others owe you, andeven intangible items such as patents and copyrights.

'Liabilities:' financial obligations or debts that are owed to other parties.Examples include: wages payable, taxes due, and borrowed money (also calleddebt).

'Equity:' the ownership value of a company. Examples include: common stockand retained earnings (we'll describe retained earning below in "FinancialStatements")

'Revenues:' the mechanisms where income enters the company (note thatrevenue and income are not the same thing--they are usedhere to describe eachother in basic terms only).

'Expenses:' the costs of doing business. Examples include: salary expense, rent,utilities expense, and interest on borrowed money.

'Income:' in U.S. business and financial accounting, the term 'income' is alsosynonymous with revenue; however, many people use it as shorthand for netincome, which is the amount of money that a company earns after covering all ofits costs.Transaction: An agreement between a buyer and a seller to exchange an assetor item for payment. An example could be as small as the buying of a pencil forcash or as large as the purchase of a building through a bank loan or morgage.Source Document: An official document proving a transaction has taken place.It could be a cash register receipt, an invoice, purchase order, etc.

Overview of the accounting cycleStep 1:A transaction occurs and a source document is produced. The transactioncould as simple as an employee buying some pencils for the business at a localstore and receiving a cash register receipt or it could involve a company salesmanwho sells a product and has the customer sign an invoice as a proof of sale.Most of the time, these documents are external to the business because thebusiness bought or sold something to another company or business, however,they can also be internal documents, such as inter-office sales. These documents


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are referred to as a source document. Some examples of source documents are:

The receipt you get when you purchase something at the store.

Interest you earned on your savings account which is documented in yourmonthly bank statement.

The monthly electric utility bill that comes in the mail.Step 2: These source documents are submitted or sent to the accountingdepartment where they are recorded in a Journal. This is also known as a book offirst entry. The journal records both sides of the transaction recorded by thesource document. These write-ups are known as Journal entries.

Step 3: These Journal entries are then transferred to a Ledger. The group ofaccounts is called ledger. A ledger is also known as a book of accounts. Thepurpose of a Ledger is to bring together all of the transactions for similar activity.For example, if a company has one bank account, then all transactions thatinclude cash would then be maintained in the Cash Ledger. This process oftransferring the values is known as posting.

Step 4: Once the entries have all been posted, the Ledger accounts are added up

in a process called Balancing. (This will make much more sense when you learnabout Debits and Credits. Balancing implies that the sum of all Debits equals thesum of all Credits.)

A particular working document called an unadjusted trial balance is created. Thislists all the balances from all the accounts in the Ledger. Notice that the valuesare not posted to the trial balance, they are merely copied.

At this point accounting happens. The accountant produces a number ofadjustments which make sure that the values comply with accounting principles.

These values are then passed through the accounting system resulting in anadjusted trial balance. This process continues until the accountant is satisfied.

Financial statements are drawn from the trial balance which may include:

the Income statement

the Balance sheet

the Cash flow statement

Step 5: If all the accounts are balanced, all the revenue and expense accounts areclosed.


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Debits and Credits:

For the purposes of accounting, please forget what you know about creditsand debits. In accounting, debit (Dr.) and credit (Cr.) have nothing to do withplastic cards that let you buy stuff. In fact, what most beginning accountingstudents need to know about Dr/Cr can be boiled down to two sentences.

How are debit and credit rules applied to different types of accounts?

In case of ASSETS and EXPENSES; increases go to the debit side, while decreases

go to credit side. On the other hand, in case of LIABILITIES,REVENUE andEQUITY; increases go to the credit side and decreases go to debit side. Anaccount will have either a "normal credit balance" or a "normal debit balance",depending on the type of account. The normal balance indicates which side of theaccount the amount goes to when the account balance increases. For example, theaccount 'Cash' has a normal debit balance: receiving cash results in a debit entry,spending it is a credit entry.

