Accounting Exam Notes PDF

​ ​ ​ ​ Accounting Study Guide Definitions: Sole Proprietorship: A business owned and operated by a single individual ➔​ Simplest form of business structure ➔​ Ex. Freelancers, local shop owners A Corporation: Legal entity that is independent from its owners (sha...

​ ​ ​ ​ Accounting Study Guide Definitions: Sole Proprietorship: A business owned and operated by a single individual ➔​ Simplest form of business structure ➔​ Ex. Freelancers, local shop owners A Corporation: Legal entity that is independent from its owners (shareholders) ➔​ Shareholders are not personally responsible for the companies debts ➔​ Ex. Apple Inc., Microsoft Partnership: Business owned and operated by two or more individuals ➔​ They share responsibilities, profits, and liabilities ➔​ Ex. Law firms, accounting firms Government Agency: A government organization that carries out specific functions (regulation, administration, or service delivery) ➔​ They operate at local, state, or national levels and are funded by taxpayers ➔​ Ex. IRS, department of education Asset: Resource owned by a business that has economic value and is expected to provide future benefits ➔​ Cash, inventory equipment Liability: Financial obligation that a business or individual owes to another party ➔​ They are settled through the transfer of assets, services, or money ➔​ Ex. Loans, accounts payable, mortgages, accrued expenses Revenue Account: An account used to record the income a business earns from its operations ➔​ It represents inflows that increase equity ➔​ Ex. Sales revenue, interest income, service revenue Expense Account: An account that tracks the money a business spends to make money during a specific time. ➔​ Expenses decrease equity ➔​ Ex. Rent expense, salaries expense, cost of goods sold Continuing Concern Concept: Assumes that a business will continue to operate indefinitely unless there is evidence to the contrary ➔​ Implies that assets are values based on their intended use in ongoing operations rather than their liquidation value  ➔​ Ex. Fixed assets like machinery are depreciated over their useful life rather than being valued at a liquidation price Seperate Identity Assumption: States that a business is distinct and separate from its owners or stakeholders for accounting purposes ➔​ Transactions of the business are recorded independently of the personal transactions of its owners ➔​ Ex. In a sole proprietorship, the owner’s personal expenses are not included in the business’s financial records Principle of Conservation: Requires accountants to anticipate potential losses but not potential gains. ➔​ When there is uncertainty, revenues and assets are understated, and expenses or liabilities are overstated ➔​ Ex. Inventory is recorded at the lower of cost or market value to avoid overstating assets Business Entity Concept: Asserts that a business is treated as a distinct accounting entity, separate from its owners, regardless of the legal structure ➔​ This ensures that only the business’s transactions are recorded in its books ➔​ Ex. An entrepreneur’s personal mortgage is not recorded in the books of their business Matching Principle: Requires that expenses be recorded in the same accounting period as the revenues they help generate ➔​ This ensures accurate reporting of profits by aligning costs with their corresponding revenues ➔​ Ex. Salaries for employees working in January to deliver services billed in January should be recorded as expenses in Januray, regardless of when they are paid Fiscal Period Concept: States that accounting activities are divided into specific, consistent time periods to measure financial performance and position ➔​ Ex. A company might prepare financial statements for the fiscal year starting January1 and ending December 31. Time Period Principle: Emphasizes the division of the entity’s economic activities into regular time periods for financial reporting purposes. ➔​ Ensures consistency and comparability over time ➔​ Ex. Preparing monthly income statements to evaluate performance regularly Revenue Recognition Principle: States that revenue should be recognized and recorded when it is earned, regardless of when payment is received ➔​ This ensures revenue is reported in the correct period  ➔​ Ex. If a service is