Description
A budget is a quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.
Budget control
BUDGET A budget is a plan expressed in quantitative, usually monetary term, covering a specific period of time, usually one year. In other words a budget is a systematic plan for the utilization of manpower and material Budget: It is a financial and / or quantitative statement, prepared and approved prior to defined period of time, of the policy to be pursued during future period of time
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BUDGET
For effective running of a business, management must know:
where it intends to go i.e. organizational objectives how it intends to accomplish its objective i.e. plans whether individual plans fit in the overall organizational objective. i.e. coordination whether operations conform to the plan of operations relating to that period i.e. control
“ Budgetary control is the device that a company uses for all these purposes.” A budget is a plan expressed in quantitative, usually monetary term, covering a specific period of time, usually one year. In other words a budget is a systematic plan for the utilization of manpower and material
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BUDGETING CONTROL : Budgetary control: it is establishment of budget relating the responsibilities of executives to the requirements of a policy and the continuous comparison of the actual with budgeted result either to secure by individual action the objective of that policy or to provide a basis for its revision Budgeting: it is a whole process of designing, implementing and operating budget
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Objectives of Budgetary control
To ensure Planning for future by setting up various budgets. To co-ordinate the activities of different departments Elimination of waste increases in profitability To anticipate capital expenditure for future To centralize the control system Correction of deviation from the established standards Fixation of responsibility of various individuals I the organization
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Characteristics of GOOD BUDGETING
A budgeting system should involve persons at different levels while preparing the budgets the subordinates should not feel any imposition on them There should be a proper fixation of authority and responsibility. The delegation of authority should be done in a proper way. The targets of the budgets should be realistic if the targets are difficult to be achieved them they will not enthuse the persons concerned A good system of accounting is also essential to make the budgeting successful. A budgeting system should have a whole hearted support of the top management The employees should be imparted budgeting education.
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Characteristics of GOOD BUDGETING
A proper reporting system should be introduced, the actual results should be promptly reported sp that performance appraisal is undertaken
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REQUISITIES FOR A
SUCCEFUL BUDGETRY CONTROL SYSTEM
Clarifying objectives Proper Delegation of authority and Responsibility Proper Communication System Budget Education Participation of all Employees Flexibility Motivation
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Classification and Types of Budgets
(A) Classification on the basis of Flexibility 1.Fixed Budget 2 Flexible Budget (B) Classification on the Basis of Function 1.Operatin Budgets 2.Financial Budget 3 Master Budget (C) Classification According Time 1. Long –term Budgets 2. Short –term Budget 3 Current Budgets
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Fundamental concepts
STEPS FOR THE SUCCESSFUL IMPLMENTATION OF A BUDGETRY CONTROL SYSTEM 1. Organization for budgetary control 2. Budget officer 3. Budget manual 4. Budget committee 5. Budget period 6. Determination of key factor
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BUDGETRY CONTROL Management accounting
Primarily for internal purposes
Costing, budgeting, net present value, etc.
This lecture will focus only on financial accounting.
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Fundamental concepts There are several ways that cash gets into a company: Investment by owners Investment by creditors (loans) Payments from customers. Repayment of amounts loaned to other entities. Return on investments (interest and dividend) Proceeds from selling assets.
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Fundamental concepts
These can be organized into three categories: Operations Payments from customers Refunds from suppliers Financing Investment by owners Investment by creditors (loans) Investing Return on investments (interest and dividend) Proceeds from selling assets Repayment of amounts loaned to other entities
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Fundamental concepts
Similarly, money going out of an entity can be categorized: Operations Payments to suppliers Refunds to customers Financing Payment of dividends or capital to owners Repayment of creditors Investing Purchase of assets Amounts invested in other entities (debt or equity)
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Fundamental concepts Financial accounting categorizes all transactions and events based on their substance.
It is very important that the substance of a transaction be accurately reflected by financial accounting because the users of the information are using it with the assumption that these categorizations are being made accurately.
If money invested by owners was reported as revenue, this would be counter to the fundamental definition of revenue (i.e. that it results from the operations of the company).
The separation of income and capital is a fundamental concept of financial accounting.
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Fundamental concepts
Entity concept Going concern Unit of measure Periodic reporting
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Fundamental concepts
Entity concept There are three basic structures that a company can have in Canada:
1. Sole proprietorship 2. Partnership 3. Corporation A sole proprietorship is not a legal entity separate from its owner A partnership is not a legal entity separate from its owners
These are both sub-components of their owners/partners for legal purposes
A corporation is a separate legal entity
The entity concept for accounting does not simply follow the legal guidelines
A business can be a separate entity for accounting even if it is not one from a legal perspective
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Fundamental concepts
Entity concept It is essential that we know for which entity we are accounting because it will determine if and how events are recorded.
e.g. If Ms. Prop is the sole proprietor of a business called SP, there is one legal entity, Ms. Prop (SP is not a separate legal entity).
If we wish to account for SP, there will be events to account for that are non-events from a legal perspective
e.g. When Ms. Prop puts money into a separate account for the company. This is a non-event legally, but is an event to be accounted for from an accounting perspective.
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Fundamental concepts
Going concern It is assumed that an entity will complete its current plans, use its existing assets, and meet its obligations in the normal course of business.
This is an underlying concept necessary for many of the fundamental recording and reporting decisions that are made in accounting.
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Fundamental concepts
Unit of measure In order for accounting to present information that is useful, it must be able to express things in a common unit of measure. The unit of measure in Canada is usually the Canadian dollar (or U.S. dollar).
It is not useful to tell users that an entity has 30 cars, a building, some land, some equipment, and that it sold 35,000 widgets in the year. The unit of measure concept allows us to express all of these things in dollars.
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Fundamental concepts
Periodic reporting Meaningful financial information about an entity can be provided for periods of time that are shorter than the life of an entity.
Because financial statements tell the users what the entity has and what they did to get it, the users want that information at different points in the entity’s life. Most commonly, the reporting period is annual. All companies are required to file annual financial statements with their tax returns.
Other common reporting periods are monthly or quarterly.
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The Accounting Cycle 1. Transaction or event occurs
Could simply be the passage of time.
2. Recorded in the Journal using a Journal Entry.
event is translated into accounting language.
3. Journal is posted to Ledger
the information from all the journal entries in the period is aggregated.
4. Ledger accounts are totalled. 5. Financial statements are prepared.
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The Accounting Cycle
1. 2. 3. 4. 5. Transaction or event occurs Recorded in the Journal using a Journal Entry. Journal is posted to Ledger Ledger accounts are totalled. Financial statements are prepared.
It is important to note that the decision-making of accounting occurs at step 2 – Journal entry.
Steps 3 – 5 are mechanical exercises.
Therefore, the decisions made when making the journal entry (i.e. translating to accounting language) are very important as they determine what will ultimately be presented on the financial statements. cont’d on next slide…
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The Accounting Cycle
The making of decisions about what journal entry should be made when a transaction or event occurs is the prominent theme of ACTG 5100.
It is commonly believed that these decisions are bound by strict rules that dictate what the journal entry should be.
In reality, this is not true. There are principles that can guide the decisions, but there are many circumstances for which there are not specific treatments prescribed and, therefore, the judgment of the preparers determines the treatment.
For the purposes of this lecture, we will look mostly at non-ambiguous situations.
Students will become very aware of the ambiguity in the real world in ACTG 5100 (and from reading the newspaper).
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Accounting Equation Fundamental Accounting Equation:
Assets = Liabilities + Owners’ Equity
This equation is always in balance
In order for this equation to remain in balance, double-entry bookkeeping is employed.
That is, the recording of every transaction or event must have at least two parts
Either an equal impact (increase or decrease) to both sides of the equation or equal and opposite impact to one side.
The recording of every transaction must keep this equation in balance
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Journal Entries All journal entries have two “sides”: Debit and Credit
For every journal entry, the total debits must equal the total credits
This ensures that the fundamental accounting equation (A = L + OE) is always in balance.
The basic journal entry: Debit Account name1 Credit Account name2 To record…
Introduction to Accounting
$amount $amount
26
Journal Entries “Debit” and “Credit” are just accountingspeak for “increase” and “decrease”
“Debit” means “increase” for some elements and “decrease” for other elements. Likewise for “credit”.
For example, a company pays its $500 utility bill:
In English: the company has incurred an expense (the amount of expense has increased) and the amount of cash in the company has decreased. An expense (Utilities) has increased An asset (Cash) has decreased In Journal entry: Debit Utility expense $500 Credit Cash $500 To record the payment of utility bill
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Journal Entries
The Basic Accounting Elements:
Asset
Expense
Liability
Revenue
Owners’ Equity
28
Introduction to Accounting
Journal Entries
The Basic Accounting Elements: Asset
Has future benefit to the entity
Liability
Obligation to transfer assets in the future
Owners’ Equity
Owners’ interest in the company
Revenue
Increase in economic resources resulting from normal operations of the company
Expense
Decrease in economic resources resulting from normal operations of the company
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Journal Entries
The Basic Accounting Elements:
Balance Sheet
Balance Sheet/ Stmt of Retained Earnings
Income Statement
Debit
Asset
Expense
Credit
Liability
Revenue
Owners’ Equity
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Introduction to Accounting
Journal Entries
Balance Sheet Income Statement
Balance Sheet/ Stmt of Retained Earnings
Debit
Asset
Expense
Credit
Liability
Revenue
Owners’ Equity
To increase an Asset or Expense: Debit To increase a Liability, Revenue, or Owners’ Equity: Credit To decrease an Asset or Expense: Credit To decrease a Liability, Revenue, or Owners’ Equity: Debit
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Journal Entries Going back to the Fundamental Accounting Equation:
Assets = Liabilities + Owners’ Equity Debit Credit Credit
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Journal Entries
What about the Income Statement elements (Revenue and Expense)? They don’t appear in the fundamental accounting equation, so how does it stay in balance when they are debited or credited? e.g. consultant sells services for $300 cash
In English: Cash (asset) increases $300 Revenue increases $300 In Accounting: Debit Cash (Asset) $300 Credit Consulting Revenue $300
To record payment for consulting services rendered
Assets have increased. Liabilities and Owners’ Equity appear to be unchanged. Is A = L + OE not true (i.e. out of balance)?