Debits and credits may be derived from the fundamental accounting equation.They result from the nature of double entry bookkeeping. Two entries are madein each balanced transaction, a debit and a credit. This allows the accounts to bebalanced to check for entry or transaction recording errors.

Owner's Equity = Assets - Liabilities is written from the perspective of the owner.In accounting this is generally rewritten from the perspective of the business or


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commercial entity the books detail:Assets = Owner's Equity + Liabilities

Entries in the books are in pairs and track the advantage or asset of the companysimultaneously with the disadvantage or liability. In this view the Owner's equityis a claim of the investor against the company. On the left side or asset side of thefundamental accounting equation. Transaction halves which increase thebusiness assets are"debits" on the left side of the equation. Transaction halves

which decrease the business assets are "credits". This is inverted on the balancingside: transaction halves (i.e. the part of the transaction) that increase the owner'sequity are credits to the company books as they are claims of what the companyowes the owner or investor, while transaction halves that decrease the owner'sequity (dividends paid or loss writeoffs) are beneficial to the company's futurefinancial position by reducing claims and are considered debits. Likewise,liabilities incurred by the business entity (which are tracked by the books) arecredits, while liabilities reduced or paid off are debits.

Separate Entity Concept:

Even when a business has a single owner we make a distinction between theowner's assets and the assets of the business. For example if the owner gives avan to the business this will count as capital introduced, if the owner takes asalary this will be accounted for as drawings.Journal Entries:

All accounting transactions are first recorded in a journal. The most common ofthese is the General Journal, sometimes alsoknown as the Book of Original Entry,because it is the first place a transaction is entered into the books. JournalEntries are made from source documents, which can be anything from receipts to

invoices to bank statements.

These two entries show the premise of double-entry accounting. Note that theform of what is written is as important as the actual text:

Debits are always recorded first, followed by the credits.

In keeping with the rule of "Debit = Left, Credit = Right", all accounts thatare credited have their titles indented ("Sales" and "Accounts Payable" inthis example).

The year and month are only recorded once in the date column. They arerecorded again at the top of every new page, and whenever the month oryear changes. However, a new page is usually started at the beginning of


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each month, because end-of-period entries are normally recorded on aseparate page.

A description of each entry is placed on the line below the entry. While thisis not required, it is good practice because, at times, account titles may notbe enough to describe what actually occurred for a specific transaction.

A blank line is inserted between entries.

The process of recording entries to a journal is called journalizing.

One representation of an account is called the T-account, shown above. A T-account contains just the basic elements of the account, so it lacks the necessary

detail for use in bookkeeping operations. However, it has its uses as both anillustrative tool and a quick reference.

Each account needs to have a unique Account Name, such as Cash, for ease ofreference later on. In modern accounting systems, you will often see an accountnumber alongside the name in order to facilitate report generation and computerentry. Under the bar are the debit (from the Latin debere, to owe) and credit(credere, to believe) columns. As it shows in the example above, the balance of aT-account can be figured by first totaling each column. Second, subtract thesmaller subtotal from the larger, and finally placing the total in the larger

number's column.Ledger Accounts

While a T-Account is useful for quickly summarising an account's balance, it onlycontains a fraction of the information that was recorded in the Journal.

Types of AccountsA central axiom for accounting is the accounting equation above. Depending onthe type of company involved, Owner's Equity may be "Shareholder's" or simply"Equity", but the equation holds. The list of all of the accounts (along with theirrespective account numbers) is called the Chart of Accounts

Asset accounts indicate what a company owns. This can be actual possession orthe right to take possession, such as a loan extended to another company. Someassets are identifiable by the term "Receivable". Assets have a normal debitbalance.

Liability accounts indicate what a company owes to others. Examples of liabilitiesinclude loans to be repayed and services that have been paid for that the companyhasn't performed yet. Many liabilities can be identified by the term "Payable" intheir account name. Liabilities have a normal credit balance.