provided in December but payment is received in January, the revenue is recognized in December Accounting: The process of recording, summarizing, and analyzing financial transactions to provide information for decision making. ➔​ It includes bookkeeping, financial reporting, and adulting, to ensure accurate and meaningful financial data. CPA: Certified Public Accountant Objectivity Principle: Requires a source document in order for a transaction to be recorded ➔​ Ensures that accounting practices are grounded and are audited effectively 401 Sales Revenue or Service Revenue 405 Income Account Supplier Invoice Received by the accounting clerk as a result of the following journal entry: Debit Supplies, Credit Accounts payable ➔​ As it triggers the recognition of both the purchase of supplies and the liability to the supplier A business purchased new farm Land three years ago for $215,000. Recently, the business was offered $325,000 for the farm Land. A real estate agent suggested that the building was actually worth $340,000. If the business follows Accounting Standards for Private Enterprises (ASPE), what should be the value of the building on the balance sheet? If the business follows ASPE the historical cost principle is applied, According to this principle, assets are recorded on the balance sheet at their original purchase price, not their current market value. The purchase price of the land = $215,000 $325,000 or $340,000 are not used for reporting under ASPE Therefore, the total price will remain $215,000 On the basis of the following data, what is the proper adjusting entry for December 31st, the end of the fiscal year? Supplies account balance before adjustment, $5,000. Supplies physical inventory on December 31st, $750. Supplies used = Supplies account balance before adjustment − Supplies physical inventory Supplies used = $5,000 − $750 = $4,250 JOURNAL ENTRY Debit Supplies Expense: $750 Credit Supplies: $4,250 Which of the following statements concerning the purchase invoice is false and why? ➔​ The account credited is always Accounts Payable ➔​ Terms of the sale are usually found on the invoice ➔​ All journal entries for purchase invoices are the same ➔​ The name of the vendor is usually printed at the top of the invoice Because… They are not always the same, as they depend on the nature of the purchase and the accounts involved. A further investment in the business by the owner would include an entry to which of the following and why? ➔​ A debt to Capital ➔​ A debit to Loan payable ➔​ A debit to the Bank ➔​ None of the above Because… When the owner makes a further investment in the business, cash is deposited into the business, increasing the business’s bank balance. A business had the following balances on the day it was to remit HST to the government. HST Recoverable $3,150; HST payable $4,618. The cheque to the government should be for and why? Net HST Payable = HST Payable - HST Recoverable Net HST Payable = $4,618 - $3,150 = $1,468 List the accounts that decrease Owner’s Equity: ➔​ Expense Accounts ➔​ Drawing or Withdrawals Accounts ➔​ Loss Accounts The owner of a business purchased a car for his family and included it on the business balance sheet. This action was in violation of the: Business Entity Concept, which states that a business is treated as a separate entity from its owner(s) for financial reporting purposes. The personal transactions of the owner must not be mixed with the business’s financial transactions. The beginning capital is $15,00, net income for the year is $22,000, the final capital balance is $30,000. The drawings amount for the year is: Drawings = Beginnings Capital + Net Income - Final Capital Drawings = $15,000 + $22,000 - $30,000 = $7,000 A credit to HST Recoverable would mean a business: ➔​ Is using its recoverable HST to offset taxes payable ➔​ Is adjusting the balance due to a correction or write-off The account credited for a transaction involving a payment on account is and why? The account credited for a payment on account is Accounts Payable because it reflects a reduction. Which of the following would not be a possible debit entry as a result of a transaction involving a cheque copy and why? ➔​ A debit to Accounts Payable ➔​ A debit to Supplies ➔​ A debit to Bank ➔​ A debit to Car