Chapter 1~3
Important formulas
Assets=Liabilities + Owner’s Equity
An expansion:
Owner’s Equity= Owner’s Capital (Investments) –Drawings + Profit OR –Loss
[Note: Owner’s capital includes investments by the owner of the company. For
example, when the owner is putting his personal money or equipment etc. into
the business, that is considered as an Owner’s investment
Drawings account is used when the owner is taking out money from the
business for his/her personal use.]
Assets=Liabilities + Owner’s Capital –Drawings +Profit OR – Loss
Financial Statements:
 Prepare Income Statement and calculate for profit or loss.
 Prepare Statement of Owner’s equity.
Beginning Owner’s Capital + investments + profit – drawings – loss = Ending
Owner’s Capital
[Note: In the same period of time, the company can have either profit or loss.
The two cannot happen at the same time.]
 Prepare Balance Sheet
Remember that total assets have to equal total liabilities + total owner’s equity
We use the ending amount of owner’s capital calculated from the Statement of
Owner’s Equity in the Balance Sheet.
Cash Flow Statement may be prepared separately, but the ending balance of
cash has to be the same as the cash amount in the Balance Sheet.
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Account Classifications
Assets:
Cash, Accounts Receivable, Notes Receivable, Interest Receivable, Supplies,
Equipment, Prepaid Insurance, Land, Building, Machinery, Furniture and
fixtures
Liabilities:
Accounts Payable, Notes Payable, Interest Payable, Unearned Revenue
Owner’s Equity:
Owner’s name, capital
[Note: Owner’s capital includes profit OR loss, owner’s investments and
drawings. Profit OR loss= revenues – expenses]
Tips for Journalizing Transactions
1. When the owner invests his/her personal asset such as cash into the
business, it is a credit for owner’s name, capital account.
2. When the owner withdraws money from the company for his/her
personal use, it is a debit for owner’s name, drawings account.
3. “Billed”, “on account” or “on credit” means no cash transaction was made
yet so either you didn’t pay other people or other people didn’t pay you so
you’ll have to use a receivable account or payable account.
4. Accounts Payable will increase when the amount you owe other people
increases. Therefore, you’ll have a credit for Accounts Payable.
Accounts Payable will decrease when you pay back money therefore
you’ll incur a debit for Accounts Payable.
5. Accounts Receivable will increase when the amount other people owe you
increases. Therefore, you’ll have a debit for Accounts Receivable.
Accounts Receivable will decrease as you collect money from those
people. Thus, you’ll have a credit for Accounts Receivable.
6. When question states “Paid $XXX” that means cash has been paid and
therefore will result in a credit for Cash.
7. When question states “Received $XXX” that means cash was received
and thus results in a debit for Cash.
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
8. Rent paid for the current month is a “Rent Expense” but rent paid for
more than the current period is a “Prepaid Rent”. For example, rent
payment for the entire year is a Prepaid Rent and it’s an asset account
because it brings us benefits for the future.
[Note: the benefit is that we don’t have to pay monthly rent for the entire
year since we already paid for it right now.]
We record “Rent Expense” after each month as we use it up.
9. If the question did not ask us to use Cash Basis, assume Accrual Basis
of Accounting is being used.
10. Under Accrual Basis of Accounting, Revenue is recorded whenever
services are performed. Thus, if question states “Performed services” or
“Provided services” we need to record as revenue. Thus, it will be a credit
in Sales Revenue, Revenue or Fees Earned.
T accounts (Pattern Memorization Tip)
Debit is always on the left side and Credit is always on the right.
Recall the formula:
Assets = Liabilities + Owner’s Equity
Notice how Assets is by itself on the left side of the equation and Liabilities and
Owner’s Equity are together on the right side of the equation.
Furthermore, Owner’s Equity can be divided up into four categories with a
positive sign before “Owner’s Capital” and “Revenues” and a negative sign
before “Drawings” and “Expenses”.
If we move “Drawings” and “Expenses” to the left side of the equation, we would
have the following formula:
Assets + Drawings + Expenses = Liabilities + Owner’s Capital + Revenues
[Note: the formula above is only used to help you to memorize the T account
patterns faster. It should not be used in any other case.]
