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Who has first claim against the assets of a business?

The creditors

On December 31, 2016, A. Lower's accounting equation was as follows: Assets $150 000 - Liabilities $70 000 = Equity $80 000. In 2017 the assets increased $70 000, and the liabilities decreased by $20 000. Calculate the owner's equity at December 31, 2017.

$170000

Karen Lipka has assets of $150 000 and liabilities of $65 000. What is her equity?

$85000

If all the assets of a business is worth $37 486.49 and all the liabilities are worth $11 547.80, what is the owner's equity?

25938.69

What is a corporation?

A business which is an individual seen by the law, the business is separate from the owners. Profits are shared to the shareholders by dividends (a sum of money), more shares means more dividends.

What is a balance sheet?

A statement showing the financial position of a person, business, or other organization.

Calculate his equity. Bank account balance is $3 650 Home is valued at $492 000 Home has mortgage of $192 360 Owns furniture and household equipment worth $55 000 Owns summer property valued at $225 000 that was bought entirely with money borrowed from the bank. He has paid back $80 000 of loan since then. Has unpaid bills of $4 200 Owes father-in-law M. Dupuis $50 000, which he borrowed interest free several years ago at time he bought his home

A: 775650 L: 391560 OE: 384090

What are the definitions of following?

Accountant, auditing, bookkeeper, corporation, manufacturing business, merchandising business, non-profit organization, partnership, producing business, public accountant, service business, sole proprietorship

What is materiality principle?

Accountants must use GAAP's except when doing so would be prohibitively expensive, difficult, and would make little significant difference in the final reported results of the business.

What is consistency principle?

Accountants should apply the same methods and procedures from period to period. When changes are made, they must be explained clearly on the financial statements. This allows for comparability from period to period.

What is business entity concept?

Accounting for a business or organization is kept separate from personal affairs of its owners, other business, or organization.

What is principle of conservatism?

Accounting for a business should be fair and reasonable, results should not overstate or understate the affairs of the business.

What is objectivity principle?

Accounting is recorded on objective evidence, different people looking at the evidence will arrive at the same value for the transaction, evidence is called a source document (receipt, invoice, bill, etc)

What is time period concept?

Accounting takes place over specific time periods known as fiscal periods, these fiscal periods should be of equal length when used to measure the financial progress of the business.

What are accounts payable?

Accounts payable can be abbreviated as A/P They are a list of suppliers who the company has purchased goods or services from on credit who will pay at a later date. They are amounts owed to creditors (anyone whom the business owes money) Individual creditors are listed in alphabetical order by last name Typically paid back within 30 days Usually listed at the very top of liabilities column.

What is accounts receivable?

Accounts receivable can be abbreviated as A/R Listed alphabetically by last name. Are customers who have purchased goods or services (on credit) who will pay at a later date. Usually collected within 30 days, and known as a debtor since they owe debts to the business. Accounts receivable is very liquidable, right after cash.

What are periodic activities?

Activities that occur at regular intervals (weekly, monthly, yearly): Payroll cheques Checking bank accounts Preparing financial reports Sending collected sales taxes to government

What are miscellaneous activities?

Activities that occur in a non predictable way: Employee quits job causing paperwork, advertise, and interview for a new position Business receives call about bank loan issues Sales call for new equipment or services Unscheduled meetings to deal with unforeseen problems or opportunities

What are routine or daily activities?

Activities that occur nearly everyday: Processing bills Preparing cheques Daily banking Recording transactions

What is the owner's equity? How is it calculated?

Also called capital, owner's equity, or net worth. It is the difference of total assets and total liabilities. It may be stated as A - L = OE or the traditional way is A = L + OE. Add up all the value of all the assets then subtract of all the value of all the liabilities to get the owner's equity.

A customer who owes $500 to the business has recently died. The lawyers for the customer's estate have told the business that there is only one chance in four of the debt being paid. Should the amount be included on the balance sheet of the business? Which GAAP(s) affect this situation? Explain.

Amount should not be included on the balance sheet. Due to principle of conservatism. Since there is only a one in four chance of the debt being paid, the amount should not be put onto the balance sheet since that will be overstating and will not be fair and reasonable.

What is a sole proprietorship?

An unincorporated business owned by a single individual. The business and the owner is not distinguished, if something happens to the business then the owner is responsible.

What is a partnership?

An unincorporated business owned by more than one individual, business and owners are not distinguished, if something happens to the business, then the owners are responsible

Are the following assets or liabilities? Office furniture Land Bank loan House and lot Unpaid heating bill An amount loaned to R. Jonas Mortgage payable Automobile A bank deposit

Answer key: A, A, L, A, L, A, L, A, A

Fill in the blanks with either accountant, accounting, accountant clerk: Work of an ______ is clerical in nature. Work of an ______ is concerned with routine matters. An ______ ensures that the supporting documents are present and correct for every transaction An ______ ensures that generally accepted accounting principles are followed An ______ records the accounting entries in the books of account. An ______ makes the payroll calculations. An ______ prepares reports based on the data produced by the accounting system. An ______ carries out all the necessary banking transactions. An ______ participates in management meetings. A professional ______ has a high level position. For centuries, all ______ was hand written. Some small businesses still do their ______ by hand.