Expense An entire journal entry for a $500 purchase invoice for supplies is not recorded. As a result what would happen? Expenses will be understated, leading to an inflated net income. Accounting work was done for a client with 30 days given for payment. Account Receivable was debited and Revenue was credited. The business was following the: Revenue Recognition Principle The Accounts Receivable account would have an exceptional balance if: ➔​ We made an error in the amount that was invoiced to the client ➔​ The client made an error in the amount that they paid (overpaid)  ➔​ We made an error in the amount we entered for the amount paid If the total assets of a business are $73,359.00 and the total liabilities are $43,727.00, the owner’s equity is: Owners Equity = Total Assets - Total Liabilities = 73,359.00 - 43,727.00 = 29,632.00 When an item subject to HST is sold by a business what will happen to the sellers and purchasers accounts? An example of a transposition error is: ➔​ An entry of $100 recorded as $1,000 ➔​ A debit entry incorrectly recorded as a credit ➔​ An entry of $375 indeed of $357 ➔​ All of the above January 31, A. Edgecombe Real Estate. Trial Balance Adjust ments DR CR DR CR Bank 1,600 Accounts Receivable 415 Prepaid Insurance 590 110 Office Supplies 150 50 Office Equipment 5,130 Acc. Dep - Equipment 560 40 Automobiles 14,220 Acc. Dep - Automobile 1,800 100 Accounts Payable 885 HST Payable 450 HST Recoverable 300 Bank Loan 7,000 J. Mantello, Capital 9,942 J. Mantello, Drawings 15,000 Revenue 56,613 Advertising Expense 5,690 Bank Charges 1,125 Car Expense 2,140 Miscellaneous Expense 350 Rent Expense 12,000 Telephone Expense 1,750 Salaries Expense 16,790 Total 77,250 77,250 Insurance Expense 110 Office Supplies 50 Expense Depreciation Expense - 40 Equipment Depreciation Expense - 100 Automobile 300 300 Depreciation: A. Edgecombe. Store manager at Shoes Plus Company, needs advice on which method of depreciation to use on the company truck: straight line or the declining balance method. Given the following information for the company truck, answer the questions below. The fiscal period ends December 31st. ➔​ Truck: $80,000 (purchased January 1st Year 1) ➔​ Expected Life: 6 years ➔​ Trade in Value (Salvage Value): $5,000 ➔​ Canada Revenue Agency’s Prescribed Rate for Depreciation: 30% If you are the owner of the company, which method od depreciation would you recommend using if you would like to report as low a net income as possible in 2nd year for tax purposes? Use the Declining Balance Method because it results in higher depreciation expenses in the early years. This method accelerates the expense recognition, reducing taxable income in the initial years The accountant wants to impress the owners of the company by reporting as high a net income as possible in the first two years. Which method of depreciation would you recommend they choose to meet this requirement? Explain. Use the Straight-Line Method because it spreads the depreciation evenly over the asset’s useful life, resulting in lower expenses in the early years. This approach can enhance reported profits during the initial periods J. Fazari wants to purchase an Apple desktop for her home and list it as an asset on the company balance sheet as a long-term asset.J. Fazari’s argument to support including this item on the company balance sheet is that she will sometimes work from home and will require a laptop to fulfill her work responsibilities. Do you support J. Fazari’s argument for including the laptop on the company financials? Explain why or why not? I do not support J. Fazari’s argument for including the laptop on the company financial because it is primarily for personal use and does not meet the criteria of a business asset. For an asset to be included, it must be used primarily for business purposes and contribute to generating revenue. Which International Financial Reporting Standard would be applicable to this situation (from the previous involving J.Fazari)? Provide a rationale for your selection. The applicable standard would be IFRS 16 - Leases, which outlines the accounting for leases and the distinction between personal and business use. This standard helps ensure that lease obligations are accurately reflected in financial statements, providing