Look at the equation above. The accounts on the left side have the same T
account pattern and the accounts on the right side have the same T account
pattern.
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
(The following space is left blank for you to make your own coloured Taccounts.)
Adjusting Entries
Adjusting Entries are made at each year end to make sure expenses and
revenues are recorded in the correct period.
4 types of adjusting entries
-Prepaid Expense: expenses paid and were recorded as a “Prepaid Expense”
asset account. Now some parts need to be converted into expense.
Usually, it’s a Debit of “XXX Expense” and credit of “Prepaid XXX”. For
example, debit “Insurance Expense” and credit “Prepaid Insurance”
- Accrued Expense: expenses incurred but not yet recorded.
Usually, it’s a debit of “XXX Expense” and a credit of “XXX Payable”. For
example, debit “Interest Expense” and credit “Interest Payable”.
-Unearned Revenues: Cash was received before services were provided by us.
Thus, it was recorded as a liability in “Unearned Revenues” account. Once we
have provided the service we convert it into revenue.
Usually, it’s a debit of “Unearned Revenue” and a credit of “Service Revenue”.
-Accrued Revenues: We have already provided the service however cash is not
yet received or we haven’t recorded the transaction yet.
Usually, it’s a debit of “Accounts Receivable” and a credit of “Service Revenue”.
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Additional Practice Question
The following Balance Sheet is given. Note that ABC Corporation’s year end is
on June 30th and it prepares financial statements on a yearly basis.
ABC Corporation
Balance Sheet
Year Ended June 30, 2010
Assets
Cash
$22,533.2
Accounts Receivable
5,000
Interest Receivable
175
Note Receivable
10,000
Prepaid Insurance
6000
Supplies
6,700
Equipment
9,902
Less: Accumulated depreciation – equipment
990.2
Building
8911.8
100,000
Less: Accumulated depreciation-building
Land
10,000
90,000
18,500
Total assets
167,820
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
Interest Payable
Note Payable
$8714
160
15,000
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Unearned Service Revenue
Total liabilities
9890
33764
Owner’s equity
Y.Yang, Capital
Total Liabilities and owner’s equity
134,056
167,820
Additional Information:
1. March 15/2010, lent $10,000 to BestWishes Organization and signed a 4
month note with a 6% interest. Interest and principal due on maturity.
2. June 30/2010, purchased one year insurance for $6000.
3. Jan.1/2010, borrowed $8000 from AceExams Corporation and signed an 8
month note with 4% interest. Interest and principal due at maturity.
4. June 30/2010, borrowed $7000 from MagicPower Limited and signed a 1
year note with 2% interest. Interest and principal due on maturity.
5. June 29/2010, received $9890 from Pure Blue organization for services to
be provided in the following month.
6. By the end of the fiscal year, ABC Corporation has $500 supplies left on
hand.
7. Equipment and building both have 10 years of useful life with no residual
value. The company is using straight line method.
Transactions:
1.
2.
3.
4.
5.
6.
7.
8.
9.
July 15, collected principal and interest due from BestWishes.
Jul. 18 provided service for $105,588 cash
July 20, provided services for Pure Blue organization.
July 30, purchased new equipment from GoldenRing Co. for $4000, paid
$1000 cash and signed a $3000, 3.5% note payable due in 2 months.
Interest and principal due on maturity.
Sept. 1, paid back AceExams interest and principal
Sept. 30, paid back GoldenRing Co. amount owing.
Oct. 2, purchased $700 of supplies on account.
Oct. 31 purchased 1 year $6780 insurance for equipment purchased from
GoldenRing Co.
Nov. 1 paid for supplies purchased on Oct.2
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10.
11.
Dec.31 provided services of $8256 on account
Jan. 25 collected amount from Dec.31 transaction
Instructions:
1.
2.
3.
4.
5.
6.
7.