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Equity accounts are a group of accounts that represent the amount of owner'sequity in the business. There are four main types of Equity accounts:

The effects of debits and credits on the types of accounts is shown on thefollowing table:

Revenue accounts indicate revenue generated by the normal operations of

a business. Fees Earned and Sales are both examples of Revenue accounts.Revenue accounts have a normal credit balance.

Expense accounts indicate the expenses incurred by a business duringnormal operations. Most account names ending in "Expense" are classifiedas expenses. Expenses have a normal debit balance.

The Owner's Equity or Owner's Capital accounts (for aProprietorship/Partnership) or the Shareholder's Equity accounts (for aCorporation) indicate the owner's equity in the business. As the accountingequation indicates, equity is the difference between the assets of thecompany, and the company's debts. Equity accounts are directly effected by

Revenue and Expenses, and the standard Equity accounts have Creditbalances.

Dividends represents equity removed from the business by the owners. In aproprietorship or partnership, each owner has an Owner's Withdrawalsaccount. In a corporation, equity is removed by way of dividends, and aWithdrawal account is not needed. Since these accounts represent capitalremoved from the business, they have a Debit balance.

Basic Accounting Principles

Historical Cost Principle: Assets and liabilities should be recorded at theprice at which they were acquired. This is to ensure a reliable price; market valuescan fluctuate and be different between differing opinions, so the price ofacquisition is used.

Matching Principle: Expenses should be matched with revenues. The expenseis recorded in the time period it is incurred, which means the time period that theexpense is used to generate revenue. This means that you can pay for an expensemonths before it is actually recorded, as the expense is matched to the period therevenue is made.

Revenue Recognition Principle: Revenues should not be recorded until theearnings process is almost complete and there is little uncertainty as to whether


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or not collection of payment will occur. This means that revenue is recordedwhen it is earned, which means the job is complete.

Financial Statements The Income statement is a list of all inflows and outflows of economic

benefits (revenues and expenses).

The balance sheet is a list of all a company's assets, liabilities, and owners'equity.

Basic Accounting Crash Course NotesALL accounting transactions are entered as journal entries. A journal entryconsists of the Account name, and either a debit (left side) amount or credit (rightside) amount. For each entry the debits and credits must balance, and overall onthe trial balance (lists all the debits and credits for all the accounts) must alwaysbalance.

There are 5 main classes of Accounts:1. Assets:An asset is anything of value that the business owns. This includes tangible assets

such as cash, accounts receivable, inventory, buildings, and machinery, as well asintangible assets such as copyrights, trademarks, and goodwill. Asset accountsnormally have a Debit (left side) balance. In transaction entries, a debit to anasset account shows an increase in its amount, while a credit (right side)indicates a decrease in the asset value.

Example: Buying Equipment for Cash. One asset (Equipment) increases, andtherefore it is Debited. Cash, which is also an asset, is decreased with a Credit.

2. Liabilities:Liabilities are debts and financial obligations that the business owes. Thisincludes accounts payable, payroll liabilities, and longterm debts (such as loans).Liabilities accounts normally have a Credit (right side) balance. In transactionentries, a credit to a liability account signifies an increase in its amount, while adebit (left side) indicates a decrease in the liability value.


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Example: Buying Inventory on credit. Merchandise Inventory (an asset) increaseswith a debit, and Accounts Payable (a liability) also increases with a credit.

3. Equity:

Equity is essentially the value of a company or business that accumulates orbuilds-up for the owners or shareholders of that business.

Equity accounts normally have a Credit (right side) balance. In transactionentries in the journals, a credit to an equity account signifies an increase in itsamount, while adebit (left side) indicates a decrease in the equity value. Alwayskeep the accounting equation in mind:

Assets = Liabilities + Equity

Since Assets normally have a Debit balance and both liabilities & equity normallyhave a credit balance, therefore applying the equation above, we always checkthat the trial balance has a NET value of Zero (the total debits and credits shouldmatch).

