RECORD THE TRANSACTION

Trying to remember why entries are recorded based on a ledger is hard. That is why there is something called a general journal. A general journal is also called a book of original entry. Of course the name explains it all. Each transaction is recorded in the general journal first. It includes the account debited and credited as well as an explanation. There will be no way to forget what each transaction is.

The month and year of the transactions are not necessarily recorded each time. Only the day of the transaction is recorded each time no matter how many transactions there are on that day. The month and year are only necessary if the month/year has changed.

Something to remember about when recording entries in a general journal is that the debit account is always recorded first, then the credit account. The credit account must be indented! Explanations can be as simple as “Paid full amount due to Bob, cheque no.1”. Source document numbers should be included for easy reference.

This is an example of  general journal.

general journal

IT’S TIME TO PAY TAXES!!

We pay taxes all the time. Whether it be through buying goods/services or paying income tax, they’re everywhere. Although businesses collect tax when you purchase things, they do not get to keep it. The tax amounts are recorded in an account named tax payable. When the tax is paid, a contra account called “HST recoverable”, for example, is credited while the payable account gets debited. This way, it clears the balance and makes it zero. Not everyone is required to record tax. Purchasers do not need to account any tax dollars, unless the purchaser is a business.

Here is an example of an entry with tax:

tax

CHART OF ACCOUNTS

Too many accounts can be hard to manage. The Chart of Accounts is a numbering system to organize each account. Assets, liabilities, and equity will all have their own set of numbers to identify each account.

This is an example:
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WHAT DID I DO WITH MY MONEY??

The Canadian dollar is low and prices are rising everywhere! Expenses increase and revenues might decrease. How will you be able to keep track of how much you are spending? The expanded ledger will show where the money went and by how much. It separates the equity section into Capital, drawings, revenues, and expenses.asdfff.PNG

From the expanded ledger, an income statement can be made to show whether there is a net income or net loss. Net income/loss can be calculated by REVENUE-EXPENSE. To see how much much money the business will have after expenses and drawings, it can be calculated by BEGINNING CAPITAL + NET INCOME – DRAWINGS = ENDING BALANCE.

This is an example of an income statement
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I WILL PAY LATER!!!

Chinese New Year and Valentines day is coming up! Everyone is probably in need of money but not everyone will have a couple hundred dollars in cash to pay for everything. So that is why we can pay on credit! Another thing is that money owed to us can be paid later.

Purchased on account means an item is purchased but not yet paid for.
Sold on account is when an item is sold but not yet paid for.
Paid on account is when money is paid out to a creditor to decrease the amount owed.
Received on account is when you receive money from a debtor.

DEBIT ON THE RIGHT, CREDIT ON THE LEFT

The debit and credit theory is simple. Balances (beginning balances) are put on the debit side (right) and credit side (left) for liabilities and equity.

IF there is a decrease in assets, it means the asset account is CREDITED.
IF there is a decrease in liabilities, it means the liability account is DEBITED.
IF there is a decrease in equity, it means the equity account is DEBITED.

For each transaction, there should be at least 1 account that is debited and at 1 account credited in order to balance statements.

Here is an example of Debit and Credit.

I have $850 in my bank account. This would mean the Bank (asset) account has $850 under the debit side and $850 under the credit side for my capital account (equity).Capture
Next, I pay $100 for K-Pop merchandise from KR Multimedia. I pay $25 in cash and $25 will be paid later. $25 will be credited from my bank account and my accounts payable account. The capital account will be debited because there is a decrease in equity.

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MANAGE MY ACCOUNTS!

With the increase number of accounts, it is hard to manage it all on a transaction analysis sheet. BUT THAT IS OKAY! There is something called a…LEDGER! A ledger is a group of files or accounts. With this, each account will have their own T-Chart. Each T-Chart records the transactions made and the changes in each account.

Ledgers are organized into assets, liabilities and equity. Some asset accounts include bank accounts receivable,  supplies, equipment and etc. Every account from the balance sheet is put in their own t-chart and a debit/credit theory applies to it. It will be explained in the next post 🙂

In the end, the total assets must equal to total liabilities and equity, just like the balance sheet!

This is an example of a ledger.

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TRANSACTIONS, TRANSACTIONS, TRANSACTIONS…

Transactions are very important to businesses…of course, that’s how they make money! Keeping track of each transaction may be hard, so that is why there is an equation analysis sheet. Every transaction is recorded and a new total is created. At the end of the equation analysis sheet, the total of all the transactions produced for each category (cash, accounts receivable, accounts payable, equity…and etc) This will make it easier to create an updated balance sheet!

The equation (Assets = Liabilities+Equity) still apply. If the totals at the bottom do not balance, it means there is an error in the transactions recorded above. The ending totals should be equal and knowing that its equal, the equation analysis sheet is accurate. There should be a minimum of TWO accounts changed in each transaction. If a desk is purchased for $50 cash, cash should decrease by $50 while furniture should increase by $50. If the desk was purchased by credit, accounts payable on the liabilities side is increased as well as furniture.

An equation analysis sheet should look more or less like this:
equation analysis sheet

BLACK FRIDAY

Black Friday is a great because everything is on sale and business can make more money! Retail stores aren’t the only type of business that make more profit, service businesses do to! Deals are good to have (because everyone likes deals…)  BUT business do have to be careful of their transactions. Source documents are very important as they can verify and prove the transaction.

Source documents are records of transactions and they can include cash receipts, bills, or cash register summaries. They are meant to prove transactions or to be used as reference. The objectivity principle requires that a business’s accounting be recorded on the basis of verifiable evidence. WHICH MEANS…source documents are based on facts and NOT opinions or feelings!

Here are some of the information source documents should include:
1. Who issued the bill
2. Who received the bill
3. When the bill was issued
4. For what service was the bill issued?
5. When is the bill due (if paid by credit)

This is an example of a source document.

 

 

BALANCE SHEETS

In business, balance sheets are very important. They show the financial position of a company. Though it may not seem like a hard task to do, it has to be accurate. If there is a miscalculation, the company may suffer a loss of hundreds, thousands, or even millions! On a balance sheet, assets go on the left while liabilities and equity go on the right. The totals must be on the same line at the bottom. Under assets, items are listed in the order of liquidity, which means whichever item that can be converted into cash the easiest goes on top (cash-accounts receivable-supplies-land-building….). Under liabilities, items are listed in the order of when they’re due (Accounts receivable-bank loans-mortgage…). The dollar signs do not apply to all the numbers on a balance sheet. They are only needed on the first item of a column and the total. In most balance sheets, there are a total of 5 dollar signs.
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To make a balance sheet, there are 6 steps.
1. Put headings
2. List assets on the left according to their liquidity
3. List liabilities on the right in order of when they’re due
4. Label owner’s equity under liabilities
5. With the equation, L+OE, calculate the total liabilities and owner’s equity
6. Calculate the totals on both sides and add double lines. 

The equation to find the equity of someone is Equity = Assets – Liabilities. It can be rearranged to find assets or liabilities.
Here is an example of a balance sheet
balance sheet of justin bieber