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ACCOUNTING IMPORTANT
d NOTES

Topic Content Simplified version

1.2: Assets Things the business owns and can generate
Accounting economic benefits for the business.
Elements
Liabilities Business’ debts
Owner’s Equity Owner’s wallet
Accounting Revenue Whatever increases O/E in the accounting
Equation: equation (excluding 3 exemptions GST,
Capital Contribution, and Drawings)
Assets –
Liabilities =
O/E
Expense Whatever decreases O/E in the accounting
equation (excluding 3 exemptions GST,
Capital Contribution, and Drawings)
1.3 Timeliness having information available to decision
Qualitative makers in time to be capable of influencing
Characteristi their decisions.
cs - TURFCV
Example: if you report that the cake is
poisoned AFTER your friend eats it, it’s not
timely
Understandabil Write reports in a way that a a reasonable
ity knowledge of business and economic
activities person can understand
Relevance Information put in reports have to be relevant
to business decision making.

Example: If I want to know how much profit I

get this month, I need to see revenues and
expenses, not what you eat for breakfast
today.
Faithful Write exactly and fully what’s going on in the
representation business
Comparability Write reports in the same templates every
period so we can compare them easily
Verifiability All data put in reports can be verified using
source documents (i.e receipts)
1.4 Period Reports must be done after a certain period of
Accounting time to sum up things before moving on to a
Assumption - new one. Can be monthly, quarterly (every 3
PAGE months), halfyearly (every 6 months) or
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annually (every year).
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Accrual Basis Revenues and expenses are recognized,
assumption therefore reported, when revenues are earned
and expenses are incurred.

Example: if I earn the right to get the revenue

of $5 this month, but won’t be paid until next
month, then the $5 revenue will be
recognized in this month’s report, not next
month’s.
Going Concern Assuming the business will keep running in
Assumption the future.

Example: If we know the business will keep

running in the future, then a business’ laptop
will be an asset, because it will give us
benefits in the future (the definition of
assets). But if the business will not keep
running in the future, the laptop becomes an
expense, because we’ll only use it once then
throw it away.
Entity Business and Business Owner are two
Assumption SEPARATE entities
2.3 Double Debit – Credit When an account is Debited – It means
Entry money is going INTO it
Accounting
When an account is Credited – it means
money is going OUT if it
ALWAYS Example: When you see this
INDENT DR CR
CREDIT Advertising $500
ENTRIES! GST Clearing $50
Cash at Bank $550
ALWAYS
INDENT It means $500 is going into Advertising
CREDIT account, $50 is going into GST account, and
ENTRIES! where does this money come from? All come
from Cash at Bank, totaling $550.
ALWAYS
INDENT What does that cash flow mean? It means the
CREDIT business is paying for advertising expense
ENTRIES! (plus GST) in cash.
2.4 FOR ALL Think about the flow of the money (Money,
Recording TRANSACTION not Cash). The example above is how you
transactions S record Paying for advertising expense onto
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in General General Journal.
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Journal
Apply the same rationale, how do you record
the transaction where the owner of the
business puts in it $100,000 as capital?

Answer: It’s called Capital Contribution.

Question: What’s the money flow?

Answer: It goes OUT of the owner’s pocket

and goes IN to the Cash at Bank account of
the business.

Question: How do you present that on General

Journal?

Answer:
ALWAYS DR
INDENT CR
CREDIT Cash at Bank 100,000
ENTRIES! Capital
100,000
4. Recording How to transfer Have a look at this example above from
in General back and forth General Journal:
Ledger between
General Journal DR
and General CR
Ledger Cash at Bank 100,000
Capital
100,000

This is how it looks like on General Ledger:

Cash at Bank
Dat Cross- $ Dat Cross- $
e referen e referenc
ce e
Capital 100,00
0

Capital
Dat Cross- $ Dat Cross- $
e referen e referen
ce ce
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Cash 100,00
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0

See the similarities? They all have the same

names of the accounts, same figures. The
money flow is the same: $100,000 is going
OUT of Capital account to go IN to Cash at
Bank account. The only difference is how they
are presented:

- When figure appears on the LEFT side

of a ledger account, that money is
going IN to that ledger account from
the account under Cross-reference
column. (similar to how DR entries are
presented on the left in General Journal)
- When figure appears on the RIGHT side
of a ledger account, that money is
going OUT of that ledger account to the
account under Cross-reference column.
(similar to how CR entries are presented
on the left in General Journal)
Question: How do you convert transactions
presented on General Journal to General
Ledger?

Answer: Think about the money flow, again.

The money flow on both General Journal and
General Ledger HAS TO BE THE SAME
(because we’re recording the same
transaction)

- So if in General Journal, Cash at Bank is

receiving $100,000 from Capital
account, on General Ledger, it has to
show the same thing.

