Suspense Account

This week’s topic is fun and unlike the previous topic , very interlinked . So if you feel you are not proficient enough with you journal entries as yet , I would suggest not to touch this topic now . If you have mastered the journal entries, can identify the nature of entries, is well acquainted with ledgers and type of ledgers – you can move on , confidently !

The topic is - suspense account, (funny name ) and a short one. According to accountingcoach.com’s definition "A suspense account is an account in the general ledger in which amounts are temporarily recorded. The suspense account is used because the proper account could not be determined at the time that the transaction was recorded.
When the proper account is determined, the amount will be moved from the suspense account to the proper account."


Before I proceed with a simple example, it’s easier if I mention errors one by one and cite examples which will be much easier to comprehend. So just to refresh up our minds – I will start off with

Error of Omission: if a transaction is completely omitted from the books there will be neither a debit entry nor a credit entry, so the trial balance will balance. For example, cash purchases not entered in the books.

Error of commission: This occurs when a transaction is entered using the correct amount and on the correct side , but in the wrong account of the same class . For example, sales on credit to C J correctly credited to the sales account, but debited to M K ‘s account instead of C J's .

Error of Principle : This occurs when a transaction is entered using the correct amount and on the correct side , but in the wrong class of account , e.g. cash paid for machinery repairs correctly credited on the cash account but debited to the machinery account instead of machinery repairs account .

Compensating Error: These occur where two or more, errors cancel each other . For example if the purchase account is added up $200 too much and the sales account is also over added by the same amount, there is an extra $200 on both the debit side and the credit side , so the trial balance will balance

Error of original entry: This occurs where an incorrect figure is used when the transaction is first entered in the accounts. The double entry will be made using this incorrect amount in both accounts. e.g. if the total of an invoice is $1010 but is incorrectly entered in the accounts as $1100 , the trial balance will balance .

Complete reversal of entries: This occurs where the correct amounts have been entered in the correct accounts, but the entry has been made on the wrong side of each account. For example, Cash purchases debited in the cash account and credited in the purchases count. This is a reversal of ht correct entry, but the trial balance will balance.


The interesting part – we will not open a suspense account if the any of these above mentioned errors occur! We will correct these errors by using journal entries using each relevant account. For example, cash drawings of $300 had been completely omitted from the books. The entry would be Drawings: Debit and Cash: Credit. We would use a suspense account in these situations, for example, the sales account was under cast by $300. Sales must be credited with $300 and the suspense account debited by the same amount. This is why it is important to identify if our situation has any of those 6 errors. In that case, we will not use a suspense account.

... For now, I hope you're staying warm, wherever you are in the world, and hope your families are happy and close, and I hope you're feeling as loved and adored as appreciated as you really and truly are. ~HappY holiDaY Wishes to All ~

Bank Reconciliation : clarification of some weird doubts ...!~

As I proceed through number of questions , some entires become increasingly chanlleging - one of them is 'bank errors' ! these entries are not difficult but getting it right is fundamental part of reconciling otherwise our bank or cash statement balance will never match . Here's an example of bank error entry . Credits to http://www.accountingcoach.com/ , here you will find many more answers to questions - primarily asked by students .

The best feature ? the questions are divided by individual topics .


Bank errors involve amounts that were recorded incorrectly by the bank. For example, if a company wrote a check for $89 but the bank coded the check as $98, the bank statement balance will be too low. (The bank deducted $9 too much from the account, and therefore, the bank owes the customer $9.) When the bank makes the correction, the bank balance will increase by $9.00. This adjustment should appear on the bank reconciliation as an addition to the balance per bank.
If a company deposits $97 and the bank records the deposit as $79, the bank added $18 too little into the account…the bank owes the company $18. When the bank makes the correction, the the bank statement balance will increase by $18.00. The company’s general ledger has the correct amount recorded, but the bank has the incorrect balance on the bank statement. Hence the balance per bank needs to be increased by $18.

Tip: For determining whether a bank error will be an addition or a deduction on the bank reconciliation, be sure to think in terms of the change in the balance of the bank account. Both of the bank errors described above caused the bank balance to be too low. The correction of each of these errors will result in an increase to the balance per bank.

Here's another question

Can you help me to understand credit memo and debit memo in the bank reconciliation?