4. Revenue:This is the entire amount of income made through the sale of goods/services, andis sometimes referred to as Income or Sales. Depending on the nature of thegoods / services being sold, companies track this account either as one bigaccount (e.g. Sales) or as many separate accounts (e.g. Sales of Product 1, Sales ofProduct 2, Freight Income etc). Sales or Revenue accounts normally have a Credit

(right side) balance, and therefore a credit to a revenue account signifies anincrease in its amount, while a debit (left side) indicates a decrease in the revenueamount. A decrease of revenue would take place a product was returned for arefund or when a product was sold for a discount (explained further down).

Example: Recording cash sales. Cash is debited because it is an increase in an

asset account, and Sales is credited because a Revenue account is increased.

5. Expenses:These are the general costs of doing business. They would include operatingexpenses such as Salaries Expense, Rent Expense, and Advertising Expense, aswell as non-operating expenses such as Loss on Sale of Assets (selling an item forless then the purchase price). Expense accounts normally have a Debit (left side)balance. In transaction entries, a debit to an expense account signifies an increasein its amount, while a credit indicates a decrease (which rarely occurs, unless anerror needs to be corrected).


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Example: The company rents office space at $15,000 per month. Rent Expense isdebited, and Cash is credited.

Some very important aspects to remember in addition to the above:

Depreciation, Amortization, and Depletion are used to allocate the cost ofan asset over its useful life. Depreciation is the allocation over time of tangibleassets, Amortization is the allocation over time of intangible assets and Depletionis the allocation over time of natural resources.Accumulated depreciation is acontra-asset account (with a normal Credit balance) used to keep a running totalof the depreciation to date. The book value of any asset at any time is the OriginalCost less any accumulated depreciation. Contra-asset accounts are listed in theassets section of the balance sheet along with the corresponding asset account,

making it easier to see what the assets original cost was and what it ispresentlyvalued at. Allowance for Uncollectible Accounts Receivable is also acontra-asset account with a normal credit balance which is netted against theAccounts Receivable account.

Sales Returns and Allowances & Sales Discounts are contra-revenueaccounts, and the normal balance of this account is a Debit. These are used tooffset the revenue credit balance.

Cost of Goods Sold (COGS): This account is used to track how much you paid

for goods / material that was held in inventory until it was sold. COGS normallyis a debit balance. This account is recorded in entries when a sale is made, andCOGS is debited for the cost, while inventory is credited (assetaccount=>decreased) for the cost.

Credit Notes/memo/refunds are used to refund customers if they returnproducts bought from the company. The entry for this transaction is usually :


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Accounting 11 OnlineMandatory Registration

AssignmentPLEASE NOTE: You will not receive any books, materials, or other resources until you havecompleted this assignment and submitted it for marking.

The first half of the page is to be completed by the teacher:

Date ReceivedBy Marker/Teacher:

Date ReturnedBy Marker/Teacher:

Letter Grade:

Percentage:

_________________________________________Teachers Signature

The rest of the page is to be completed by the student:

Name: Student Number:

Birthdate: Telephone Number:

Personal

Year Month Day

Year Month Day


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E-Mail Address:

This assignment is out of marks.

Your assignment will be assessed on the following criteria. Pleaserefer to this when you receive your assignment back from the

teacher.

Rubric to Assess Content-Based AssignmentCategories

&Expectations

Criteria F


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Responses

InstructionsUsing the required resource document Accountancy/Introduction toAccountancy, please complete the following questions making sure that you addas much detail as possible. Please answer show all answers using bolded anditalicized font.

