Common journal entries

Depreciation expense (E)

Accumulated depreciation (XA)

Cost of goods sold (E)

Inventory (A)
ECL
Loss Allowance Expected Credit Loss (E) – Bad debt
Notes payable, accured expenses, Sales Tax payable
Retained earnings: equity earned by company – accumulated earnings of the business not distributed to owners , Current portion of LT-debt
expense
Loss Allowance (XA)
Equity: Share capital + Retained earnings – Expenses – Dividends
Loss Allowance (XA)
Write-off
R – E: Profits AR (A)

Dr Revenue
Cr Income Summary
#1 Reinstate AR
Collection
AR (L) of bad
- Abnormal
LA (XA) debts
#2 record collection using
allowance
Cash (A)
method
AR (A)
Notes Receivable (L)
- Sales Revenue (for sales)
- Accounts Receivable (A)
(conversion from AR)
- Cash (for lending)
DEA|LER

AJE
Interest receivable (A)
Interest income (R)
DR Cash Sales Tax
CR Sales Rev Payable –
CR GST Payable GST is not
an
expense!
DR GST Payable
CR Cash
Above cost – CR P. on TS Sale of T.S
Below Cost – DR P. on TS/ RE
Preventive Controls:
(1) Establish responsibilities and
segregate duties
(2) Proper procedures for
authorization
(3) Control assets and records:
separate recordkeeping from custody
of assets.
Detective Controls:
(4) Maintain adequate records.
(5) Perform regular and independent
reviews.
Internal controls for cash:
Separation of duties, cash handling
* Does not deduct Residual value, final entry to adjust for residual value procedure, sep approval of purchase
& actual cash payment, cash
disbursement by pre-numbered
checks, periodic bank reconciliation
- Normal credit balance*: move up on
debit and down on credit
- Net income overstated = equity
overstated
- RE = Sales – expenses – dividends
(declared (E) not payable (L))
- Prepaid expense (A) not expenses
- The use of a loss allowance for
accounts receivables requires an
adjusting entry before financial
statements are prepared. TRUE (ECL)
- Write off no effect on net profit/
Net AR, only ECL
- Under Loss Allowance method, you
may get a negative ECL.
- Include interest revenue & expense
into RE calculation. Unearned
revenue is a LIABLITY
- Book Value = Net Book Value =
Carrying amount
- Premium on treasury shares (P. on
TS) = Paid-in capital, treasury shares
-

Discard: 0 or loss on disposal, Sale: 0 / Gain/ loss on disposal

 Unearned Rev Income Statement
Accrued Rev Prepaid Exp Accrued Exp ↑ Non-cash Assets -> ↓ Cash
↑ Liabilities -> ↑ Cash
During Dr Cash (A) - Dr Prepaids (A) Sales Revenues
Period Cr UE Rev (L) Cr Cash (A) (Sales returns/ discounts)
= Net Sales Revenue
(COGS)
EOP AJE Dr UE Rev (L) Dr Receivables (A) Dr Expense Dr Expense = Gross Profit (Gross Margin)
Cr Rev (Rev) Cr Sales Rev (Rev) Cr Prepaids Cr Payables (Operating expense)
= Operating income
Next P - Dr Cash (A) Dr Payables ± Non-operating income/expense
Cr Receivables (A) Cr Cash ± Interest Income/Expense
± Other Gain/ Loss
= Income Before taxes
BS L over A under A over L under - Income Tax Expense
Equity under Equity under Equity over Equity over ± Non-recurring events
= Net income
IS Rev under Rev under Exp under Exp under

Beg RE + Net income –

dividends = Ending RE

- NCI share
= Total equity – NCI - Preference

General Explanation
CFO CFI CFF
Company is using cash generated from operations, from sale of assets, and from financing to build up a pile of cash-very
liquid company possibly looking for acquisition.
Company is using cash flows generated from operations to buy fixed assets and to pay down debt or pay owners.
Company is using cash from operations and from sale of fixed assets to pay down debt or pay owners.
Company is using cash from operations and from borrowing (or from owner investment) to expand.
Company's operating cash flow problems are covered by sale of fixed assets, by borrowing, or by stockholder contributions.
The negative cash flow from operations could cause long-term problems if it persists.
Company is growing rapidly, but has shortfalls in cash flows from operations and from purchase of fixed assets financed by
long-term debt or new investment.
Company is financing operating cash flow shortages and payments to creditors and or stockholders via sale of fixed assets.
Company is using cash reserves to finance operation shortfall and pay long-term creditors and/or investors.

Debt- to-equity = Total liabilities/ Total Equity

Return on Net Income (fm shareholders) Net Sales Average total Assets
Equity 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑞𝑢𝑖𝑡𝑦 (𝑓𝑚 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠)
 Income Statement
Sales Revenues
(Sales returns/ discounts) Accumulated Depreciation
= Net Sales Revenue
(COGS) Beg Bal
Contingent Liabilities Estimable? = Gross Profit (Gross Margin) + Current yr depn
(Operating expense) - Acc depn of disposed FA
Probable (> 50%) Make Disclose = Operating income Ending balance
Provision in notes
± Non-operating
income/expense
Reasonably Possible Disclose in notes
Differences Perpetual Periodic ± Interest Income/Expense
± Other Gain/ Loss
Remote ( < 10%) No action
Purchase Of Merchandise DR Inventory DR Purchases = Income Before taxes
- Income Tax Expense
Freight In DR Inventory DR Freight-In ± Non-recurring events
= Net income Rights To Common Preferred
Purchases Returns CR Inventory CR Purchase Returns Shares Shares

Purchases Discounts CR Inventory CR Purchase Discounts Fixed Asset Dividend No Priority Has Priority

Sales Of Merchandise CR Inventory No Entry For COGS Cumulative No Usually Yes

Dividend

Sales Return DR Inventory No Entry For COGS

Beg Bal
Claim of asset at No Priority Has Priority
liquidation
+ FA Purchase
Inventory Loss CR Inventory No Entry - Cost of disposed FA Right to vote Yes Usually No
Ending Bal
Period End No Entry Beg + Net purchases
(including freight-in) –
End = COGS (DR)
CR Inventory
Reverse temp accts.