Answer key: Accounting clerk, accounting clerk, accounting clerk, accountant, accounting clerk, accounting clerk, accountant, accounting clerk, accountant, accountant, accountant, accounting, accounting

What is full disclosure principle?

Any and all information that affects the full understanding of a company's financial statements must be included with the financial statements.

How is the order of assets listed?

Assets are listened in the order of liquidity (order in which assets are converted into cash) Bank account, then supplies, then ski rental equipment, then building are from most liquidable to least liquidable.

If a business closes down, who takes possession of the assets?

Assets belong to the owner and creditors. Claims of the creditors will be settled first (liabilities), then claims of the owner is settled (owner's equity). This means owner takes the losses or profits from selling of assets to pay the creditors. Assets = Creditors' claims against the assets + Owner's claim against the assets

What is continuing concern concept?

Assumes that a business will continue to operate until known otherwise.

What is a merchandising business?

Buys goods and resells them at a higher price to make a profit: Walmart, Target, Home Depot, Lowe's, Toys R Us

What is a manufacturing business?

Buys raw materials then converts them into a new product then sold to make a profit: Apple, Boeing, General Electric

What is a non-profit business?

Carry out activities to meet social needs and not for financial profit: World Vision, Red Cross

What are the accounting professions?

Chartered Accountant (C.A.) Certified Management Accountant (C.M.A) Certified General Accountant (C.G.A) Merger is the Chartered Professional Accountant (C.P.A)

What are the roles of a bookkeeper (accounting clerk)?

Clerical in nature and for the most part is concerned with routine matters: Recording transactions and making the necessary supporting documents Carrying out banking activities Preparing payroll calculations and preparing payroll cheques

A contracting company is involved in a dispute over its bill to a customer. The bill for $500,000 was recently reduced to $400,000 by a decision of the courts. The company is now appealing the decision. Which amount should be taken into accounts (recognized)? Which GAAP(s) affect this situation? Explain.

Cost that should be taken into account is $400 000. Due to principle of conservatism and objectivity principle. States that the cost should be fair and reasonable and recorded on objective evidence (decision by court). Unfair to state anything other than $400 000 since the law decided it.

What is matching/expense principle?

Costs that generate revenue must be recorded in the same accounting period as the revenue that they generate, not necessarily when they pay for it.

How is financial position determined?

Defined by assets and liabilities of a person, business, or organization. A balance sheet represents this.

What are the advantages of a partnership?

Easy formation Broader management skills Limited regulations More capital resources

What are business transactions?

Events that causes a change in the financial position of the business: Business purchases new truck for $20 000 cash Causes increase in asset of a new truck, decrease in asset of cash

What is auditing?

The examining and testing of the books, records, and procedures of a business in order to be able to express an opinion about its financial statements.

Some accounting notes

Financial details about multiple assets associated with a liability are fully disclosed. Land and buildings are listed in the asset section at their purchase value for example. Amount of mortgage payable owed against both assets is listed in the liabilities section. Providing separate value for land is more descriptive than just showing one value. Owner's equity is listed separately from liabilities. Show the owner's name, followed by the word "capital". This figure is the difference of assets and liabilities. The two final totals on each side of the balance sheet are recorded on the same line.

How is heading formatted?

First line: name of the individual, business, or other organization Second line: name of financial statement Third line: date on which the financial position is determined

Explain the background about GAAP

GAAP'S are a set of rules or standards followed by accountants for Canada Some are formal regulations while others are common practice The Canadian Institute of Chartered Accountants establishes the standards They can be referenced in the CICA handbook GAAP is now known as IFRS (International financial reporting standards) which is very similar to GAAP but used by most of the world as of 2011.

What are the 5 main activities involved in accounting?

Gathering financial information Preparing and collecting records Rearranging, summarizing and classifying financial information Preparing information for reports and summaries Establishing controls to promote accuracy and honesty

What are the disadvantages of a corporation?

Higher start up cost and more complex to organize More regulations Owners and employees do not directly communicate Owners have little control in day to day operations Profits are taxed twice

What is accounting?

It is a system to deal with financial information that provides information for decision making. It is the language of business.

What does GAAP stand for? List all of them.

It stands for generally accepted accounting principles. Business entity concept Continuing concern concept Principle of conservatism Objectivity principle Revenue recognition convention Matching/expense principle Time period concept Cost principle Consistency principle Materiality Full disclosure principle

What is cost principle?

Items are recorded in the books at the historical cost paid by the purchaser, and do not change from their original value.

How are liabilities ordered in a balance sheet?

Liabilities are listed in the order when they are normally paid. Bank loan is listed before mortgage payable, since bank loan is usually paid first.

How do you find out who has claims against assets of a business?

Liabilities section of the balance sheet.

What are the advantages of a corporation?