Journalize the transactions above
Record all adjusting entries necessary
Prepare T-accounts
Prepare Adjusted Trial Balance
Prepare Income Statement
Prepare Statement of Owner’s Equity
Prepare Balance Sheet
Solutions
Jul. 15
Cash
10,200
Interest Receivable
175
Interest Revenue
25
Note Receivable
Jul.18
Cash
10,000
105588
Service Revenue
Jul.20
Unearned Service Revenue
105588
9890
Service Revenue
Jul.30
Equipment
9890
4000
Cash
1000
Note Payable
3000
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Sept.1
Note Payable
8000
Interest Payable
160
Interest Expense
53.33
Cash
Sept.30 Note Payable
Interest Expense
8213.33
3000
17.5
Cash
Oct. 2
Supplies
3017.5
700
Accounts Payable
Oct.31
Prepaid Insurance
700
6780
Cash
Nov. 1
Accounts Payable
6780
700
Cash
Dec.31
Accounts Receivable
700
8256
Service Revenue
Jan.25
Cash
Accounts Receivable
8256
8256
8256
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Jun.30/2011 Insurance Expense
10520
Prepaid Insurance
10520
[6000+ 6780x(8/12)]
Jun. 30/2011 Note Payable
Interest Expense
7000
140
Cash
Jun.30/2011 Supplies Expense
7140
6900
Supplies
Jun.30/2011 Depreciation Expense – equipment
6900
1390.2
Accumulated Depreciation-equipment
June.30/2011 Depreciation Expense – Building
Accumulated Depreciation – building
1390.2
10,000
10,000
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T-accounts
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
ABC Corporation
Adjusted Trial Balance
June 30, 2011
Debit
Cash
$119726.37
Accounts Receivable
5000
Prepaid Insurance
2260
Supplies
500
Equipment
13902
Accumulated Depreciation-equipment
Building
$2380.4
100,000
Accumulated Depreciation-building
Land
Credit
20,000
18500
Accounts Payable
8714
Y.Yang, Capital
134056
Service Revenue
123734
Interest Revenue
Depreciation Expense-Equipment
25
1390.2
Depreciation Expense-Building
10,000
Interest Expense
210.83
Supplies Expense
6900
Insurance Expense
10520
Totals
$288909.4 $288909.4
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ABC Corporation
Income Statement
Year Ended June 30, 2011
Revenues
Service Revenue
$123734
Interest Revenue
25
Total revenues
123759
Expenses
Interest expense
210.83
Insurance expense
10520
Supplies expense
6900
Depreciation expense-equipment
1390.2
Depreciation expense- building
10000
Total expenses
29021.03
Profit
$94737.97
ABC Corporation
Statement of Owner’s Equity
Year Ended June 30, 2011
Y. Yang, capital, June 30, 2010
$134056
Add: Profit
94737.97
Y. Yang, capital, June 30, 2011
$228793.97
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
ABC Corporation
Balance Sheet
June 30, 2011
Assets
Cash
$119726.37
Accounts Receivable
5000
Prepaid Insurance
2260
Supplies
500
Equipment
$13902
Less: Accumulated Depreciation-equipment
2380.4
Building
100000
Less: Accumulated Depreciation-building
Land
20000
11521.6
80000
18500
Total assets
$237507.97
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
$8714
Owner’s Equity
Y. Yang, capital
Total liabilities and owner’s equity
228793.97
$237507.97
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Chapter 4 – Completion of the Accounting Cycle
Temporary Accounts and Permanent Accounts
Temporary accounts include owner’s drawings account and Income Statement
accounts such as revenues and expenses.
Balance Sheet accounts are permanent accounts.
By the end of the accounting period, all the temporary accounts will be closed
into the permanent account  Owner’s Capital.
Closing Entry Steps
1. Close revenue accounts into Income Summary.
When Revenue has its normal balance of credit we close it by debiting
Revenue and crediting Income Summary.
2. Close expense accounts into Income Summary.
When Expense has its normal balance of debit we close it by crediting
Expense and debiting Income Summary.
3. Close Income Summary into Owner’s Capital.
-If the company has profit then its Income Summary would have a credit
balance. In this case to close Income Summary we need to debit Income
Summary and Credit Owner’s Capital.
-If the company has a loss then its Income Summary would have a debit
balance. Thus, to close Income Summary we need credit Income
Summary and debit Owner’s Capital.
4. Close Drawings into Owner’s Capital.
When Drawings has its normal balance of debit we close it by crediting
Drawings and debiting Owner’s Capital.