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Element structures
Assets
Current assets
Cash
• Cash on hand Bank accounts • CIBC • BMO
Accounts receivable
• Accounts receivable – customer 1 • Accounts receivable – customer 2
Inventory
Raw materials Work in process Finished goods • Product 1 • Product 2
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Element structures
Assets
Current assets Long-term assets
Buildings
Ontario buildings Quebec buildings • Montreal building • Sherbrooke building
Vehicles
Cars Trucks • Truck 1 • Truck 2
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Element structures
Liabilities
Current liabilities
Accounts payable Accrued liabilities
Long-term liabilities
Bank loans
• Loan from RBC • Loan from Scotiabank
Notes payable Bonds payable
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Element structures
Owners’ equity
Capital stock (direct investment) Retained earnings (indirect investment)
Revenue Expenses (Dividends)
Although revenue and expenses are not subpieces of Retained earnings the way Current assets are a sub-piece of Total assets, for the purposes of understanding how they fit in to the equation, this representation is helpful.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Long-term assets
-
1,000 1,000 1,000
Total Assets Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
-
Net Income
-
1,000 1,000 1,000 1,000 1,000 -
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000
-
-
-
Total Liabilities and OE
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Tasman Inc.
2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return.
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Tasman Inc.
2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return.
Debit Credit
Cash Capital stock
Asset Owners’ Equity
10,000 10,000
To record sale of common shares.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Total current assets Long-term assets Total Assets Net Income 1,000 1,000 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
10,000
1,000 -
10,000
10,000
1,000 1,000 1,000 10,000 1,000 9,000
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000
-
-
-
Total Liabilities and OE
10,000
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Tasman Inc.
3 Tasman Inc. gets a $50,000 loan from the bank. Interest rate is 6% per year. Interest on the outstanding amount must be paid each year on the anniversary. Principal can be repaid at any time.
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Tasman Inc.
3 Tasman Inc. gets a $50,000 loan from the bank. Interest rate is 6% per year. Interest on the outstanding amount must be paid each year on the anniversary. Principal can be repaid at any time.
Debit Credit
Cash Bank loan
Asset Liability
50,000 50,000
To record the receipt of bank loan.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Total current assets Long-term assets Total Assets Net Income 1,000 1,000 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
60,000
1,000 -
60,000
60,000
1,000 1,000 50,000 51,000 10,000 1,000 9,000
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000
-
-
-
Total Liabilities and OE
60,000
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Tasman Inc.
4 Signed a lease for store space. Rental cost is $3,000 per month. Lease term is 36 months. Annual rent must be paid up front on the anniversary of the lease.
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Tasman Inc.
4 Signed a lease for store space. Rental cost is $3,000 per month. Lease term is 36 months. Annual rent must be paid up front on the anniversary of the lease.
There is no entry.
Signing of a lease (or any contract) is not considered a transaction for accounting purposes.
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Tasman Inc.
5 Make the rent payment for 2003 ($36,000).
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Tasman Inc.
5 Make the rent payment for 2003 ($36,000).
Debit Credit
Prepaid rent expense Cash
Asset Asset
36,000 36,000
To record the payment of 2003 rent in advance.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Total current assets Long-term assets Net Income 1,000 Total Assets 1,000 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities 1,000 1,000 9,000 Total Liabilities and OE 60,000 Owners' Equity Capital stock Retained Earnings 60,000
1,000 -
24,000 36,000
-
60,000
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings
1,000 1,000 50,000 51,000 10,000 1,000
-
-
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Tasman Inc.
6 Buy an oven which costs $15,000. Pay $5,000 cash, balance is due in one year. Interest rate on the outstanding balance is 3.5% per year.
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Tasman Inc.
6 Buy an oven which costs $15,000. Pay $5,000 cash, balance is due in one year. Interest rate on the outstanding balance is 3.5% per year.
Debit Credit Credit
Cooking equipment Cash Accounts payable
Asset Asset Liability
15,000 5,000 10,000
To record the purchase of oven partially on credit.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Total current assets Long-term assets Cooking equipment
1,000 1,000 1,000
19,000 36,000
-
55,000 15,000 15,000 70,000
Net Income
-
Total Assets Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
1,000 10,000 11,000 50,000 61,000 10,000 1,000 9,000
-
-
-
Total Liabilities and OE
70,000
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Tasman Inc.
7 Buy $1,500 of food supplies (ingredients to make pizzas).
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Tasman Inc.
7 Buy $1,500 of food supplies (ingredients to make pizzas).
Debit Credit
Food inventory Cash
Asset Asset
1,500 1,500
To record the purchase of supplies to be used in making pizzas for sale.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment
1,000 1,000 1,000
17,500 36,000 1,500
-
55,000 15,000 15,000 70,000
Net Income
-
Total Assets Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
1,000 10,000 11,000 50,000 61,000 10,000 1,000 9,000
-
-
-
Total Liabilities and OE
70,000
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Tasman Inc.
8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days.
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Tasman Inc.
8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days.
Debit Credit
Office equipment Accounts payable
Asset Liability
4,000 4,000
To record the purchase of office equipment on credit.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment Office equipment Total Assets Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
1,000 1,000 1,000
17,500 36,000 1,500
-
55,000 15,000 4,000 19,000 74,000
Net Income
-
1,000 14,000 15,000 50,000 65,000 10,000 1,000 9,000
-
-
-
Total Liabilities and OE
74,000
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Tasman Inc.
9 Hired a chef. Salary of $33,800 per year paid biweekly (26 times a year).
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Tasman Inc.
9 Hired a chef. Salary of $33,800 per year paid biweekly (26 times a year).
No entry.
Hiring of an employee is not considered a transaction for accounting purposes.
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Tasman Inc.
10 In addition to being the manager, Dave will be the delivery man until there is revenue enough to hire one. Dave decides to pay himself a salary of $62,400 per year paid bi-weekly. To avoid draining cash from the company, Dave will not take cash salary until further notice.
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Tasman Inc.
10 In addition to being the manager, Dave will be the delivery man until there is revenue enough to hire one. Dave decides to pay himself a salary of $62,400 per year paid bi-weekly. To avoid draining cash from the company, Dave will not take cash salary until further notice.
No entry.
Same reason as previous example. Information will be useful in determining future journal entries.
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Tasman Inc.
11 First salary payments are made.
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Tasman Inc.
11 First salary payments are made.
Debit Credit
Salary expense Cash
Expense Asset
1,300 1,300
To record payment of chef (33,800/26 = 1,300).
Debit Credit
Salary expense Due to shareholder
Expense Liability
2,400 2,400
To record salary expense for Manager, not paid in cash (62,400/26 = 2,400)
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Salaries Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment Office equipment Total Assets Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 4,700 4,700 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
1,000 3,700 4,700 4,700
16,200 36,000 1,500
-
53,700 15,000 4,000 19,000 72,700
Net Income
-
3,400 14,000 17,400 50,000 67,400 10,000 4,700 5,300
-
-
-
Total Liabilities and OE
72,700
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Tasman Inc.
12 Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms.
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Tasman Inc.
12 Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms.
Debit Credit
Vehicle Cash
Asset Asset
10,000 10,000
To record purchase of used vehicle to be used as delivery vehicle.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Salaries Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
1,000 3,700 4,700 4,700
6,200 36,000 1,500 43,700 15,000 4,000 10,000
Net Income
-
29,000 72,700
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 4,700 4,700
3,400 14,000 17,400 50,000 67,400 10,000 4,700 5,300
-
-
-
Total Liabilities and OE
72,700
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Tasman Inc.
13 Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days.
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Tasman Inc.
13 Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days.
Debit
Cash
Asset
900
Debit
Credit
Accounts receivable
Catering revenue
Asset
Revenue
600
1,500
To record the earning of catering revenue.
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Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Expenses Incorp costs Salaries
Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Total current assets Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
Tasman Inc.
1,500 1,500 1,000 3,700 4,700 3,200
7,100 36,000 1,500 600 45,200 15,000 4,000 10,000
Net Income
-
29,000 74,200
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 3,200 3,200
3,400 14,000 17,400 50,000 67,400 10,000 3,200 6,800
-
-
-
Total Liabilities and OE
74,200
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Tasman Inc.
14 Store is open for business. Cash register reports revenue of $1,200 for the day.
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Tasman Inc.
14 Store is open for business. Cash register reports revenue of $1,200 for the day.
Debit Credit
Cash Store revenue
Asset Revenue
1,200 1,200
To record the aggregate sales for the first day of business.
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Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries
Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Total current assets Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
Tasman Inc.
1,500 1,200 1,000 3,700 -
2,700
8,300 36,000 1,500 600 46,400 15,000 4,000 10,000
4,700 2,000
Net Income
-
29,000 75,400
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000
3,400 14,000 17,400 50,000 67,400 10,000 2,000 8,000
-
-
-
Total Liabilities and OE
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75,400
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Tasman Inc.
15 The company upstairs in Tasman’s building approaches Dave about an exclusive catering arrangement whereby the company will pay Tasman $4,000 up front to cater 5 functions throughout the year. Dave accepts the deal and $4,000 cash.