Limited liability of shareholders Possible lower taxation rate Can be sue or be sued in the corporate name More prestige Continuity of business

Six months ago, you closed out your business. Now, a person has expressed an interest in acquiring the business. The potential buyer requests a current balance sheet, but you provide her with the one that was prepared just prior to closing. Will the balance sheet be accepted by the buyer and her accountant? Which GAAP(s) affect this situation? Explain.

No, balance sheet should not be accepted. Principle of conservatism. Balance sheet was made just prior to closing, meaning assets may have already been liquidated. Buying the business may be more expensive than before since new assets will be needed to be bought.

A figure of $25,000 for computerized office equipment appears on a company balance sheet. Recently, better quality equipment has been developed and put on the market. However, the existing equipment still does an adequate job for the company, and the company has no intention of replacing it. Should the equipment figure be eliminated because it represents obsolete equipment? Which GAAP(s) affect this situation? Explain.

No, equipment figure should not be eliminated. Continuing concern concept, cost principle. Business is assumed to continue to operate, so the assets is also assumed to continue to be used. New costs should not affect the cost of the obsolete equipment due to the cost principle.

The manager of a business has heard that the business might be sold and that he might lose his job as a result. When preparing a balance sheet for the owner, the manager values everything as low as possible in order to discourage the prospective buyer. He claims that this practice is allowed by the principle of conservatism. Is the manager correct in his claim? Which GAAP(s) affect this situation? Explain.

No, manager is wrong in his claim. Continuing concern concept, principle of conservatism, objectivity principle. Business is assumed to continue to operate unless known otherwise, the manager does not know for sure. Valuing the assets as low as possible is understating the value of the assets, violating the principle of conservatism, this also violates the objectivity principle, as there is no objective evidence to prove the value of the assets.

Martha Higgins is currently trying to borrow some money from the bank. She has listed her personal automobile ($25,000) on the business balance sheet to make the statement look more attractive to the banker. Is this a reasonable thing to do? Which GAAP(s) affect this situation? Explain.

No, this is not a reasonable thing to do. Business entity concept., principle of conservatism. Personal and business affairs should be kept separate , meaning this causes the balance sheet to look better than it actually is, causing violation of the principle of conservatism by overstating the value of the business.

Who benefits from gains or losses made in closing down a business?

Owner benefits from gains, owner suffers from losses.

What are advantages of sole proprietorship?

Owner makes all the decisions and has complete control All profit goes to owner Great freedom from regulations Low startup cost (cheap signup)

What is a producing business?

Produces a commodity (raw materials): Fisheries, farms, mines

What are the roles of an accountant?

Responsible for design and management of the accounting systems that bookkeepers use Ensure financial information is entered into the accounting system correctly and accurately Prepare reports and financial statements based on the data produced from the system Interpret data produced from the system to decision makers Ensure that generally accepted accounting principles are met Participate in management meetings and assist in making business decisions

What is revenue recognition convention?

Revenue is recorded when it is earned, not necessarily when cash changes hands.

What are the three categories of accounting activities?

Routine/daily activities Periodic activities Miscellaneous activities

What is a service business?

Sells a service to the public: Molly Maid, Weedman

What are the different types of businesses?

Service, merchandising, manufacturing, producing, non-profit

What is the fundamental accounting equation?

Set up in the form of the fundamental accounting equation of A = L + OE

What are the three forms of business organizations?

Sole proprietorship, partnership, corporation

What are source documents?

They are the original record of a business transaction: Used to verify the dollar amount of the transaction such as utility bills, receipts, cheque copies They are objective evidence for a transaction

What are two reasons why creditors have claims against the assets of a business?

They provided money such as loans, or they provided assets in the business. They own part of the business.

What does a public accountant do?

They serve the general public for free, including individuals of businesses; they mainly do auditing.

What are liabilities? Give some examples.

Things that you owe: Credit card bills Loans Mortgage Car payments Accounts payable (amount of money that you owe to someone else)

What are assets? Give some examples.

Things that you own and have value (must have monetary value, and you must own it): Cash Building Land Computers Automobiles Furniture Accounts receivable (amount of money that people owe you)

What study accounting?

To help with things such as banking, payroll, taxes, or keeping track of what is owed by customers when owning your own business. To help organize personal finances of keeping financial records, preparing income tax return, budgeting, or financial planning.

What are the disadvantages of a partnership?

Unlimited liability Disagreements between owners Divided authority Difficult to find partners Partners liable for each other

What are disadvantages of sole proprietorship?

Unlimited liability Hard to raise capital and attract talented employees Limited to a single owner's knowledge Profits taxed at higher personal rate Lack of continuity

Some more accounting notes

Write and underline subheadings for assets, liabilities, and owner's equity. Single ruled lines and used before all subtracts and totals Use double-ruled after all final totals. This means no further numbers will be added or subtracted from them. Dollar signs ($) are placed with the first amount in every column. They are also used beneath each single ruled line. Use columnar paper to keep figures aligned. Even dollar amounts may be shown as "00" or a "-" in the cents column. Decimal and commas are not used. No abbreviations for business names unless the name itself includes one Rulers must be used to draw ruled lines Spelling and neatness counts