Differences Perpetual Periodic

Purchase Of Merchandise DR Inventory DR Purchases
Freight In DR Inventory DR Freight-In
Account + Increase - Decrease
Purchases Returns CR Inventory CR Purchase Returns Bank Book
Purchases Discounts CR Inventory CR Purchase Discounts Bank Reconciliation + Interest by bank
Inventory Purchases COGS + transits
Sales Of Merchandise CR Inventory No Entry For COGS Bank Book + direct deposits
Sales Return DR Inventory No Entry For COGS + Interest by bank - SVC. charge
Trade Payable Purchase Cash Paid to supplier of merchandise
Inventory Loss CR Inventory No Entry + transits - Outstanding - Bank Transfer
+ direct deposits
Beg + Net purchases - SVC. charge cheques - Not sufficient fund cheque
Interest receivable Interest revenue earned Interest received
(including freight-in) – End = - Bank Transfer ± Accounting Error
Period End No Entry COGS (DR) - Outstanding
- Not sufficient fund
Interest payable Interest expense (accrued) Payment of accrued interest
CR Inventory cheques
cheque
Reverse temp accts. ± Accounting Error
Salaries payable Salaries expense (accrued) Payment of accrued salaries

Operating activities
Account + Increase - Decrease
Inventory Purchases COGS
Trade Payable Purchase Cash Paid to supplier of merchandise
Interest receivable Interest revenue earned Interest received
Interest payable Interest expense (accrued) Payment of accrued interest Financing activities
Salaries payable Salaries expense (accrued) Payment of accrued salaries Account + Increase - Decrease
Loans receivable New loans paid out Collections of old loans
Investing activities Long term notes payable New loans received Repayment of old loans
Account + Increase - Decrease Ordinary share capital, at par Issuance of new shares Retirement of old shares
Equipment Purchase of new equipment Cost of equipment sold Share premium –ordinary shares Shares issued above par value Retirement of shares above par value
Acc depn of equipment Depreciation expense Acc depn of equipment sold Treasury shares (T.S.) Purchase of T.S. Cost of T.S. sold
Share premium – T.S. T.S. sold above cost T.S. sold below cost
Retained earnings Net income Dividends declared
 Journal Entries & FS effect for Adjustments

Retained earnings: equity earned by company – accumulated earnings of the business not distributed to owners

Equity: Share capital + Retained earnings – Expenses – Dividends

Common journal entries Income Statement SCE

R – E: Profits Depreciation expense (E) Sales Revenues
Accumulated depreciation (XA) (COGS)
Gross Profit (Gross Margin) Beg RE + Net income –
Cost of goods sold (E) (Operating expense) dividends = Ending RE
Inventory (A) Operating income
± Non-operating
income/expense SFP (Balance sheet)
Expected Credit Loss (E) – Bad debt expense
Loss Allowance (XA) ± Interest Income/Expense Adjusted trial balance ->
± Other Gain/ Loss Extract account balance of all
Write off Closing Process - Income Tax Expense
Loss Allowance (XA) Dr Revenue assets and liabilities account
± Non-recurring events SCE -> equity portion of BS
AR (A) Cr Income Summary Net income
Notes Receivable Closing the books
Sales Revenue (for sales) Collection of bad debts using
Accounts Receivable allowance method
(conversion from AR) #1 Reinstate AR
Cash (for lending) AR
LA
AJE #2 record collection
Interest receivable (A) Cash
Interest income (R) AR

Normal credit balance*: move up on debit and down on credit

Net income overstated = equity overstated
RE = Sales – expenses – dividends (declared (E) not payable (L))
The use of a loss allowance for accounts receivables requires an
adjusting entry before financial statements are
prepared. TRUE (ECL)
Write off no effect on net profit/ Net AR, only ECL
Under Loss Allowance method, you may get a
negative ECL.
Include interest revenue & expense into
RE calculation. Unearned revenue is a LIABLITY
Preventive Controls:
(1) Establish responsibilities and segregate duties
(2) Proper procedures for authorization
(3) Control assets and records: separate
recordkeeping from custody of assets.
Detective Controls:
(4) Maintain adequate records.
(5) Perform regular and independent reviews.
Nominal (Temporary)
Real (Permanent) account Internal Control for Cash
accounts
Balance Sheet account Income Statement accounts
– Assets - Revenues (in IS not SFP/BS) Separation of duties, cash handling
- Liabilities - Expenses (in IS not SFP/BS) procedure, sep approval of purchase
- Stockholders equity - Gains/ loses & actual cash payment, cash
Accounts are not closed at the - Dividends disbursement by pre-numbered
end of accounting period Closed to retained earnings. checks, periodic bank reconciliation
Ending balance carried over to Ending balance reset to 0, next Other
the next accounting period accounting period beg bal = 0
Financial Statement Analysis
Accounts
Net ProMit Net 𝑆𝑎𝑙𝑒𝑠 (𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑂𝑁𝐿𝑌)
Return on assets receivable
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
turnover
To𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 If Debt ratio is lower than what it should have been (0.287 vs.
Debt Ratio
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 0.293), it gives the impression that the company is less leveraged.
Net ProMit/Income (R−E) Average 365
Profit Margin
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 (𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑂𝑁𝐿𝑌) collection period 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