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Tasman Inc.
15 The company upstairs in Tasman’s building approaches Dave about an exclusive catering arrangement whereby the company will pay Tasman $4,000 up front to cater 5 functions throughout the year. Dave accepts the deal and $4,000 cash.
Debit Credit
Cash Unearned revenue
Asset Liability
4,000 4,000
To record the receipt of cash for work to be performed in the future.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 1,500 1,200 1,000 3,700 Net Income 4,700 2,000
2,700
12,300 36,000 1,500 600 15,000 4,000 10,000
50,400
29,000 79,400
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000
3,400 14,000 4,000
-
21,400 50,000 71,400 10,000 2,000 8,000
-
-
Total Liabilities and OE
79,400
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Tasman Inc.
16 Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days.
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Tasman Inc.
16 Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days.
Debit Credit
Food inventory Accounts payable
Asset Liability
5,000 5,000
To record the purchase of food inventory on credit.
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79
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 1,500 1,200 1,000 3,700 Net Income 4,700 2,000
2,700
12,300 36,000 6,500 600 15,000 4,000 10,000
55,400
29,000 84,400
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000
3,400 19,000 4,000
-
26,400 50,000 76,400 10,000 2,000 8,000
-
-
Total Liabilities and OE
84,400
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80
Tasman Inc.
17 Pay off the balances owing on the office equipment and the food supplies.
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81
Tasman Inc.
17 Pay off the balances owing on the office equipment and the food supplies.
Debit Credit Debit Credit
Accounts payable Cash
Liability Asset
4,000 4,000 5,000 5,000
To record the payment of amounts owing to supplier of office equipment. Accounts payable Cash
Liability Asset
To record the payment of amount owing to supplier of food inventory.
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82
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 1,500 1,200 1,000 3,700 Net Income 4,700 2,000
2,700
3,300 36,000 6,500 600 15,000 4,000 10,000
46,400
29,000 75,400
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000
3,400 10,000 4,000
-
17,400 50,000 67,400 10,000 2,000 8,000
-
-
Total Liabilities and OE
75,400
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83
Tasman Inc.
18 Dave finds out that the company that owes Tasman $600 for the catering job has gone bankrupt and Tasman will not be receiving payment.
Introduction to Accounting
84
Tasman Inc.
18 Dave finds out that the company that owes Tasman $600 for the catering job has gone bankrupt and Tasman will not be receiving payment.
Debit Credit
Bad debt expense Accounts receivable
Expense Asset
600 600
To record the write-off of amount owing from customer.
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85
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 1,500 1,200 1,000 3,700 600 Net Income 5,300 2,600
2,700
3,300 36,000 6,500 15,000 4,000 10,000
45,800
29,000 74,800
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,600 2,600
3,400 10,000 4,000
-
17,400 50,000 67,400 10,000 2,600 7,400
-
-
Total Liabilities and OE
74,800
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86
Tasman Inc.
19 Tasman provides the catering for an event for the company upstairs. Everything goes fine.
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87
Tasman Inc.
19 Tasman provides the catering for an event for the company upstairs. Everything goes fine.
Debit Credit
Unearned revenue Catering revenue
Liability Revenue
800 800
To record the earning of catering revenue (assume $4,000 is earned evenly over 5 events)
Introduction to Accounting
88
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 1,200 1,000 3,700 600 Net Income 5,300 1,800
3,500
3,300 36,000 6,500 15,000 4,000 10,000
45,800
29,000 74,800
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,800 1,800
3,400 10,000 3,200
-
16,600 50,000 66,600 10,000 1,800 8,200
-
-
Total Liabilities and OE
74,800
Introduction to Accounting
89
Tasman Inc.
Summary amount 1 Store revenues have been $220,000.
Introduction to Accounting
90
Tasman Inc.
Summary amount 1 Store revenues have been $220,000.
Debit Credit
Cash Store revenue
Asset Revenue
220,000 220,000
To record aggregate store revenue for the year.
Introduction to Accounting
91
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 221,200 1,000 3,700 600 Net Income 5,300 218,200
223,500
223,300 36,000 6,500 15,000 4,000 10,000
265,800
29,000 294,800
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 218,200 218,200
3,400 10,000 3,200
16,600 50,000 66,600 10,000 218,200 228,200
Total Liabilities and OE
294,800
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Tasman Inc.
Summary amount 2 All salaries have been paid. Dave has taken half of his salary in cash.
Introduction to Accounting
93
Tasman Inc.
Summary amount 2 All salaries have been paid. Dave has taken half of his salary in cash.
Debit Credit
Salary expense Cash
Expense Asset
32,500 32,500
To record payment of chef’s salary (33,800 - 1,300 (previously recorded) = 32,500).
Debit Credit
Credit
Salary expense Cash
Due to shareholder
Expense Asset
Liability
60,000 31,200
28,800
To record salary expense for Manager (62,400 – 2,400 (previously recorded) = 60,000)
94
Introduction to Accounting
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 221,200 1,000 96,200 600 Net Income 97,800 125,700
223,500
159,600 36,000 6,500 15,000 4,000 10,000
202,100
29,000 231,100
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 125,700 125,700
32,200 10,000 3,200
45,400 50,000 95,400 10,000 125,700 135,700
Total Liabilities and OE
231,100
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95
Tasman Inc.
Summary amount 3 Additional food supply purchases were $80,000.
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96
Tasman Inc.
Summary amount 3 Additional food supply purchases were $80,000.
Debit Credit
Food inventory Cash
Asset Asset
80,000 80,000
To record aggregate food supply purchases for the year.
Introduction to Accounting
97
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 221,200 1,000 96,200 600 Net Income 97,800 125,700
223,500
79,600 36,000 86,500 15,000 4,000 10,000
202,100
29,000 231,100
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 125,700 125,700
32,200 10,000 3,200
45,400 50,000 95,400 10,000 125,700 135,700
Total Liabilities and OE
231,100
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98
Tasman Inc.
Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003.
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99
Tasman Inc.
Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003. Total purchased in the year
= 1,500 + 5,000 + 80,000 = 86,500 86,500 – 3,500 = 83,000 = Cost of the inventory used = Cost of goods sold
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Tasman Inc.
Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003. Total purchased in the year
= 1,500 + 5,000 + 80,000 = 86,500 86,500 – 3,500 = 83,000 = Cost of the inventory used = Cost of goods sold
Debit Credit
Cost of goods sold Food inventory
Expense Liability
83,000 83,000
To record the cost of food inventory used in the year.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 221,200 -
223,500 83,000 140,500
79,600 36,000 3,500 15,000 4,000 10,000
119,100
1,000 96,200 600 97,800 42,700
29,000 148,100
Net Income
32,200 10,000 3,200
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 42,700 42,700
45,400 50,000 95,400 10,000 42,700 52,700
Total Liabilities and OE
148,100
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Tasman Inc.
Summary amount 5 Utilities expenses were all paid in cash on the last day of each month. Total for the year was $9,600.
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103
Tasman Inc.
Summary amount 5 Utilities expenses were all paid in cash on the last day of each month. Total for the year was $9,600.
Debit Credit
Utilities expense Cash
Expense Asset
9,600 9,600
To record aggregate payment of utilities expense for the year.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 221,200 -
223,500 83,000 140,500
70,000 36,000 3,500 15,000 4,000 10,000
109,500
1,000 96,200 600 9,600 107,400 33,100
29,000 138,500
Net Income
32,200 10,000 3,200
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 33,100 33,100
45,400 50,000 95,400 10,000 33,100 43,100
Total Liabilities and OE
138,500
Introduction to Accounting
105
Tasman Inc.
Summary amount 6 Tasman catered 3 of the remaining events for the company upstairs. The last one will be held on January 7, 2004.
Introduction to Accounting
106
Tasman Inc.
Summary amount 6 Tasman catered 3 of the remaining events for the company upstairs. The last one will be held on January 7, 2004.
Debit Credit
Unearned revenue Catering revenue
Liability Revenue
2,400 2,400
To record the earning of revenue for 3 of remaining 4 events that had been pre-paid.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 4,700 221,200 -
225,900 83,000 142,900
70,000 36,000 3,500 15,000 4,000 10,000
109,500
1,000 96,200 600 9,600 107,400 35,500
29,000 138,500
Net Income
32,200 10,000 800
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 35,500 35,500
43,000 50,000 93,000 10,000 35,500 45,500
Total Liabilities and OE
138,500
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Tasman Inc.
Adjusting entry 1 Costs related to the oven, the office equipment, and the Camaro must be recorded.
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109
Tasman Inc.
Adjusting entry 1 Costs related to the oven, the office equipment, and the Camaro must be recorded.
Debit
Credit
Depreciation expense
Accumulated Depreciation – Oven
Expense
Contra-asset
3,000
3,000
To record annual depreciation of Oven (15,000/5 = 3,000 (assume 5-year life)).
Debit
Credit
Depreciation expense Accumulated Depreciation – Office equipment
Expense Contra-asset
1,000
1,000
To record annual depreciation of office equipment (4,000/4 = 1,000 (assume 4-year life)).
Debit Credit
Depreciation expense Accumulated Depreciation – Vehicle
Expense Contra-asset
2,000 2,000
To record annual depreciation of delivery vehicle (10,000/5 = 2,000).
Introduction to Accounting 110
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Depreciation Net Income Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings
4,700 221,200 -
225,900 83,000 142,900
70,000 36,000 3,500 15,000 4,000 10,000 6,000
109,500
1,000 96,200 600 9,600 6,000 -
23,000 132,500
113,400 29,500
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 29,500 29,500
32,200 10,000 800
43,000 50,000 93,000 10,000 29,500 39,500
Total Liabilities and OE
Introduction to Accounting
132,500
111
Tasman Inc.