5 Inventory 4 special Inventory Gain: Newest purchase from the

Cards transactions IN column

Inventory Loss: Oldest batch from Inventory

on hand

Sales Returns: Reverse FIFO (What goes out

last comes back first)
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Purchase returns: Credit notes from
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Suppliers.

6 Balance Accrued Accrued means “owed”. Accrued Expense

day Expense and means the expense the business has incurred
Adjustments Accrued but still hasn’t paid (in other words, the
Revenue expense that the business is owing the
supplier). This is a liability because it’s a
debt the business has to pay.

On the other hand, Accrued Revenue

means the revenue that the business has
earned, is supposed to get but hasn’t been
paid yet (in other words, someone is owing us
money for the work we’ve done). This is an
asset because it will generate money for the
business in the future.
Prepaid Prepaid expense means the expense the
Expense and business hasn’t incurred but paid ahead
Unearned anyway. This is an asset because it will
Revenue generate economic benefit for the business in
the future (the business doesn’t have to pay
rent afterwards)

For example, on 1st of August, the business

pays $3000 of rent. The rent itself is only
$1000/month. This means the business has
prepaid 3 months rent. At the end of August,
one month rent has incurred, reducing the
prepaid expense to $2000.

Unearned Revenue means a deposit for a

transaction that hasn’t happened. This is a
liability because when receiving Unearned
Revenue, the business is owing the customer
the transaction which will be completed in the
future.
6.7 Bad This content Otherwise, see below
debts and is SUPER
Allowance HARD!
for Doubtful Attend class
debts for more
details
7 Financial Cash Flow ONLY RECORD CASH TRANSACTIONS!!!
Reports Statement ONLY RECORD CASH TRANSACTIONS!!!
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ONLY RECORD CASH TRANSACTIONS!!!
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Use diagram provided in class or below:

Income ONLY RECORD REVENUE AND EXPENSES

Statement ITEMS!
ONLY RECORD REVENUE AND EXPENSES
ITEMS!
ONLY RECORD REVENUE AND EXPENSES
ITEMS!

Balance ONLY RECORD ACCOUNTING ELEMENTS!

Sheet ONLY RECORD ACCOUNTING ELEMENTS!
ONLY RECORD ACCOUNTING ELEMENTS!

Chapter 6.7: Bad and Doubtful debts (solution is at the end of the
page)
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1. 30 June 2019 2. 16 July 2019

You estimate that 1% of net credit sales of Jimmi owes $660 (inc $60 GST) but he has been
$100,000 will not be received declared bankrupt
à DOUBTFUL DEBT = $....................... à BAD DEBT (it’s official)
Create an allowance for this amount: Write Jimmi’s debt off as you won’t receive it:
Debit: ………………………………………………. Debit: ……………………………………………….……….
…………………… ……………
Credit: ……………………………………………………………. Debit: …………………………………………….………….
…….. ……………
Credit: …………………………………………………………….
……..

3. 31 July 2019 - end of the reporting period

Record balance day adjustments before closing the ledger.
Adjustment for doubtful debts: The remaining balance in the Allowance for doubtful debts
account must be taken into account when recording the balance day adjustment for Bad debts
expense.

Estimated @ 30/06 $................ bad debt write off in July $.............. à balance of $............. @
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31/07
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31 July 2019: Estimate 1% of July’s net credit sales of $90,000 will not be received
à DOUBTFUL DEBT = $..............
Balance day adjustment required at 31 July 2019:
Doubtful debt $...............
Less balance $..............
Adjustment $..............

Debit: ……………………………………………….……………………

Credit: …………………………………………………………….……..

Chapter 6.7: Bad and Doubtful debts (Solution)

1. 30 June 2019 2. 16 July 2019

You estimate that 1% of net credit sales of Jimmi owes $660 (inc $60 GST) but he has been
$100,000 will not be received declared bankrupt
à DOUBTFUL DEBT = $1,000 à BAD DEBT (it’s official)
Create an allowance for this amount: Write Jimmi’s debt off as you won’t receive it:
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Debit: Bad debts (áE) $1,000 Debit: Allowance for Doubtful Debts (â-A) $600
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Credit: Allowance for doubtful debts (á-A) Debit: GST Clearing (âL) $60
$1,000 Credit: Account’s Receivable – Jimmi (âA) $660

3. 31 July 2019 - end of the reporting period

Record balance day adjustments before closing the ledger.
Adjustment for doubtful debts: The remaining balance in the Allowance for doubtful debts
account must be taken into account when recording the balance day adjustment for Bad debts
expense.

Estimated @ 30/06 $1,000 bad debt write off in July $600. à balance of $400. @ 31/07

31 July 2019: Estimate 1% of July’s net credit sales of $90,000 will not be received
à DOUBTFUL DEBT = $900
Balance day adjustment required at 31 July 2019:
Doubtful debt $900
Less balance $400
Adjustment $500
Debit: Bad debts (áE) $500

Credit: Allowance for doubtful debts (á-A) $500