transparency to investors and stakeholders. CALCULATIONS Question 1: On November 1, 2025 - Edge Business Solutions LLP had a meeting for a potential client that would bring in $2,000,000 in revenue in a new contract. The client has signed the contract but would like the contract to initialize in March of 2023. D. Fortino would like to include this contract in this fiscal period by crediting “Fees Earned” in order to make the company look more profitable to potential investors. *Assume that the fiscal period is from January 1, 2022 to Decemver 31, 2022* Do you agree or disagree with including the contract in the 2022 fiscal period? Explain the rationale for your choice.  I disagree with including thee contract in the 2022 fiscal period. The revenue recognition principle is a fundamental concept in accounting that dictates when revenue should be recognized in the financial statements. According to thai principle, revenue should only be recognuzed when its earned, which typically occurs when the company has delivered goods or provided services, and there is reasonable assurance that payment will be received. ​ In this case, the contract with the client is set to begin in March 2023. This means that the revenue from this contract will not be earned until the services are performed in that month. Including it in the 2022 fiscal period would misrepresent the companies financial performance, reporting of revenue is crucial for maintaining trust with the stakeholders and complying with accounting standards. Misstating revenue can lead to significant consequences, including legal repercussions and loss of investor confidence. Which International Financual Reporting Standard would be applicable to this situation? In the event tha the company wanted to recognize the revenue now, what could the company do to ensure they are still following IFRS? The applicable IFRA standard in this situation IFRS 15 - Revenue from contracts with customers. This standard provides comprehensive guidance on how to recognize revenue fro, contracts with customers. It outlines a five-step model for revenue recognition, which includes: 1.​ Identifying the contract with the customer: understanding terms and conditions 2.​ Identifying the performance obligations in the contract: what service or goods the company is obligated to deliver 3.​ Determining the transaction price: money the company expects to receive in exchange for fulfilling the performance obligations 4.​ Allocating the transaction price to the performance obligations: based on the selling prices 5.​ Recognizing revenue when the entity satisfies a performance obligation: Revenue is recognized when the company has delivered the goods or services. In addition to your response in the table below, show the journal entry that would be entered into the general journal (disregard tax) Date Particulars PR Debit Credit Nov 30, 2022 Fees Earned 2,000,000 Nov 30, 2022 Unearned Revenue 2,000,000 Question 2: The trial balance figures for Company Adam appear on the following worksheet. Using the additional information below, prepare the Adjusting Entries for the fiscal year ended December 31st, 2022. 1. Purchase invoices received in January 2023, pertaining to goods and services received in December 2022 are for the following: Advertising Expense - $250.00 Telephone Expense - $50.00 Utilities Expense - $200.00 TOTAL =$500.00 Date Particulars PR Debit Credit Dec 31, 2022 Advertising Expense $250.00 Dec 31, 2022 Telephone Expense $50.00 Dec 31, 2022 Utilities Expense $200.00 Dec 31, 2022 Accounts Payable $500.00 2. The Supplies inventory taken on December 31st, 2022, amounted to $600.00 The supplies inventory were $600.00. The previous was $1,074.00, so we need to adjust for the difference of $474.00 ($1,074 - $600 = $474) Date Particulars PR Debit Credit Dec 31, 2022 Supplies Expense $474.00 Dec 31, 2022 Supplies $474.00 3. The prepaid insurance as of December 31st showed a total of $400 in unexpired insurance. Unexpired insurace is $400. The previous balance was $1,400, so we need to adjust for the expired portion of $1,000 ($1,400 - $400 = $1,000) Date Particulars PR Debit Credit Dec 31, 2022 Insurance Expense $1000.00 Dec 31, 2022 Prepaid Expense $1000.00 4. A customer paid $2,000 cash in advance in December 