A bank credit memo is an item on a company’s bank statement that increases a company’s checking account balance. A bank debit memo is an item on the bank statement that reduces the company’s checking account balance. Since these items are already on the bank statement, the only adjustment that could be required is in the company’s accounting records. The old rule for the bank reconciliation “Put it where it isn’t” means that the bank’s credit memo amount must be added to the company’s accounting records, if it is not yet in the company’s accounts. Since the bank credit memo increased the checking account balance, the company’s Cash account will have to be debited and another account will need to be credited. For example, if the bank statement shows a credit memo for $100 for interest earned, the company will need to have a debit of $100 in its Cash account and will need a credit of $100 in Interest Revenue or Interest Income.
If the bank statement shows a debit memo of $25 for a service fee, the bank statement balance was decreased by $25. As part of the bank reconciliation process the following entry must be made if the item has not yet been recorded in the company’s records: debit Bank Fee Expense or Miscellaneous Expense $25 and credit Cash $25. The company’s Cash account needs to be credited because this company’s asset account decreased.
The reason the bank used “debit” to decrease the company’s checking account is that its customers’ checking account balances are liabilities for the bank. (The bank’s cash was debited when customers deposited money and the bank’s liability account Demand Deposits or Checking Account Deposits was credited.) When the bank pays a customer’s check, the bank’s cash is reduced and the bank’s liabilities are reduced. The bank records this with a credit to Cash and a debit to Demand Deposits.

This will by the my last entry of BR ....in some days I will post a new topic , if you have any doubts in mind regarding BR questions or anything - do ask away , I'll try my best to answer them .

Any queries , suggestions , critisism , are genuinely welcome :)~

Procedure of bank reconciliation

Many of you who are still at the begining might be thinking why have I choosen this topic and not a more 'basic topic'...Well , in accouting most of the topics are very interdependent like for example , you need to know the sales and purchase day book entry in order to do control account . But bank reconciliation is unlike that . Its not interdependent on any topic and its not even a part of double entry - This is a very important distinction that must be made . In this entry the procedure to 'reconcile' the entries are given . I personally find it easier to have the procedure in my mind and then apply it on the question so this 'technique' , followed step by step eliminates chaotic approach which often the case in bank reconciliation statement .

Procedure for Bank Reconciliation

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Bank reconciliation

Hello everyone ! This is FSZ and I will be providing resources, links and solving few previous paper questions of the unit Princple of Accounting . I would like to express my gratitude to Joon for this briliiant blog !

My first entry topic as you can see is bank reconciliation, this is one of the topics which is tested on the very first question of our examination paper of Principles of Accounting , along with suspense account, control account, etc . Mastering on these topic is crucial.

Bank reconciliation is a relatively easy topic but confusion arises as some questions provide "confusing" entries but nevertheless structuring it "step by step" helps to provide an excellent presentation and correct entries . Here’s a very clear introduction to begin with




Bank Reconciliation Statement

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My next entry will consist the " procedure of bank reconciliation" Do look forward to that ...:)

A link of bank reconciliation lecture ...very explanatory :)




Your comments , suggestions , queries are genuinely welcome ~

Note to FSZ

Thank you for your kind comments, and thank you for the offer, I would like to add you as a contributor to this blog, so if you send me your email address, please email me at joonbugxx@yahoo.com I'd like to add you as a contributor

Thank you

Exercise 1D

Here's Exercise 1D, to view the video click HERE
To download click HERE
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Please see below for the answers & short explanation

Exercise 1D

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Answers:

Exercise 1D Answers

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a) It's a liability, so any liability has to be credited.
b) Accounts Receivable, based on accrual basis accounting, this is a revenue that is expected, so it's a debit to assets.
c) Cash, always a debit to assets.
d) Capital Stock is an Owner's Equity account, this makes the owner richer (well, I guess not in today's economic climate, LOL), anyways, anything that enriches the owner will be a credit.
e) Dividends is an owner's equity that has the opposite effect of enriching the owner therefore, if credit enriches an owner, any cash outlay or decrease in owner's equity will have to be debited.
f) Equipment is an asset, therefore a debit to asset.
g) Fees Earned (aka Revenue), is always a credit.
h) Rent Expense, any expenses has the opposite effect of enriching the owner therefore debit the owner's equity account.
i) Salary Expense, once again the key word is "EXPENSE", thus decreasing the owner's equity, thus debiting the OE
j) Supplies is an asset and to increase assets, we must always debit.

Exercise 1C

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use the following:
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The answers are at the bottom, work it out first please!!!