[Tip: Closing the account means turning the ending balance of the account into
0. Therefore, if the account has a debit balance we would credit it by the same
number. For example, Service Revenue has an ending balance of $15000
credit. To close it, we debit Service Revenue by $15000 and credit Income
Summary by $15000.]
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The Difference between Trial Balance, Adjusted Trial Balance and PostClosing Trial Balance
- Trial Balance is prepared at the end of the period before adjusting entries are
done.
- Adjusted Trial Balance is prepared after the adjusting entries are done.
- Post-Closing Trial Balance is prepared after the adjusting entries and closing
entries are done. It only includes permanent accounts and their balances.
Correcting Entries
We need to record correcting entries only when error occurs in our previous
transactions.
Two Methods in correcting an error:
 Correct the error by first reversing the incorrect entry that was previously
recorded then put in the correct entry.
 Directly correct the error without reversing the incorrect entry.
Example 1: annual depreciation on equipment of $6000 was debited to
Depreciation Expense and credited to Equipment.
Method 1:
Using the first method, we need to reverse the error first. Reversing the error
means the account that was recorded as a debit before needs to be credited.
Also, the previously recorded credit should be debited.
Equipment
6000
Depreciation Expense
6000
After that, we need to put in the correct entry (what should have been recorded
in the first place).
Depreciation Expense
Accumulated Depreciation - Equipment
6000
6000
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Method 2:
In this method, we correct the error without reversing the incorrect entry.
Thus, we need to combine the entries from method 1 into one entry.
Equipment
6000
Accumulated Depreciation – Equipment
6000
[Note: In Method 1, we have debited and credited Depreciation Expense by the
same amount. Therefore, it cancels each other.]
Example 2: The accrual of wages of $865 was debited to Wages and
credited to Cash.
Method 1:
Cash
865
Wages
Wages Expense
865
865
Wages Payable
865
Method 2:
Cash
865
Wages Expense
865
Wages
865
Wages Payable
865
Example 3: Purchased $906 of Supplies was recorded as a debit to
supplies of $609 and credit to cash of $609.
Method 1:
Cash
609
Supplies
Supplies
Cash
609
906
906
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Method 2:
Supplies
297
Cash
297
In method 2 we combine the two entries from method 1 together as shown in
the following T accounts.
Supplies
609
Cash
609
906
906
297
297
Therefore, we end up with a debit of 297 for Supplies and a credit of 297 for
cash.
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Chapter 5 – Accounting for Merchandising Operations
Difference between the two Inventory Systems
Perpetual inventory system – keeps track of what happens to merchandise
inventory after every purchase or sale. By the end of the period the actual
number of inventory on hand should be the same as the one recorded in the
company’s books. If it’s not the same, adjusting entries need to be made.
Example: Ending inventory on books showed a balance of $6100. After a
physical count, only $6000 is left on hand. Therefore, $100 of merchandise
inventory is missing. To adjust for this number, we record:
Cost of Goods Sold
100
Merchandise Inventory
100
Periodic inventory system – do NOT keep track of what happens to merchandise
inventory account after every purchase or sale. Instead, by the end of the
period, the company will take a physical count and adjust for cost of goods
sold.
Formula:
Beginning Inventory + Cost of Goods Purchased – Ending Inventory = Cost of Goods
Sold
Shipping Payments(For Perpetual System)
FOB Shipping Point – Buyer pays for freight cost. When buyer pays for the
shipping, it is considered as part of their inventory cost. The entry is shown as
followed:
Merchandise Inventory
XXX
Cash
XXX
FOB Destination – Seller pays for freight cost. When the seller pays for the
shipping cost it is not considered as part of the inventory cost but an expense
for them.
Freight Out
Cash
XXX
XXX
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Journal Entries (Perpetual System)
If you are the Buyer…
• Purchase merchandise on account
Merchandise Inventory
XXX
Accounts Payable
XXX
• Returned merchandise on account
Accounts Payable
XXX
Merchandise Inventory
XXX
• Paid for merchandise purchased on account within the discount period
Accounts Payable
XXX
Merchandise Inventory
XXX
Cash
XXX
[Note: If the company paid back within the discount period, the amount of
discount is considered as a reduction of the cost of the merchandise that was
originally purchased.