Adjusting entry 2 Interest has accrued on the bank loan and the amount due to the oven supplier.
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112
Tasman Inc.
Adjusting entry 2 Interest has accrued on the bank loan and the amount due to the oven supplier.
Debit Credit
Interest expense Interest payable
Expense Liability
3,000 3,000
To record the interest which has accrued in the year (50,000*6% = 3,000)
Debit Credit
Interest expense Interest payable
Expense Liability
350 350
To record the interest which has accrued on amount payable on oven (10,000*3.5% = 350)
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Depreciation Interest Net Income Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Interest payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings
4,700 221,200 -
225,900 83,000 142,900
70,000 36,000 3,500 15,000 4,000 10,000 6,000
109,500
1,000 96,200 600 9,600 6,000 3,350 -
23,000 132,500
116,750 26,150
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 26,150 26,150
32,200 10,000 3,350 800
46,350 50,000 96,350 10,000 26,150 36,150 132,500
114
Total Liabilities and OE
Introduction to Accounting
Tasman Inc.
Adjusting entry 3 Rent expense must be recorded. Recall that $36,000 was paid at the beginning of the year for the full year and was recorded as an asset, Prepaid rent expense.
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Tasman Inc.
Adjusting entry 3 Rent expense must be recorded. Recall that $36,000 was paid at the beginning of the year for the full year and was recorded as an asset, Prepaid rent expense.
Debit Credit
Rent expense Prepaid rent expense
Expense Asset
36,000 36,000
To record the rent expense which had been prepaid at the beginning of the year.
Introduction to Accounting
116
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Rent Depreciation Interest Net Income Tasman Inc. Balance Steet As at December 31, 2003 Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Interest payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 4,700 221,200 -
225,900 83,000 142,900
70,000 3,500 15,000 4,000 10,000 6,000
73,500
1,000 96,200 600 9,600 36,000 6,000 3,350 -
23,000 96,500
152,750 9,850
32,200 10,000 3,350 800
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 9,850 9,850
46,350 50,000 96,350 10,000 9,850 150 96,500
117
-
-
Total Liabilities and OE
Introduction to Accounting
The Accounting Cycle
1. 2. 3. 4. 5. Transaction or event occurs Recorded in the Journal using a Journal Entry. Journal is posted to Ledger Ledger accounts are totalled. Financial statements are prepared.
We have done step 2 (journal entries). Step 3 is most easily done using a spreadsheet (Friedlan text provides a template).
We will use the old-fashioned method known as Taccounts.
Each account is represented by a T. All debits are “posted” on the left, all credits are “posted” on the right. Spreadsheets have made this practice virtually obsolete, but it is informative to do it to help understand the fundamentals.
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T-Accounts (posting to ledgers)
Before the closing entry:
Cash 10,000 36,000 50,000 5,000 900 1,500 1,200 1,300 4,000 10,000 220,000 9,000 32,500 31,200 80,000 9,600 70,000 Accounts Receivable 600 600 Prepaid rent expense 36,000 36,000 Food inventory 1,500 83,000 5,000 80,000 3,500 Due to shareholder 1,000 2,400 28,800 32,200 Accounts payable 9,000 10,000 4,000 5,000 10,000 Interest payable 3,000 350 3,350 Unearned revenue 800 4,000 2,400 800 Bank loan 50,000 50,000 Capital stock 10,000 10,000 Catering revenue 1,500 800 2,400 4,700 Store sales 1,200 220,000 221,200
Cost of goods sold 83,000 83,000 Incorporation costs 1,000 1,000 Salaries 3,700 92,500 96,200 Bad debts 600 600 Retained earnings
Rent 36,000 36,000 Depreciation 3,000 1,000 2,000 6,000 Interest 3,000 350 3,350 Utilities 9,600 9,600
Cooking equipment 15,000 15,000 Accumulated depn 3,000 1,000 2,000 6,000
Office equipment 4,000 4,000 Vehicle 10,000 10,000
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The closing entry
The closing entry resets all of the temporary accounts to zero and send the residual to Retained earnings. Dr Catering revenue 4,700 Dr Store sales 221,200 Cr Cost of goods sold 83,000 Cr Incorporation costs 1,000 Cr Salaries 96,200 Cr Bad debts 600 Cr Utilities 9,600 Cr Rent 36,000 Cr Depreciation 6,000 Cr Interest 3,350 Dr Retained earnings 9,850 To close the temporary accounts for the year
Introduction to Accounting 120
T-Accounts (posting to ledgers)
After the closing entry:
Cash 10,000 36,000 50,000 5,000 900 1,500 1,200 1,300 4,000 10,000 220,000 9,000 32,500 31,200 80,000 9,600 70,000 Accounts Receivable 600 600 Prepaid rent expense 36,000 36,000 Food inventory 1,500 83,000 5,000 80,000 3,500 Due to shareholder 1,000 2,400 28,800 32,200 Accounts payable 9,000 10,000 4,000 5,000 10,000 Interest payable 3,000 350 3,350 Unearned revenue 800 4,000 2,400 800 Bank loan 50,000 50,000 Capital stock 10,000 10,000 Catering revenue 1,500 800 2,400 4,700 4,700 Cost of goods sold 83,000 83,000 83,000 Incorporation costs 1,000 1,000 1,000 Salaries 3,700 92,500 96,200 96,200 Bad debts 600 600 Store sales 1,200 220,000 221,200 221,200
Rent 36,000 36,000 36,000 Depreciation 3,000 1,000 2,000 6,000 6,000 Interest 3,000 350 3,350 3,350 Utilities 9,600 9,600 9,600 -
Cooking equipment 15,000 15,000 Accumulated depn 3,000 1,000 2,000 6,000
Office equipment 4,000 4,000 Vehicle 10,000 10,000
600
Retained earnings 9,850 9,850
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121
Financial statements
Numbers to go to the financial statements
Cash 10,000 36,000 50,000 5,000 900 1,500 1,200 1,300 4,000 10,000 220,000 9,000 32,500 31,200 80,000 9,600 70,000 Accounts Receivable 600 600 Prepaid rent expense 36,000 36,000 Food inventory 1,500 83,000 5,000 80,000 3,500 Due to shareholder 1,000 2,400 28,800 32,200 Accounts payable 9,000 10,000 4,000 5,000 10,000 Interest payable 3,000 350 3,350 Unearned revenue 800 4,000 2,400 800 Bank loan 50,000 50,000 Capital stock 10,000 10,000 Catering revenue 1,500 800 2,400 4,700 4,700 Cost of goods sold 83,000 83,000 83,000 Incorporation costs 1,000 1,000 1,000 Salaries 3,700 92,500 96,200 96,200 Bad debts 600 600 Store sales 1,200 220,000 221,200 221,200
Rent 36,000 36,000 36,000 Depreciation 3,000 1,000 2,000 6,000 6,000 Interest 3,000 350 3,350 3,350 Utilities 9,600 9,600 9,600 -
Cooking equipment 15,000 15,000 Accumulated depn 3,000 1,000 2,000 6,000
Office equipment 4,000 4,000 Vehicle 10,000 10,000
600
Retained earnings 9,850 9,850
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122
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Rent Depreciation Interest Net Income Tasman Inc. Balance Steet As at December 31, 2003 Assets Current assets Cash Food inventory Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Interest payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 9,850 9,850 4,700 221,200 -
225,900 83,000 142,900
70,000 3,500 15,000 4,000 10,000 6,000
73,500
1,000 96,200 600 9,600 36,000 6,000 3,350 -
23,000 96,500
152,750 9,850
32,200 10,000 3,350 800
46,350 50,000 96,350 10,000 9,850 150 96,500
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings
-
-
Total Liabilities and OE
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123
doc_914751477.ppt
A budget is a quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.
Budget control
BUDGET A budget is a plan expressed in quantitative, usually monetary term, covering a specific period of time, usually one year. In other words a budget is a systematic plan for the utilization of manpower and material Budget: It is a financial and / or quantitative statement, prepared and approved prior to defined period of time, of the policy to be pursued during future period of time
Introduction to Accounting 2
BUDGET
For effective running of a business, management must know:
where it intends to go i.e. organizational objectives how it intends to accomplish its objective i.e. plans whether individual plans fit in the overall organizational objective. i.e. coordination whether operations conform to the plan of operations relating to that period i.e. control
“ Budgetary control is the device that a company uses for all these purposes.” A budget is a plan expressed in quantitative, usually monetary term, covering a specific period of time, usually one year. In other words a budget is a systematic plan for the utilization of manpower and material
Introduction to Accounting
3
BUDGETING CONTROL : Budgetary control: it is establishment of budget relating the responsibilities of executives to the requirements of a policy and the continuous comparison of the actual with budgeted result either to secure by individual action the objective of that policy or to provide a basis for its revision Budgeting: it is a whole process of designing, implementing and operating budget
Introduction to Accounting 4
Objectives of Budgetary control
To ensure Planning for future by setting up various budgets. To co-ordinate the activities of different departments Elimination of waste increases in profitability To anticipate capital expenditure for future To centralize the control system Correction of deviation from the established standards Fixation of responsibility of various individuals I the organization
Introduction to Accounting 5
Characteristics of GOOD BUDGETING
A budgeting system should involve persons at different levels while preparing the budgets the subordinates should not feel any imposition on them There should be a proper fixation of authority and responsibility. The delegation of authority should be done in a proper way. The targets of the budgets should be realistic if the targets are difficult to be achieved them they will not enthuse the persons concerned A good system of accounting is also essential to make the budgeting successful. A budgeting system should have a whole hearted support of the top management The employees should be imparted budgeting education.