Exercise 1C

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Answers:

Answers to Exercise 1C

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A) Income Statement
B) Balance Sheet (keyword -= inventory)
C) Balance Sheet (payable = liability)
D) Sales/Revenue = Income Statement
E) Balance Sheet (Assets)
F) Balance Sheet (Assets)
G) Income Statement (Expense - keyword)
H) Balance Sheet (payable = liability)
I) Balance Sheet (short term assets)
J) Balance Sheet (debt = liability)
K) Income Statement (expense)
L) Balance Sheet (Owner's Equity account)
M) Balance Sheet

T-Account

This is an old school tool they used to use in accounting prior to journal posting, hope this is helpful.

To download, click HERE
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T Bar

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Exercise 1B

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use the following:
ID: uolexternalstudent
p/w: lseexternal
The answers are at the bottom, work it out first please!!!

Exercise 1B

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Answers:
1. C - Cash is received, which would increase the asset, since it was a revenue, it increases owner's equity.
2. D - Cash is an asset, so by paying cash, we reduce our asset. An obligation to a creditor is a liability, so by paying/fulfilling our obligation to the credit, we also reduce our liability (obligation) to the creditor.
3. C - Cash, once again is an asset, and stock is an owner's equity.
4. E - Think of Expense as decreasing Owner's equity, and a decrease in cash is a decrease in assets.
5. E - This is a kind of trick question, INTEREST was paid, not the PRINCIPLE, if PRINCIPLE was paid then we would be lowering the obligation (liability) to the creditor, but INTEREST is an expense on the PRINCIPLE, so by paying only the INTEREST, we are not lowering the obligation, thus INTEREST is an EXPENSE, thus lowering Owner's equity and since we're paying cash, also lowering ASSET. I got caught on this one too!!!!!!!
6. A - When supplies are initially purchased with cash, the asset (cash) decreases and supplies (asset) increases, therefore it's a simultaneous increase and decrease in asset (+ supply, - cash).
7. E - Rent is an expense, remember expense lowers owner's equity, and since it's being paid by cash (check is also considered cash), asset is also decreased.
8. B - Borrowing money will also increase cash which increases asset, and since an obligation developed, then a liability increases.
9.E - Consumption of supplies is an expense, which means it decreases owner's equity and since all the supplies are used up (consumed), then asset also decreases (kind of a trick question).
10. E - Paying out cash will lower asset and owner's equity.

Exercise 1A

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Exercise 1A

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Exercise 1A Answers

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Transaction A:
Since cash is received cash goes up, and since capital stock is an Owner's Equity account, it goes up along with cash.

Transaction B:
Any time cash is received assets always goes up, services performed is how revenues are gained, therefore revenues increase owner's equity.

Transaction C:
Supplies are an asset, so assets will increase and since it was paid for by cash, it will decrease the cash also.

Transaction D:
Utilities are paid for by cash therefore assets (cash) will decrease, and expenses will also decrease owner's equity.

Transaction E:
Cash borrowed will increase assets (cash) and increase obligation (liabilities).

A new community on Yansa for BSc Management majors

Hey guys, with the limit of my blog and email, I created this community HERE so we can post our homework, discussions, answers, etc here, let's meet here for discussions

ACCA Resources

Open Tuition, click HERE

ACCA - the global body for professional accountants, click HERE

ACCA global, click HERE

Unit information sheets

We provide unit information sheets to help you choose which units to study. The sheets include key information such as the syllabus, on which you’ll be examined; the unit aims and objectives; learning outcomes; an essential reading list; prerequisite and exclusion information; and method of assessment.

25 Principles of Accounting Information Guide - Upload a Document to Scribd

Dictionary of Accounting

Hello everybody, I have posted the Dictionary of Accounting here, if you wish to download, please click HERE You will need a ID & p/w, so use the universal account I created:
ID: uolexternalstudent
p/w: lseexternal

Enjoy & happy studying everybody

Dictionary of Accounting - Upload a Document to Scribd

Syllabus for October

Hey guys, I just got my accounting book today from DHL woo hoo!!!! Paid $55CAD or $85CAD with shipping from http://www.amazon.ca it was the lowest price out there (or about 42 pounds for you UK people). Anyways here's the syllabus for Accounting that I will follow: (I will refer to the main text as MT from here on out) You can also follow Indiana University video lecture for accounting, click HERE

To follow the lectures along with the book (click on the lecture to open the streaming video)

Lecture 01: Accounting and Business

Lecture 02: Double-Entry Accounting

Lecture 03: Accrual and Cash Basis Accounting

Oct 6 & 7
Readings:
MT, Chap 1 to 3 (buncha theories, I will write down the necessary vocab words and definition and stuff like that
SG Chapter 1

Oct 8 to Oct 19
MT Chap 4 to 6
SG Chapter 2

Oct 20 to 27
MT Ch 7 to 9
SG Chapter 3

Oct 28 to Nov 1
Review, discussions etc.