Questions

1. In its simplest terms, Accounting is the ...? Choose one answer.

a. language of money

b. language of business

c. language of education

d. language of mathematics

2. For each entry the debits and credits must balance. Choose one answer.

a. True

b. False

3. Sales or Revenue accounts normally have a Credit (right side) balance. Choose oneanswer.

a. True

b. False

4. What do Asset accounts indicate? Choose one answer.

a. What a company owes

b. What a company owns

c. The owners equity

d. The cost of doing business

5. An account which indicate the expenses incurred by a business during normaloperations is called what? Choose one answer.

a. Revenue Account

b. Expense Account

c. Capital Account


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d. Owners Withdrawals Account

6. A decrease of revenue would take place a product was returned for a refund. Chooseone answer.

a. True

b. False

7. Debit is on the left side. Choose one answer.

a. True

b. False

8. What is Revenue. Choose one answer.

a. debts and financial obligations that the business owes

b. general costs of doing business

c. anything of value that the business owns.

d. income made through the sale of goods/services

9. What do the initials GAAP stand for ...? Choose one answer.

a. Generally Adapted Accounting Practices

b. Globally Accepted Accounting Practices

c. Generally Accepted Accounting Practices

d. Generally Accepted Accounting Principals

10. What is the third rule of accounting? Choose one answer.

a. Debits and credits must balance

b. Every recorded transaction must be captured in the General Journal

c. Transactions are recorded using the double entry method

d. Every transaction is recorded

11. For an Asset Account, increases go to the debit side. Choose one answer.

a. True

b. False


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12. Which basic accounting principle states that expenses should be matched withrevenues? Choose one answer.

a. Historical Cost Principle

b. Matching Principle: Expenses should be matched with revenues.

c. Revenue Recognition Principle

d. Financial Principal

13. Describe in full, the steps of the Accounting Cycle. Marks: 10

Answer:

________________________________________________________________________________________________________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

14. For each balanced transaction, two entries are made. What are they? Choose one

answer.

a. Expenses and Revenue

b. Liabilities and Assets

c. Debits and Credits

d. Assets and Expenses

15. Cost of Goods Sold (COGS) normally has a debit balance. Choose one answer.

a. True

b. False

16. Are you taking any other courses, either through this school (SCIDES) or anotherschool or college. What are those courses are where are you taking them?

Answer:

____________________________________________________


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________________________________________________________________________________________________________________________________________________________________________________________________________________

17. For an Expenses Account, increases go to the Credit side. Choose one answer.

a. True

b. False

18.What is expenses. Choose one answer.

a. debts and financial obligations that the business owes

b. general costs of doing business

c. anything of value that the business owns.

d. income made through the sale of goods/services

19. For a Revenue Account, increases go to the debit side. Choose one answer.

a. True

b. False

20. What is a Liability? Choose one answer.

a. Items of value that the company owns.

b. A financial obligation that are owed to other parties.

c. Mechanisms where income enters the company.

d. The costs of doing business

21. What is the first rule of accounting? Choose one answer.

a. Debits and credits must balance

b. Every recorded transaction must be captured in the General Journal

c. Transactions are recorded using the double entry method

d. Every transaction is recorded


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22. This book is known as the book of first entry. Choose one answer.

a. The Ledger

b. The Journal

c. The Balance Sheet

d. The Financial Statement

23. As well as taking one or more courses, are you also working, involved in sports orother out of school activities, looking after a home or some other endeavor that requiresa lot of your time? Approximately how many hours a week do these activities require?What are they?

Answer:

________________________________________________________________________________________________________

____________________________________________________________________________________________________________________________________________________________

24. Completing this course will require approximately 100 hours of study and work.

1. Please note that even though this course is self paced, you are expected to beginworking on the course within two weeks of enrollment. If this is not possible pleasecontact me and let me know when you do plan to start.

2. Please note also that if no contact is made within two weeks of enrollment, studentsmay be withdrawn from the class.

With that in mind, when do you intend to start working on this course?

When do you hope to finish it?

These dates are not cast in stone and you can change your mind but it is important thatyou have some kind of goal or schedule.

Answer:________________________________________________________________________________________________________________________________________________________________________________________________________________


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Accounting Activation Assignment.doc