Introduction to Accounting 6
Characteristics of GOOD BUDGETING
A proper reporting system should be introduced, the actual results should be promptly reported sp that performance appraisal is undertaken
Introduction to Accounting
7
REQUISITIES FOR A
SUCCEFUL BUDGETRY CONTROL SYSTEM
Clarifying objectives Proper Delegation of authority and Responsibility Proper Communication System Budget Education Participation of all Employees Flexibility Motivation
Introduction to Accounting
8
Classification and Types of Budgets
(A) Classification on the basis of Flexibility 1.Fixed Budget 2 Flexible Budget (B) Classification on the Basis of Function 1.Operatin Budgets 2.Financial Budget 3 Master Budget (C) Classification According Time 1. Long –term Budgets 2. Short –term Budget 3 Current Budgets
Introduction to Accounting 9
Fundamental concepts
STEPS FOR THE SUCCESSFUL IMPLMENTATION OF A BUDGETRY CONTROL SYSTEM 1. Organization for budgetary control 2. Budget officer 3. Budget manual 4. Budget committee 5. Budget period 6. Determination of key factor
Introduction to Accounting
10
BUDGETRY CONTROL Management accounting
Primarily for internal purposes
Costing, budgeting, net present value, etc.
This lecture will focus only on financial accounting.
Introduction to Accounting
11
Fundamental concepts There are several ways that cash gets into a company: Investment by owners Investment by creditors (loans) Payments from customers. Repayment of amounts loaned to other entities. Return on investments (interest and dividend) Proceeds from selling assets.
Introduction to Accounting 12
Fundamental concepts
These can be organized into three categories: Operations Payments from customers Refunds from suppliers Financing Investment by owners Investment by creditors (loans) Investing Return on investments (interest and dividend) Proceeds from selling assets Repayment of amounts loaned to other entities
Introduction to Accounting 13
Fundamental concepts
Similarly, money going out of an entity can be categorized: Operations Payments to suppliers Refunds to customers Financing Payment of dividends or capital to owners Repayment of creditors Investing Purchase of assets Amounts invested in other entities (debt or equity)
Introduction to Accounting 14
Fundamental concepts Financial accounting categorizes all transactions and events based on their substance.
It is very important that the substance of a transaction be accurately reflected by financial accounting because the users of the information are using it with the assumption that these categorizations are being made accurately.
If money invested by owners was reported as revenue, this would be counter to the fundamental definition of revenue (i.e. that it results from the operations of the company).
The separation of income and capital is a fundamental concept of financial accounting.
Introduction to Accounting 15
Fundamental concepts
Entity concept Going concern Unit of measure Periodic reporting
Introduction to Accounting
16
Fundamental concepts
Entity concept There are three basic structures that a company can have in Canada:
1. Sole proprietorship 2. Partnership 3. Corporation A sole proprietorship is not a legal entity separate from its owner A partnership is not a legal entity separate from its owners
These are both sub-components of their owners/partners for legal purposes
A corporation is a separate legal entity
The entity concept for accounting does not simply follow the legal guidelines
A business can be a separate entity for accounting even if it is not one from a legal perspective
Introduction to Accounting 17
Fundamental concepts
Entity concept It is essential that we know for which entity we are accounting because it will determine if and how events are recorded.
e.g. If Ms. Prop is the sole proprietor of a business called SP, there is one legal entity, Ms. Prop (SP is not a separate legal entity).
If we wish to account for SP, there will be events to account for that are non-events from a legal perspective
e.g. When Ms. Prop puts money into a separate account for the company. This is a non-event legally, but is an event to be accounted for from an accounting perspective.
Introduction to Accounting 18
Fundamental concepts
Going concern It is assumed that an entity will complete its current plans, use its existing assets, and meet its obligations in the normal course of business.
This is an underlying concept necessary for many of the fundamental recording and reporting decisions that are made in accounting.
Introduction to Accounting
19
Fundamental concepts
Unit of measure In order for accounting to present information that is useful, it must be able to express things in a common unit of measure. The unit of measure in Canada is usually the Canadian dollar (or U.S. dollar).
It is not useful to tell users that an entity has 30 cars, a building, some land, some equipment, and that it sold 35,000 widgets in the year. The unit of measure concept allows us to express all of these things in dollars.
Introduction to Accounting 20
Fundamental concepts
Periodic reporting Meaningful financial information about an entity can be provided for periods of time that are shorter than the life of an entity.
Because financial statements tell the users what the entity has and what they did to get it, the users want that information at different points in the entity’s life. Most commonly, the reporting period is annual. All companies are required to file annual financial statements with their tax returns.
Other common reporting periods are monthly or quarterly.
Introduction to Accounting 21
The Accounting Cycle 1. Transaction or event occurs
Could simply be the passage of time.
2. Recorded in the Journal using a Journal Entry.
event is translated into accounting language.
3. Journal is posted to Ledger
the information from all the journal entries in the period is aggregated.
4. Ledger accounts are totalled. 5. Financial statements are prepared.
Introduction to Accounting 22
The Accounting Cycle
1. 2. 3. 4. 5. Transaction or event occurs Recorded in the Journal using a Journal Entry. Journal is posted to Ledger Ledger accounts are totalled. Financial statements are prepared.
It is important to note that the decision-making of accounting occurs at step 2 – Journal entry.
Steps 3 – 5 are mechanical exercises.
Therefore, the decisions made when making the journal entry (i.e. translating to accounting language) are very important as they determine what will ultimately be presented on the financial statements. cont’d on next slide…
Introduction to Accounting 23
The Accounting Cycle
The making of decisions about what journal entry should be made when a transaction or event occurs is the prominent theme of ACTG 5100.
It is commonly believed that these decisions are bound by strict rules that dictate what the journal entry should be.
In reality, this is not true. There are principles that can guide the decisions, but there are many circumstances for which there are not specific treatments prescribed and, therefore, the judgment of the preparers determines the treatment.
For the purposes of this lecture, we will look mostly at non-ambiguous situations.
Students will become very aware of the ambiguity in the real world in ACTG 5100 (and from reading the newspaper).
Introduction to Accounting 24
Accounting Equation Fundamental Accounting Equation:
Assets = Liabilities + Owners’ Equity
This equation is always in balance
In order for this equation to remain in balance, double-entry bookkeeping is employed.
That is, the recording of every transaction or event must have at least two parts
Either an equal impact (increase or decrease) to both sides of the equation or equal and opposite impact to one side.
The recording of every transaction must keep this equation in balance
Introduction to Accounting 25
Journal Entries All journal entries have two “sides”: Debit and Credit
For every journal entry, the total debits must equal the total credits
This ensures that the fundamental accounting equation (A = L + OE) is always in balance.
The basic journal entry: Debit Account name1 Credit Account name2 To record…
Introduction to Accounting
$amount $amount
26
Journal Entries “Debit” and “Credit” are just accountingspeak for “increase” and “decrease”
“Debit” means “increase” for some elements and “decrease” for other elements. Likewise for “credit”.
For example, a company pays its $500 utility bill:
In English: the company has incurred an expense (the amount of expense has increased) and the amount of cash in the company has decreased. An expense (Utilities) has increased An asset (Cash) has decreased In Journal entry: Debit Utility expense $500 Credit Cash $500 To record the payment of utility bill
Introduction to Accounting 27
Journal Entries
The Basic Accounting Elements:
Asset
Expense
Liability
Revenue
Owners’ Equity
28
Introduction to Accounting
Journal Entries
The Basic Accounting Elements: Asset
Has future benefit to the entity
Liability
Obligation to transfer assets in the future
Owners’ Equity
Owners’ interest in the company
Revenue
Increase in economic resources resulting from normal operations of the company
Expense
Decrease in economic resources resulting from normal operations of the company
Introduction to Accounting 29
Journal Entries
The Basic Accounting Elements:
Balance Sheet
Balance Sheet/ Stmt of Retained Earnings
Income Statement
Debit
Asset
Expense
Credit
Liability
Revenue
Owners’ Equity
30
Introduction to Accounting
Journal Entries
Balance Sheet Income Statement
Balance Sheet/ Stmt of Retained Earnings
Debit
Asset
Expense
Credit
Liability
Revenue
Owners’ Equity
To increase an Asset or Expense: Debit To increase a Liability, Revenue, or Owners’ Equity: Credit To decrease an Asset or Expense: Credit To decrease a Liability, Revenue, or Owners’ Equity: Debit
Introduction to Accounting 31
Journal Entries Going back to the Fundamental Accounting Equation:
Assets = Liabilities + Owners’ Equity Debit Credit Credit
Introduction to Accounting
32
Journal Entries
What about the Income Statement elements (Revenue and Expense)? They don’t appear in the fundamental accounting equation, so how does it stay in balance when they are debited or credited? e.g. consultant sells services for $300 cash
In English: Cash (asset) increases $300 Revenue increases $300 In Accounting: Debit Cash (Asset) $300 Credit Consulting Revenue $300
To record payment for consulting services rendered
Assets have increased. Liabilities and Owners’ Equity appear to be unchanged. Is A = L + OE not true (i.e. out of balance)?