Wrapping It Up Video

Tying up all the loose ends, how to put everything together

1. Need cash from last year's Balance Sheet and post to the Statement of Cash Flows (I mistakenly wrote Cash Flow Statements on the Image, sorry) as BEGINNING CASH.

2. Do the Income Statement and post NET INCOME to the STATEMENT OF R/E Net Income Box.

3. Post R/E from last year's Balance Sheet into the first box of the Statement of R/E.

4. Post the results from the Statement of R/E into the current Balance Sheet.

5. Post the Ending Cash into the Cash column to the current Balance Sheet.

Hope this was helpful, I will post a video to my YouTube channel http://www.youtube.com/lseexternal

If you have any questions, please leave a comment or feel free to email me

Joon Kang

Balance Sheet, Statement of Cash Flow

Balance Sheet aka Statement of Financial Position

 

It is the summary of the financial position of a company at a particular date.

 

Format:

 

Joon Kang, Inc.

Balance Sheet

December 31, XXXX

 

Note: It doesn't always have to be year-end, it can be done monthly, quarterly, twice a year, etc. Balance sheet is always of a specific date because cash position can change daily depending on how much money is taken out or deposited.

 

This statement reports three of the following: Assets, Liabilities, Owner's Equity.

 

1. Asset: Cash, Accounts Receivables (A/R), Inventory, Land, Buildings, Equipment, and Intangible Items (such as company good will, brand name value, trademark.
   
   1. Liquidity – How fast you can turn an asset into cash (current assets). Examples are cash (most liquid), always listed first, and followed by marketable securities, short term investments, A/R & inventory. This is the order current assets should be listed on the Balance Sheet.
      
   2. Plant, property and equipment aka Long Term Assets: In place to help company generate revenues.
      
      1. Equipment – For example, I need a printing press to print books, and need this asset for more than a year. Not a current asset, not looking to sell it right away, need it to generate revenue.
         
   3. Other assets aka intangible assets, copyrights, patents, trademarks, goodwill, items you can't touch physically.
      
2. Liabilities aka Company's obligations. Accounts Payable (A/P), Salaries payable, taxes payable, unearned sales revenue, notes payable and mortgage payable (you can omit payable for most of these): Liabilities/Obligations are broken up into two terms, current (paid off in a year or less) and long term (paid off in over a year). Can be listed by amount or alphabetically, none the less they are separated by 2 sections.
   
3. Current Liabilities vs. Long Term Liabilities:
   
   1. Unearned sales revenue vs. Sales revenue.
      
      1. Unearned sales revenue: Anything with the word "Unearned" will always be a liability. Will show up on balance sheet as an obligation to perform a future service or provide a product for sale, in other words you already received money for a product or service you offer and you haven't performed the service yet, until that obligation is fulfilled you can't claim the revenue.
         
      2. Sales Revenue will show up on the income statement. Obligation has been fulfilled, so the income/revenue can be claimed.
         
   2. Salaries (payable): Current liabilities, people want their paycheck ASAP, monthly (very common in Asia), bi-weekly (most common in the USA), or weekly (common in most union shops in the USA).
      
   3. Accounts Payable (A/P): Normally a 30 day promise to pay the supplier (in most cases) for services/products offered. Very informal.
      
   4. Notes (Payable): It can be long term liability or a current liability (short term), It can be a 90 day note (current) or a 3 year note (long term), more formal, will have interest attached to it
      
   5. Mortgage (Payable): Mostly long term, 15 to 30 years. For example:
      
      1. Year 1: Current Liability
         
      2. Years 2 and more = Long Term Liability.
         

      So, it's possible to see Mortgage payable to be split, what's due this year may be posted in current liabilities and years 2 and on to be listed on long term liabilities.
      

