Ontario Grade 12 BAN4E Accounting for a Small Business (Grade 12, Workplace Preparation)
Chapters: 4
1. Financial Analysis and Decision Making
1 Methods of Financing · 2 Annual Reports · 3 Financial Analysis for Decision Making
- Sources of Business Finance – Every business needs money for long-term assets (fixed capital) and daily running (working capital). This money comes from two big pools: owners' funds (equity shares, preference shares, retained earnings) that need not be paid back, and borrowed funds (debentures, bonds, bank and institution loans, public deposits, trade credit, inter-corporate deposits) that must be repaid with interest.
- Financial Statements of a Company (Schedule III) – A company prepares two main statements: the Balance Sheet (what it owns and owes on a date) and the Statement of Profit and Loss (income and expenses for a year). Schedule III of the Companies Act 2013 gives a fixed vertical format with main heads and sub-heads, so every company's statements look alike and can be compared.
- Tools of Financial Statement Analysis – Analysis means studying financial statements to judge a company's profit, safety and growth. Its main tools are comparative statements (compare two years side by side: change in rupees and %) and common-size statements (show every item as a % of a common base: revenue or total). Analysis has limits: it uses past data, ignores non-money facts and depends on accounting choices.
2. Service and Merchandising Businesses
1 The Accounting Cycle for a Service Business · 2 Inventory Systems · 3 The Accounting Cycle for a Merchandising Business
- The Accounting Cycle for a Service Business – The accounting cycle is the set of steps a business repeats every period to turn its daily transactions into financial statements. Analyse each transaction, record it in the journal, post it to the ledger, prepare a trial balance, make adjusting entries, prepare the statements, close the temporary accounts, and check with a post-closing trial balance. Then the cycle starts again.
- Inventory Accounting: Systems, Costing Methods and Controls – Inventory is the stock of goods a business holds to sell. Inventory accounting decides how much the goods sold cost (cost of goods sold) and how much the goods left are worth (closing inventory). When prices change, the answer depends on the costing method: FIFO or weighted average (specific identification for unique items). Businesses track stock with a perpetual or periodic system, count it physically, protect it with internal controls, and watch how fast it sells with inventory turnover.
- Accounting for a Merchandising Business – A merchandising business buys finished goods and sells them again for more. Its special accounts are Inventory, Purchases, Sales, Sales Returns, Discounts, Freight-in and Cost of Goods Sold (COGS). Stock is tracked with a perpetual system (updated at every sale) or a periodic system (counted at year end). COGS = opening inventory + net purchases − closing inventory. Net sales − COGS = gross profit; gross profit − operating expenses = net income.
3. Accounting Practices
1 Special Journals · 2 Accounting for Receivables · 3 Accounting for Payables
- Journal and Special Purpose Books – The journal is the book of first entry: each transaction is written in date order with the account debited, the account credited and a narration. Busy firms split it into special purpose books — cash book, petty cash book, purchases, sales and return books — and keep a journal proper for everything else.
- Accounts Receivable and Accounts Payable – When a business sells on credit, the customer owes it money: an account receivable (a current asset). When it buys on credit, it owes the supplier: an account payable (a current liability). Credit terms such as 2/10, n/30 offer a discount for paying early. Each customer and supplier has a page in a subledger that must agree with the control account. Because some customers never pay, businesses estimate bad debts with an allowance. A written promise to pay with interest is a note receivable.
4. Fixed Assets
1 Fixed Assets · 2 Payroll Practices · 3 Income Tax
- Depreciation, Provisions and Reserves – Depreciation is the fall in value of a fixed asset because of use, time and new technology; its cost is spread over its useful life by the straight line method (same amount yearly) or the written down value method (same rate on the reducing balance). A provision is a charge against profit for a known loss or liability; a reserve is a part of profit kept back to strengthen the business.
- Payroll Accounting: From Gross Pay to Net Pay – Payroll is the process of paying employees and recording it. Employees can earn a salary, hourly wages with overtime, commission, piece rate or bonuses. Their total earnings are gross pay. Some amounts are taken off (deductions): income tax, pension or social security, insurance and voluntary items like union dues. What is left is net pay. The employer records gross pay as an expense, owes the deductions to the government and others, adds its own contributions as payroll tax expense, and sends the money on time.
- Filing an Income Tax Return – An income tax return is a form you send to the tax office once a year. On it you show all the money you earned, the deductions and credits you can claim, the tax you owe, and the tax already taken from your pay. If too much tax was taken, you get a refund. If too little, you pay the balance. You need documents: pay slips, interest slips, receipts for donations or pension savings. Self-employed people also report business income and costs. Today most returns are filed online, and free help is available.