Introduction to Accounting
33
Element structures
Assets
Current assets
Cash
• Cash on hand Bank accounts • CIBC • BMO
Accounts receivable
• Accounts receivable – customer 1 • Accounts receivable – customer 2
Inventory
Raw materials Work in process Finished goods • Product 1 • Product 2
Introduction to Accounting 34
Element structures
Assets
Current assets Long-term assets
Buildings
Ontario buildings Quebec buildings • Montreal building • Sherbrooke building
Vehicles
Cars Trucks • Truck 1 • Truck 2
Introduction to Accounting
35
Element structures
Liabilities
Current liabilities
Accounts payable Accrued liabilities
Long-term liabilities
Bank loans
• Loan from RBC • Loan from Scotiabank
Notes payable Bonds payable
Introduction to Accounting
36
Element structures
Owners’ equity
Capital stock (direct investment) Retained earnings (indirect investment)
Revenue Expenses (Dividends)
Although revenue and expenses are not subpieces of Retained earnings the way Current assets are a sub-piece of Total assets, for the purposes of understanding how they fit in to the equation, this representation is helpful.
Introduction to Accounting 37
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Long-term assets
-
1,000 1,000 1,000
Total Assets Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
-
Net Income
-
1,000 1,000 1,000 1,000 1,000 -
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000
-
-
-
Total Liabilities and OE
Introduction to Accounting
38
Tasman Inc.
2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return.
Introduction to Accounting
39
Tasman Inc.
2 Dave opens a bank account for Tasman and deposits $10,000. He receives 1,000 common shares in return.
Debit Credit
Cash Capital stock
Asset Owners’ Equity
10,000 10,000
To record sale of common shares.
Introduction to Accounting
40
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Total current assets Long-term assets Total Assets Net Income 1,000 1,000 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
10,000
1,000 -
10,000
10,000
1,000 1,000 1,000 10,000 1,000 9,000
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000
-
-
-
Total Liabilities and OE
10,000
Introduction to Accounting
41
Tasman Inc.
3 Tasman Inc. gets a $50,000 loan from the bank. Interest rate is 6% per year. Interest on the outstanding amount must be paid each year on the anniversary. Principal can be repaid at any time.
Introduction to Accounting
42
Tasman Inc.
3 Tasman Inc. gets a $50,000 loan from the bank. Interest rate is 6% per year. Interest on the outstanding amount must be paid each year on the anniversary. Principal can be repaid at any time.
Debit Credit
Cash Bank loan
Asset Liability
50,000 50,000
To record the receipt of bank loan.
Introduction to Accounting
43
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Total current assets Long-term assets Total Assets Net Income 1,000 1,000 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
60,000
1,000 -
60,000
60,000
1,000 1,000 50,000 51,000 10,000 1,000 9,000
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000
-
-
-
Total Liabilities and OE
60,000
Introduction to Accounting
44
Tasman Inc.
4 Signed a lease for store space. Rental cost is $3,000 per month. Lease term is 36 months. Annual rent must be paid up front on the anniversary of the lease.
Introduction to Accounting
45
Tasman Inc.
4 Signed a lease for store space. Rental cost is $3,000 per month. Lease term is 36 months. Annual rent must be paid up front on the anniversary of the lease.
There is no entry.
Signing of a lease (or any contract) is not considered a transaction for accounting purposes.
Introduction to Accounting
46
Tasman Inc.
5 Make the rent payment for 2003 ($36,000).
Introduction to Accounting
47
Tasman Inc.
5 Make the rent payment for 2003 ($36,000).
Debit Credit
Prepaid rent expense Cash
Asset Asset
36,000 36,000
To record the payment of 2003 rent in advance.
Introduction to Accounting
48
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Total current assets Long-term assets Net Income 1,000 Total Assets 1,000 Liabilities Current liabilities Due to shareholder Total current liabilities Long-term liabilities 1,000 1,000 9,000 Total Liabilities and OE 60,000 Owners' Equity Capital stock Retained Earnings 60,000
1,000 -
24,000 36,000
-
60,000
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings
1,000 1,000 50,000 51,000 10,000 1,000
-
-
Introduction to Accounting
49
Tasman Inc.
6 Buy an oven which costs $15,000. Pay $5,000 cash, balance is due in one year. Interest rate on the outstanding balance is 3.5% per year.
Introduction to Accounting
50
Tasman Inc.
6 Buy an oven which costs $15,000. Pay $5,000 cash, balance is due in one year. Interest rate on the outstanding balance is 3.5% per year.
Debit Credit Credit
Cooking equipment Cash Accounts payable
Asset Asset Liability
15,000 5,000 10,000
To record the purchase of oven partially on credit.
Introduction to Accounting
51
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Total current assets Long-term assets Cooking equipment
1,000 1,000 1,000
19,000 36,000
-
55,000 15,000 15,000 70,000
Net Income
-
Total Assets Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
1,000 10,000 11,000 50,000 61,000 10,000 1,000 9,000
-
-
-
Total Liabilities and OE
70,000
Introduction to Accounting
52
Tasman Inc.
7 Buy $1,500 of food supplies (ingredients to make pizzas).
Introduction to Accounting
53
Tasman Inc.
7 Buy $1,500 of food supplies (ingredients to make pizzas).
Debit Credit
Food inventory Cash
Asset Asset
1,500 1,500
To record the purchase of supplies to be used in making pizzas for sale.
Introduction to Accounting
54
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment
1,000 1,000 1,000
17,500 36,000 1,500
-
55,000 15,000 15,000 70,000
Net Income
-
Total Assets Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
1,000 10,000 11,000 50,000 61,000 10,000 1,000 9,000
-
-
-
Total Liabilities and OE
70,000
Introduction to Accounting
55
Tasman Inc.
8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days.
Introduction to Accounting
56
Tasman Inc.
8 Purchase office equipment costing $4,000 on credit. Full amount to be paid within 30 days.
Debit Credit
Office equipment Accounts payable
Asset Liability
4,000 4,000
To record the purchase of office equipment on credit.
Introduction to Accounting
57
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment Office equipment Total Assets Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,000 1,000 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
1,000 1,000 1,000
17,500 36,000 1,500
-
55,000 15,000 4,000 19,000 74,000
Net Income
-
1,000 14,000 15,000 50,000 65,000 10,000 1,000 9,000
-
-
-
Total Liabilities and OE
74,000
Introduction to Accounting
58
Tasman Inc.
9 Hired a chef. Salary of $33,800 per year paid biweekly (26 times a year).
Introduction to Accounting
59
Tasman Inc.
9 Hired a chef. Salary of $33,800 per year paid biweekly (26 times a year).
No entry.
Hiring of an employee is not considered a transaction for accounting purposes.
Introduction to Accounting
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Tasman Inc.
10 In addition to being the manager, Dave will be the delivery man until there is revenue enough to hire one. Dave decides to pay himself a salary of $62,400 per year paid bi-weekly. To avoid draining cash from the company, Dave will not take cash salary until further notice.
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61
Tasman Inc.
10 In addition to being the manager, Dave will be the delivery man until there is revenue enough to hire one. Dave decides to pay himself a salary of $62,400 per year paid bi-weekly. To avoid draining cash from the company, Dave will not take cash salary until further notice.
No entry.
Same reason as previous example. Information will be useful in determining future journal entries.
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Tasman Inc.
11 First salary payments are made.
Introduction to Accounting
63
Tasman Inc.
11 First salary payments are made.
Debit Credit
Salary expense Cash
Expense Asset
1,300 1,300
To record payment of chef (33,800/26 = 1,300).
Debit Credit
Salary expense Due to shareholder
Expense Liability
2,400 2,400
To record salary expense for Manager, not paid in cash (62,400/26 = 2,400)
Introduction to Accounting
64
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Salaries Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment Office equipment Total Assets Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 4,700 4,700 Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
1,000 3,700 4,700 4,700
16,200 36,000 1,500
-
53,700 15,000 4,000 19,000 72,700
Net Income
-
3,400 14,000 17,400 50,000 67,400 10,000 4,700 5,300
-
-
-
Total Liabilities and OE
72,700
Introduction to Accounting
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Tasman Inc.
12 Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms.
Introduction to Accounting
66
Tasman Inc.
12 Buy a delivery car, a used 1989 Camaro, for $10,000. Expected remaining life is 5 years or 100,000 kms.
Debit Credit
Vehicle Cash
Asset Asset
10,000 10,000
To record purchase of used vehicle to be used as delivery vehicle.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Expenses Incorp costs Salaries Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Total current assets Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
1,000 3,700 4,700 4,700
6,200 36,000 1,500 43,700 15,000 4,000 10,000
Net Income
-
29,000 72,700
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 4,700 4,700
3,400 14,000 17,400 50,000 67,400 10,000 4,700 5,300
-
-
-
Total Liabilities and OE
72,700
Introduction to Accounting
68
Tasman Inc.
13 Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days.
Introduction to Accounting
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Tasman Inc.
13 Tasman caters an event for $1,500. Receives $900 in cash. The balance is due in 30 days.
Debit
Cash
Asset
900
Debit
Credit
Accounts receivable
Catering revenue
Asset
Revenue
600
1,500
To record the earning of catering revenue.
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70
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Expenses Incorp costs Salaries
Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Total current assets Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
Tasman Inc.
1,500 1,500 1,000 3,700 4,700 3,200
7,100 36,000 1,500 600 45,200 15,000 4,000 10,000
Net Income
-
29,000 74,200
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 3,200 3,200
3,400 14,000 17,400 50,000 67,400 10,000 3,200 6,800
-
-
-
Total Liabilities and OE
74,200
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Tasman Inc.
14 Store is open for business. Cash register reports revenue of $1,200 for the day.
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Tasman Inc.
14 Store is open for business. Cash register reports revenue of $1,200 for the day.
Debit Credit
Cash Store revenue
Asset Revenue
1,200 1,200
To record the aggregate sales for the first day of business.
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Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries
Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Total current assets Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Total current liabilities Long-term liabilities Owners' Equity Capital stock Retained Earnings
Tasman Inc.