2022 for work to be done in Febuary 2023. The accounting clerk originally credited Fees Earned for $2,000. Accounts Trial Balance Adjustment s DR CR DR CR Bank 2,570.00 Accounts 12,419.00 Receivable Supplies 1,074.00 Prepaid 1,400.00 Insurance Equipment 14,116.00 Land 17,000.00 Automobile 48,472.00 Building 50,000.00 Accounts 3,417.40 Payable A. Smith, 114,273.68 Capital A. Smith, 8,900.00 Drawings Fees Earned 70,721.19 Advertising 115.25 Expense Bank Charges 219.51 Car Expense 316.25  Rent Expense 11,901.32 Telephone 2,506.00 Expense Utilities 17,402.94 Expense 188,412.27 188,412.27 Question 3: Prepare the four closing entries for Edge Co. as of December 31, 2022, using the account balance below Fees Earned $80,821.19 Advertising Expense Bank Charges $442.00 $314.00 Car Expense $3,320.00 Supplies Expense $685.00 Utilities Expense $300 Wages Expense $995.00 M. Harrison, Drawings M. Harrison, Capital $3,500.00 $95,000.00 In order to close the revenue account, we need to transfer the balance of Fees Earned to the Income Summary. This resets the revenue account to zero for the new accounting period.  Date Particulars PR Debit Credit Dec 31, 2022 Fees Earned $80,821.19 Dec 31, 2022 Income Summary $80,821.19 Next, we need to close all expense accounts by transferring their balances to the Income Summary. The total expenses amount to $5,056.25. This action ensures that all expenses are reset to sero for the upcoming period. Date Particulars PR Debit Credit Dec 31, 2022 Income Summary $5,056.25 Dec 31, 2022 Advertising Expense $314.00 Dec 31, 2022 Bank Charges $442.00 Dec 31, 2022 Car Expense $3,320.00 Dec 31, 2022 Supplies Expense $685.00 Dec 31, 2022 Utilities Expense $300.00 Dec 31, 2022 Wages Expense $995.00 After closing the revenue and expense accounts, we need to transfer the net income to the owner’s capital account. The new income is calculates as $75,764.94 (Revenue - Expenses). This step reflects the companies profitability for the period in the owners equity section of the balance sheet. Date Particulars PR Debit Credit Dec 31, 2022 Income Summary $75,764.94 Dec 31, 2022 M. Harrison Capital $75,764.94 Finally, we need to close the Drawings account to the Capital account. The balance in the M. Harrison, Drawing account is $3,500.00. This ensures that the drawings are accounted for and do not affect the net income calculation for the period. Date Particulars PR Debit Credit Dec 31, 2022 M. Harrison, Capital $3,500.00  Dec 31, 2022 M. Harrison $3,500.00 Drawings Depreciation Calculations 1.​ Straight-Line Method​ Annual Depreciation = Cost − Salvage Value Useful Life Example: Truck costing $80,000, salvage value $5,000, useful life 6 years: $12,500 per year = 80,000 - 5,000 ​ ​ ​ ​ 6 2.​ Declining Balance Method​ Depreciation = Net Book Value × Depreciation Rate Example: 30% declining balance for $80,000 truck in Year 1: 80,000 x 0.30 = 24,000 Key Calculations 1.​ Owner’s Equity​ Owner’s Equity=Total Assets−Total Liabilities.\text{Owner’s Equity} = \text{Total Assets} - \text{Total Liabilities.}Owner’s Equity=Total Assets−Total Liabilities. ○​ Example: Assets = $73,359; Liabilities = $43,727: 73,359−43,727=29,632.73,359 - 43,727 = 29,632.73,359−43,727=29,632. 2.​ Net HST Payable​ Net HST Payable=HST Payable−HST Recoverable.\text{Net HST Payable} = \text{HST Payable} - \text{HST Recoverable.}Net HST Payable=HST Payable−HST Recoverable. ○​ Example: $4,618 - $3,150 = $1,468. 3.​ Drawings​ Drawings=Beginning Capital+Net Income−Ending Capital.\text{Drawings} = \text{Beginning Capital} + \text{Net Income} - \text{Ending Capital.}Drawings=Beginning Capital+Net Income−Ending Capital. ○​ Example: $15,000 + $22,000 - $30,000 = $7,000. Journal Entries 1. Recording Unearned Revenue  ​ When a customer pays in advance for services:​ Debit Bank (Cash); Credit Unearned Revenue.​ Adjust when the service is performed:​ Debit Unearned Revenue; Credit Fees Earned. 2. Adjusting for Supplies ​ Calculate supplies used:​ Debit Supplies Expense; Credit Supplies. 3. Closing Entries ​ Close revenue accounts:​ Debit Fees Earned; Credit Income Summary. ​ Close expense accounts:​ Debit Income Summary; Credit Individual Expense Accounts. ​ Transfer net income to Capital:​ Debit Income Summary; Credit Capital. ​ Close Drawings:​ Debit Capital; Credit Drawings.