For example: You purchased a pair of pants that were originally $70 and you
have taken a 10% discount ($7) on it. Therefore, in total you only paid $63 so
the pants are worth $63 for you, not $70. This is why we subtract the discount
amount from Merchandise Inventory.]
• Paid for merchandise purchased on account after the discount period
Accounts Payable
Cash
XXX
XXX
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
If you are the Seller…
• Sold merchandise on account
Accounts Receivable
XXX
Sales
Cost of Goods Sold
XXX
XXX
Merchandise Inventory
XXX
• Buyer returned merchandise to us
Sales Return and Allowances
XXX
Accounts Receivable
XXX
If the merchandise is in good condition and can be sold to other customers
then we need to record the following transaction. If not then the following
transaction may be ignored.
Merchandise Inventory
XXX
Cost of Goods Sold
XXX
• Buyer paid us within the discount period
Cash
XXX
Sales Discounts
XXX
Accounts Receivable
XXX
[Note: Sales Return and Allowances and Sales Discounts are contra revenue
accounts. They work in the opposite direction with Sales.
Net Sales = Sales – Sales Return and Allowances – Sales Discounts
If Sales Return and Allowances or Sales Discounts increase, Net Sales would
decrease.]
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Journal Entries (Periodic System)
If you are the Buyer…
• Purchase merchandise on account
Purchases
XXX
Accounts Payable
XXX
• Paid for freight cost on purchases
Freight In
XXX
Cash
XXX
• Returned merchandise on account
Accounts Payable
XXX
Purchase Returns and Allowances
XXX
• Paid for merchandise purchased on account within the discount period
Accounts Payable
XXX
Purchase Discounts
XXX
Cash
XXX
• Paid for merchandise purchased on account after the discount period
Accounts Payable
Cash
XXX
XXX
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
If you are the Seller…
• Sold merchandise on account
Accounts Receivable
XXX
Sales
XXX
• Buyer returned merchandise to us
Sales Return and Allowances
XXX
Accounts Receivable
XXX
• Buyer paid us within the discount period
Cash
XXX
Sales Discounts
XXX
Accounts Receivable
XXX
Income Statements
For Single-Step Income Statement format please refer to your textbook on page
263.
For Multi- Step Income Statement format under Perpetual System please refer
to your textbook on page 266.
For Multi-Step Income Statement format under Periodic System please refer to
your textbook on page 274.
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Chapter 6 – Inventory Costing
Three Inventory Cost Determination Methods
 Specific Identification
 FIFO (First-In, First-Out)
 Average
For Specific Identification, the cost of goods sold can be tracked towards a
specific inventory. This method is usually used for inventory with significant
costs and which can be easily identified.
FIFO and Average are used for inventories with insignificant costs and are not
easily identified.
FIFO (First-In, First-Out)
Just as it sounds, First-In First-Out means the goods we purchased first
should the ones that are sold first.
Average Cost
Under this method, average cost needs to be calculated after each purchase.
Ratios
Inventory Turnover =
Days Sales in Inventory =
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
FIFO & Average Cost Example
Jan.1 Purchased 200 units at $6 each
Jan.15 Purchased 150 units at $7.5 each
Jan. 19 Sold 300 units for $15 each
Feb. 1 Purchased 100 units for $5 each
FIFO
Purchases
Cost of Goods Sold
Date
Units
Cost
Total
Jan.1
200
6
Jan.15
150
7.5
Units
Cost
Total
200x6=1200
200
6
1200
150x7.5=1125
200
150
6
7.5
1200
1125
150100=50
7.5
375
50
100
7.5
5
375
500
Jan.19
Feb.1
Units
300
100
5
Cost
Total
Balance
200
6
1200
100
7.5
750
100x5=500
Average
Date
Jan.1
Units
200
Jan.15
150
Purchases
Cost
Total
6
200x6=
1200
7.5
150x7.5=
1125
Jan.19
Feb.1
Cost of Goods Sold
Units Cost
Total
200+150=
350
300
100
5
100x5=
500
Units
200
6.643
1992.9
350-300=
50
100+50=
150
Balance
Cost
6
=
6.643
6.643
=
Total
1200
1200+1125
=2325
332.15
332.15+500
=832.15
5.548
[Note: FIFO and Average Cost are methods used to determine costs. Therefore,
for the January 19 transaction we do not use $15 in our chart. However, we
will need to use $15 when calculating for Sales and Accounts Receivable.]