1,500 1,200 1,000 3,700 -
2,700
8,300 36,000 1,500 600 46,400 15,000 4,000 10,000
4,700 2,000
Net Income
-
29,000 75,400
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000
3,400 14,000 17,400 50,000 67,400 10,000 2,000 8,000
-
-
-
Total Liabilities and OE
Introduction to Accounting
75,400
74
Tasman Inc.
15 The company upstairs in Tasman’s building approaches Dave about an exclusive catering arrangement whereby the company will pay Tasman $4,000 up front to cater 5 functions throughout the year. Dave accepts the deal and $4,000 cash.
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Tasman Inc.
15 The company upstairs in Tasman’s building approaches Dave about an exclusive catering arrangement whereby the company will pay Tasman $4,000 up front to cater 5 functions throughout the year. Dave accepts the deal and $4,000 cash.
Debit Credit
Cash Unearned revenue
Asset Liability
4,000 4,000
To record the receipt of cash for work to be performed in the future.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 1,500 1,200 1,000 3,700 Net Income 4,700 2,000
2,700
12,300 36,000 1,500 600 15,000 4,000 10,000
50,400
29,000 79,400
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000
3,400 14,000 4,000
-
21,400 50,000 71,400 10,000 2,000 8,000
-
-
Total Liabilities and OE
79,400
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Tasman Inc.
16 Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days.
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78
Tasman Inc.
16 Purchase $5,000 more of food supplies on credit with the supplier. To be paid within 30 days.
Debit Credit
Food inventory Accounts payable
Asset Liability
5,000 5,000
To record the purchase of food inventory on credit.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 1,500 1,200 1,000 3,700 Net Income 4,700 2,000
2,700
12,300 36,000 6,500 600 15,000 4,000 10,000
55,400
29,000 84,400
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000
3,400 19,000 4,000
-
26,400 50,000 76,400 10,000 2,000 8,000
-
-
Total Liabilities and OE
84,400
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Tasman Inc.
17 Pay off the balances owing on the office equipment and the food supplies.
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Tasman Inc.
17 Pay off the balances owing on the office equipment and the food supplies.
Debit Credit Debit Credit
Accounts payable Cash
Liability Asset
4,000 4,000 5,000 5,000
To record the payment of amounts owing to supplier of office equipment. Accounts payable Cash
Liability Asset
To record the payment of amount owing to supplier of food inventory.
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 1,500 1,200 1,000 3,700 Net Income 4,700 2,000
2,700
3,300 36,000 6,500 600 15,000 4,000 10,000
46,400
29,000 75,400
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,000 2,000
3,400 10,000 4,000
-
17,400 50,000 67,400 10,000 2,000 8,000
-
-
Total Liabilities and OE
75,400
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Tasman Inc.
18 Dave finds out that the company that owes Tasman $600 for the catering job has gone bankrupt and Tasman will not be receiving payment.
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84
Tasman Inc.
18 Dave finds out that the company that owes Tasman $600 for the catering job has gone bankrupt and Tasman will not be receiving payment.
Debit Credit
Bad debt expense Accounts receivable
Expense Asset
600 600
To record the write-off of amount owing from customer.
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85
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 1,500 1,200 1,000 3,700 600 Net Income 5,300 2,600
2,700
3,300 36,000 6,500 15,000 4,000 10,000
45,800
29,000 74,800
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 2,600 2,600
3,400 10,000 4,000
-
17,400 50,000 67,400 10,000 2,600 7,400
-
-
Total Liabilities and OE
74,800
Introduction to Accounting
86
Tasman Inc.
19 Tasman provides the catering for an event for the company upstairs. Everything goes fine.
Introduction to Accounting
87
Tasman Inc.
19 Tasman provides the catering for an event for the company upstairs. Everything goes fine.
Debit Credit
Unearned revenue Catering revenue
Liability Revenue
800 800
To record the earning of catering revenue (assume $4,000 is earned evenly over 5 events)
Introduction to Accounting
88
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 1,200 1,000 3,700 600 Net Income 5,300 1,800
3,500
3,300 36,000 6,500 15,000 4,000 10,000
45,800
29,000 74,800
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 1,800 1,800
3,400 10,000 3,200
-
16,600 50,000 66,600 10,000 1,800 8,200
-
-
Total Liabilities and OE
74,800
Introduction to Accounting
89
Tasman Inc.
Summary amount 1 Store revenues have been $220,000.
Introduction to Accounting
90
Tasman Inc.
Summary amount 1 Store revenues have been $220,000.
Debit Credit
Cash Store revenue
Asset Revenue
220,000 220,000
To record aggregate store revenue for the year.
Introduction to Accounting
91
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 221,200 1,000 3,700 600 Net Income 5,300 218,200
223,500
223,300 36,000 6,500 15,000 4,000 10,000
265,800
29,000 294,800
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 218,200 218,200
3,400 10,000 3,200
16,600 50,000 66,600 10,000 218,200 228,200
Total Liabilities and OE
294,800
Introduction to Accounting
92
Tasman Inc.
Summary amount 2 All salaries have been paid. Dave has taken half of his salary in cash.
Introduction to Accounting
93
Tasman Inc.
Summary amount 2 All salaries have been paid. Dave has taken half of his salary in cash.
Debit Credit
Salary expense Cash
Expense Asset
32,500 32,500
To record payment of chef’s salary (33,800 - 1,300 (previously recorded) = 32,500).
Debit Credit
Credit
Salary expense Cash
Due to shareholder
Expense Asset
Liability
60,000 31,200
28,800
To record salary expense for Manager (62,400 – 2,400 (previously recorded) = 60,000)
94
Introduction to Accounting
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 221,200 1,000 96,200 600 Net Income 97,800 125,700
223,500
159,600 36,000 6,500 15,000 4,000 10,000
202,100
29,000 231,100
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 125,700 125,700
32,200 10,000 3,200
45,400 50,000 95,400 10,000 125,700 135,700
Total Liabilities and OE
231,100
Introduction to Accounting
95
Tasman Inc.
Summary amount 3 Additional food supply purchases were $80,000.
Introduction to Accounting
96
Tasman Inc.
Summary amount 3 Additional food supply purchases were $80,000.
Debit Credit
Food inventory Cash
Asset Asset
80,000 80,000
To record aggregate food supply purchases for the year.
Introduction to Accounting
97
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 221,200 1,000 96,200 600 Net Income 97,800 125,700
223,500
79,600 36,000 86,500 15,000 4,000 10,000
202,100
29,000 231,100
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 125,700 125,700
32,200 10,000 3,200
45,400 50,000 95,400 10,000 125,700 135,700
Total Liabilities and OE
231,100
Introduction to Accounting
98
Tasman Inc.
Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003.
Introduction to Accounting
99
Tasman Inc.
Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003. Total purchased in the year
= 1,500 + 5,000 + 80,000 = 86,500 86,500 – 3,500 = 83,000 = Cost of the inventory used = Cost of goods sold
Introduction to Accounting
100
Tasman Inc.
Summary amount 4 Food supplies that had cost $3,500 are on hand on December 31, 2003. Total purchased in the year
= 1,500 + 5,000 + 80,000 = 86,500 86,500 – 3,500 = 83,000 = Cost of the inventory used = Cost of goods sold
Debit Credit
Cost of goods sold Food inventory
Expense Liability
83,000 83,000
To record the cost of food inventory used in the year.
Introduction to Accounting
101
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 221,200 -
223,500 83,000 140,500
79,600 36,000 3,500 15,000 4,000 10,000
119,100
1,000 96,200 600 97,800 42,700
29,000 148,100
Net Income
32,200 10,000 3,200
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 42,700 42,700
45,400 50,000 95,400 10,000 42,700 52,700
Total Liabilities and OE
148,100
Introduction to Accounting
102
Tasman Inc.
Summary amount 5 Utilities expenses were all paid in cash on the last day of each month. Total for the year was $9,600.
Introduction to Accounting
103
Tasman Inc.
Summary amount 5 Utilities expenses were all paid in cash on the last day of each month. Total for the year was $9,600.
Debit Credit
Utilities expense Cash
Expense Asset
9,600 9,600
To record aggregate payment of utilities expense for the year.
Introduction to Accounting
104
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 2,300 221,200 -
223,500 83,000 140,500
70,000 36,000 3,500 15,000 4,000 10,000
109,500
1,000 96,200 600 9,600 107,400 33,100
29,000 138,500
Net Income
32,200 10,000 3,200
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 33,100 33,100
45,400 50,000 95,400 10,000 33,100 43,100
Total Liabilities and OE
138,500
Introduction to Accounting
105
Tasman Inc.
Summary amount 6 Tasman catered 3 of the remaining events for the company upstairs. The last one will be held on January 7, 2004.
Introduction to Accounting
106
Tasman Inc.
Summary amount 6 Tasman catered 3 of the remaining events for the company upstairs. The last one will be held on January 7, 2004.
Debit Credit
Unearned revenue Catering revenue
Liability Revenue
2,400 2,400
To record the earning of revenue for 3 of remaining 4 events that had been pre-paid.
Introduction to Accounting
107
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 4,700 221,200 -
225,900 83,000 142,900
70,000 36,000 3,500 15,000 4,000 10,000
109,500
1,000 96,200 600 9,600 107,400 35,500
29,000 138,500
Net Income
32,200 10,000 800
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 35,500 35,500
43,000 50,000 93,000 10,000 35,500 45,500
Total Liabilities and OE
138,500
Introduction to Accounting
108
Tasman Inc.
Adjusting entry 1 Costs related to the oven, the office equipment, and the Camaro must be recorded.
Introduction to Accounting
109
Tasman Inc.
Adjusting entry 1 Costs related to the oven, the office equipment, and the Camaro must be recorded.