4. Net Assets = Total Assets – Total Liabilities = Net Assets (aka Owner's Equity).
   
   1. Owner's Equity = The net assets after all obligations have been satisfied.
      

 

1. The Accounting Equation:
   

   Assets = Liabilities + Owner's Equity
   

   This is also known as Double Entry Accounting
   

        It is a system of recording transactions in a way that maintains the equality of the accounting equation. (Precursor to Debits & Credits).
   

    In other words, the left side should equal the right side.

Statement of Cash Flow: Reports the amount of cash collected and paid out by a company in operating, investing, and financing activities. In other words Cash inflow and cash outflow.

1. Cash Inflow: How did the company receive cash?
   
   1. Sell goods or services.
      
   2. Sell other assets or by borrowing. Sell old equipment or assets no longer needed.
      
   3. Receive cash from investments by owners. Selling of securities.
      

1. Cash Outflow: How does the company utilize its cash.
   
   1. Pay operating expenses. Rent, utilities, etc.
      
   2. Expand operations, repay loans. Building a new factory or upgrading.
      
   3. Pay owners a return on investment. Dividends.
      

It's the attempt of quantifying Cash flow.

1. Types of Activities:
   
   1. Operating Activities: Day to day activities. (Inventory, taxes, loan interest, rent, utilities, sales)
      
   2. Investing Activities: Buying and selling long-term assets. (Property and equipment, long term assets from Balance Sheet)
      
   3. Financing Activities: Cash is obtained from or repaid to owners and creditors. (Payment of principles of loan, dividends, selling securities).
      

 

Hope this helps you out, happy studying and if you have any questions please feel free to email me.

 

 

Joon

Retained Earnings Statement Notes

Retained Earnings Statement

 

This is a statement that identifies additional financial changes in retained earnings from one accounting period to the next. (In other words, it's a cumulative process over the life of the business).

 

Example:

 

Year 1 RE = 1,000,000

Year 2 RE = 750,000

Total RE = 1,750,000

 

Beginning RE (Retained Earnings) + Net Income – Dividends = RE

 

Retained Earnings Statement Format:

 

 

Company Name

Retained Earnings

For the Year Ended Dec 31, XXXX

 

Beginning Retained Earnings+Net Income-Dividends = Ending Retained Earnings Dec 31, XXXX

 

So it would look like this:

 

Joon Kang Inc.

Retained Earnings

For the Year Ended Oct 31, 2009

 

Beginning Retained Earnings+Net Income-Dividends = Ending Retained Earnings Oct 31, 2009

 

If you noticed in the example I used the Fiscal Year and in the format example, I used the calendar year

 

Hope this was a little helpful

 

Joon

Income Statement Notes

Income statement format

At the very top, it'll be the company name:

Joon Kang Company

Then, it'll state the name of the statement:

Income Statement

Finally, the time period it's referring to:

For the year ended Dec 31, XXXX

So put all together, it'll look like this at the top:

Joon Kang Company

Income Statement

For the year ended Dec 31, XXXX

This is for most business, but there are two types of years:

Calendar Year:

This is a straightforward Jan 1, Yr1 to Dec 31, Yr 2, e.g. Jan 1, 2008 to Dec 31, 2008.

Fiscal Year:

Not all businesses operate on a calendar year, due to peak season, for example (in the retail industry), so they may want to close their books at the end of that season. If, for example, the Fiscal year ends at the end of October: Nov 1, Yr1 to Oct 31, Yr2 (the reason it's year 2, is because it goes into the next calendar year). For example, the NBA basketball season starts around November or so and ends in May or June, so they refer to the season as the 2002/2003 season.

The main question for Income Statements: Is there a net profit or net loss?

Revenue - Expenses = Net Income or (Net Loss) -> Net loss always placed in parenthesis.

If Income > Expenses = Net Profit

If Expenses > Income = Net Loss

I know it's simple but...

Hope this was a little helpful

Joon

Accounting Video Lectures From Indiana University

Here's a list of videos from Indiana University for Accounting, so you can pick and choose :) Enjoy

List of Accounting Classes (Video Lectures)

Principles of Accounting Course from Indiana University

This is a video so this is really cool, lecture and we can see a lot of examples :)

The lecture/classes

Hello Everybody

My name is Joon, and due to my frustration of resources and people to share ideas, study with I created this blog and decided to take the initiative of sharing helpful and useful resources myself and maybe if I build it, they will come. If you would also like to be a contributor to this blog, please let me know and I will give you permission.

Thank You and happy studying :)