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
Chapter 7 – Internal Control and Cash
Debit Card, Credit Card Transactions
Cash
XXX
Debit Card Expense or Credit Card Expense
XXX
Sales
XXX
Petty Cash Fund
·Establishing the Fund
Petty Cash
XXX
Cash
XXX
·Making Payments from the Fund
No accounting entry is made at this time but the payment should be
documented on a pre-numbered petty cash receipt. It needs to be signed by
both the custodian (the person who is responsible for the fund) and the person
who receives the cash.
·Replenishing the Fund
No cash shortage or overage
Example: There was originally $100 in petty cash fund. $50 was used on Fright
In, $40 was used on postage. Now there is $10 left in the petty cash fund.
Merchandise Inventory
50
Postage Expense
40
Cash
90
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
With cash shortage
Example: There was originally $100 in petty cash fund. $50 was used on Fright
In, $40 was used on postage. Now there is $8 left in the petty cash fund.
Merchandise Inventory
50
Postage Expense
40
Cash Over and Short
2
Cash
92
With Cash Overage
Example: There was originally $100 in petty cash fund. $50 was used on Fright
In, $40 was used on postage. Now there is $12 left in the petty cash fund.
Merchandise Inventory
50
Postage Expense
40
Cash Over and Short
2
Cash
88
[Note: Replenishing the fund does not change the balance in the fund. In the
three examples above, we have used up $90 of the fund and the balance in the
fund should be $100.
In the first case, there is $10 left in the fund thus we just need to reimburse
the $90 used. There is no shortage or overage.
In the second case, there is only $8 left in the fund so we need to reimburse
$92. The additional $2 is given for the shortage of cash. Notice Cash Over and
Short is debited. It is reported in the Income Statement as Miscellaneous
Expense.
In the third case, there is $12 left in the fund so we only need to reimburse
$88. We do not need to give the $2 because we had an overage of cash. Notice
here the Cash Over and Short is credited. Therefore, it is reported as
Miscellaneous Revenue in the Income Statement.]
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 To increase petty fund’s balance
Example: There was originally $100 in petty cash fund. $50 was used on Fright
In, $40 was used on postage. Now there is $12 left in the petty cash fund.
Company decides to increase petty cash’s balance to $150.
Petty Cash
50
Merchandise Inventory
50
Postage Expense
40
Cash Over and Short
Cash
2
138
Bank Reconciliation
The balances on the company’s books might be different from the bank.
Therefore, bank reconciliation is required to make the two balances agree with
each other. The difference between the balances might be caused by time lags
or errors created by either party.
·Reconciling items per bank (adjusting bank’s balance)
 Deposits in transit (+)
Deposits in transit are recorded by the company but not yet recorded by the
bank. It should be added to the balance per bank.
 Outstanding cheques (-)
Outstanding cheques are money paid by the company but not yet
cleared(recorded) by the bank. It should be deducted from the balance per
bank because it is the amount of money paid by the company but not yet
deducted on the bank’s balance.
 Bank errors
Adjust for any errors that the bank had made from balance per bank.
·Reconciling items per book (adjusting company’s balance)
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.
 Credit memo and other deposits (+)
Credit memos on the bank may include money that customers paid online from
their bank to the company. This amount may be recorded in the bank but not
yet recorded by the company. Therefore, this amount should be added to the
balance per books.
 Debit memo and other payments (-)
Debit memos might include money that bank already deducted from the
company’s balance but not yet recorded by the company such as bank service
charges of the company. This amount should be deducted from the balance
per books.
 Company errors
Adjust for any errors that the company had made from balance per book.
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Weygandt et al. (2010) . Accounting Principles Part 1 (5th ed.) John Wiley & Sons Canada, Ltd.