Debit
Credit
Depreciation expense
Accumulated Depreciation – Oven
Expense
Contra-asset
3,000
3,000
To record annual depreciation of Oven (15,000/5 = 3,000 (assume 5-year life)).
Debit
Credit
Depreciation expense Accumulated Depreciation – Office equipment
Expense Contra-asset
1,000
1,000
To record annual depreciation of office equipment (4,000/4 = 1,000 (assume 4-year life)).
Debit Credit
Depreciation expense Accumulated Depreciation – Vehicle
Expense Contra-asset
2,000 2,000
To record annual depreciation of delivery vehicle (10,000/5 = 2,000).
Introduction to Accounting 110
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Depreciation Net Income Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings
4,700 221,200 -
225,900 83,000 142,900
70,000 36,000 3,500 15,000 4,000 10,000 6,000
109,500
1,000 96,200 600 9,600 6,000 -
23,000 132,500
113,400 29,500
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 29,500 29,500
32,200 10,000 800
43,000 50,000 93,000 10,000 29,500 39,500
Total Liabilities and OE
Introduction to Accounting
132,500
111
Tasman Inc.
Adjusting entry 2 Interest has accrued on the bank loan and the amount due to the oven supplier.
Introduction to Accounting
112
Tasman Inc.
Adjusting entry 2 Interest has accrued on the bank loan and the amount due to the oven supplier.
Debit Credit
Interest expense Interest payable
Expense Liability
3,000 3,000
To record the interest which has accrued in the year (50,000*6% = 3,000)
Debit Credit
Interest expense Interest payable
Expense Liability
350 350
To record the interest which has accrued on amount payable on oven (10,000*3.5% = 350)
Introduction to Accounting
113
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Depreciation Interest Net Income Tasman Inc. Balance Steet As at Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Interest payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings
4,700 221,200 -
225,900 83,000 142,900
70,000 36,000 3,500 15,000 4,000 10,000 6,000
109,500
1,000 96,200 600 9,600 6,000 3,350 -
23,000 132,500
116,750 26,150
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 26,150 26,150
32,200 10,000 3,350 800
46,350 50,000 96,350 10,000 26,150 36,150 132,500
114
Total Liabilities and OE
Introduction to Accounting
Tasman Inc.
Adjusting entry 3 Rent expense must be recorded. Recall that $36,000 was paid at the beginning of the year for the full year and was recorded as an asset, Prepaid rent expense.
Introduction to Accounting
115
Tasman Inc.
Adjusting entry 3 Rent expense must be recorded. Recall that $36,000 was paid at the beginning of the year for the full year and was recorded as an asset, Prepaid rent expense.
Debit Credit
Rent expense Prepaid rent expense
Expense Asset
36,000 36,000
To record the rent expense which had been prepaid at the beginning of the year.
Introduction to Accounting
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Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Rent Depreciation Interest Net Income Tasman Inc. Balance Steet As at December 31, 2003 Assets Current assets Cash Prepaid rent expense Food inventory Accounts receivable Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Interest payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 4,700 221,200 -
225,900 83,000 142,900
70,000 3,500 15,000 4,000 10,000 6,000
73,500
1,000 96,200 600 9,600 36,000 6,000 3,350 -
23,000 96,500
152,750 9,850
32,200 10,000 3,350 800
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings 9,850 9,850
46,350 50,000 96,350 10,000 9,850 150 96,500
117
-
-
Total Liabilities and OE
Introduction to Accounting
The Accounting Cycle
1. 2. 3. 4. 5. Transaction or event occurs Recorded in the Journal using a Journal Entry. Journal is posted to Ledger Ledger accounts are totalled. Financial statements are prepared.
We have done step 2 (journal entries). Step 3 is most easily done using a spreadsheet (Friedlan text provides a template).
We will use the old-fashioned method known as Taccounts.
Each account is represented by a T. All debits are “posted” on the left, all credits are “posted” on the right. Spreadsheets have made this practice virtually obsolete, but it is informative to do it to help understand the fundamentals.
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T-Accounts (posting to ledgers)
Before the closing entry:
Cash 10,000 36,000 50,000 5,000 900 1,500 1,200 1,300 4,000 10,000 220,000 9,000 32,500 31,200 80,000 9,600 70,000 Accounts Receivable 600 600 Prepaid rent expense 36,000 36,000 Food inventory 1,500 83,000 5,000 80,000 3,500 Due to shareholder 1,000 2,400 28,800 32,200 Accounts payable 9,000 10,000 4,000 5,000 10,000 Interest payable 3,000 350 3,350 Unearned revenue 800 4,000 2,400 800 Bank loan 50,000 50,000 Capital stock 10,000 10,000 Catering revenue 1,500 800 2,400 4,700 Store sales 1,200 220,000 221,200
Cost of goods sold 83,000 83,000 Incorporation costs 1,000 1,000 Salaries 3,700 92,500 96,200 Bad debts 600 600 Retained earnings
Rent 36,000 36,000 Depreciation 3,000 1,000 2,000 6,000 Interest 3,000 350 3,350 Utilities 9,600 9,600
Cooking equipment 15,000 15,000 Accumulated depn 3,000 1,000 2,000 6,000
Office equipment 4,000 4,000 Vehicle 10,000 10,000
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119
The closing entry
The closing entry resets all of the temporary accounts to zero and send the residual to Retained earnings. Dr Catering revenue 4,700 Dr Store sales 221,200 Cr Cost of goods sold 83,000 Cr Incorporation costs 1,000 Cr Salaries 96,200 Cr Bad debts 600 Cr Utilities 9,600 Cr Rent 36,000 Cr Depreciation 6,000 Cr Interest 3,350 Dr Retained earnings 9,850 To close the temporary accounts for the year
Introduction to Accounting 120
T-Accounts (posting to ledgers)
After the closing entry:
Cash 10,000 36,000 50,000 5,000 900 1,500 1,200 1,300 4,000 10,000 220,000 9,000 32,500 31,200 80,000 9,600 70,000 Accounts Receivable 600 600 Prepaid rent expense 36,000 36,000 Food inventory 1,500 83,000 5,000 80,000 3,500 Due to shareholder 1,000 2,400 28,800 32,200 Accounts payable 9,000 10,000 4,000 5,000 10,000 Interest payable 3,000 350 3,350 Unearned revenue 800 4,000 2,400 800 Bank loan 50,000 50,000 Capital stock 10,000 10,000 Catering revenue 1,500 800 2,400 4,700 4,700 Cost of goods sold 83,000 83,000 83,000 Incorporation costs 1,000 1,000 1,000 Salaries 3,700 92,500 96,200 96,200 Bad debts 600 600 Store sales 1,200 220,000 221,200 221,200
Rent 36,000 36,000 36,000 Depreciation 3,000 1,000 2,000 6,000 6,000 Interest 3,000 350 3,350 3,350 Utilities 9,600 9,600 9,600 -
Cooking equipment 15,000 15,000 Accumulated depn 3,000 1,000 2,000 6,000
Office equipment 4,000 4,000 Vehicle 10,000 10,000
600
Retained earnings 9,850 9,850
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121
Financial statements
Numbers to go to the financial statements
Cash 10,000 36,000 50,000 5,000 900 1,500 1,200 1,300 4,000 10,000 220,000 9,000 32,500 31,200 80,000 9,600 70,000 Accounts Receivable 600 600 Prepaid rent expense 36,000 36,000 Food inventory 1,500 83,000 5,000 80,000 3,500 Due to shareholder 1,000 2,400 28,800 32,200 Accounts payable 9,000 10,000 4,000 5,000 10,000 Interest payable 3,000 350 3,350 Unearned revenue 800 4,000 2,400 800 Bank loan 50,000 50,000 Capital stock 10,000 10,000 Catering revenue 1,500 800 2,400 4,700 4,700 Cost of goods sold 83,000 83,000 83,000 Incorporation costs 1,000 1,000 1,000 Salaries 3,700 92,500 96,200 96,200 Bad debts 600 600 Store sales 1,200 220,000 221,200 221,200
Rent 36,000 36,000 36,000 Depreciation 3,000 1,000 2,000 6,000 6,000 Interest 3,000 350 3,350 3,350 Utilities 9,600 9,600 9,600 -
Cooking equipment 15,000 15,000 Accumulated depn 3,000 1,000 2,000 6,000
Office equipment 4,000 4,000 Vehicle 10,000 10,000
600
Retained earnings 9,850 9,850
Introduction to Accounting
122
Tasman Inc.
Tasman Inc. Income statement For year ended December 31, 2003 Revenue Catering Store sales Cost of goods sold Gross margin Expenses Incorp costs Salaries Bad debts Utilities Rent Depreciation Interest Net Income Tasman Inc. Balance Steet As at December 31, 2003 Assets Current assets Cash Food inventory Long-term assets Cooking equipment Office equipment Vehicle Accum Depn (total) Total Assets Liabilities Current liabilities Due to shareholder Accounts payable Interest payable Unearned revenue Long-term liabilities Owners' Equity Capital stock Retained Earnings 9,850 9,850 4,700 221,200 -
225,900 83,000 142,900
70,000 3,500 15,000 4,000 10,000 6,000
73,500
1,000 96,200 600 9,600 36,000 6,000 3,350 -
23,000 96,500
152,750 9,850
32,200 10,000 3,350 800
46,350 50,000 96,350 10,000 9,850 150 96,500
Tasman Inc. Statement of Retained Earnings For year ended December 31, 2003 Opening Retained Earnings Net Income (Loss) Dividends Closing Retained Earnings
-
-
Total Liabilities and OE
Introduction to Accounting
123
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