[h1] chapter 8 completing the accounting cycle [h2]...

Chapter 8 – Lesson Notes

Copyright © 2013 Pearson Canada Inc. DRAFT MANUSCRIPT 1

[H1] Chapter 8 Completing the Accounting Cycle

Students will be excited by the title of this chapter. It indicates that the end of a task is

near. When students complete Chapter 8, they will realize that they can handle the basic

cycle of accounting activities that every business does every fiscal year.

[H2] Section 8.1 The Adjustment Process

“Juggling the books” is an expression used to describe the changing of account balances

for unethical reasons. Tell students that accountants change account balances at the end

of every fiscal year; however, they do not do it to distort reality but to reflect it more

accurately.

This first section explores new accounting standards, teaches students what an

adjusting entry is, and explains the concepts associated with three items that need

adjusting at year-end: supplies, prepaid expenses, and unearned revenue.

Textbook

p. 269 1 The concept of accrual accounting should make sense to students if you relate it to the

Revenue Recognition principle from Section 5.2.

2 The importance of financial statement compatability should help explain why precision

and accuracy was emphasized when processing transactions and creating financial

statements up to this point in the course.

pp. 269–271 3 To illustrate the importance of adjusting entries, role-play the steps of buying a

pencil or other perishable asset. Ask students what accounts would be used if they bought

a pencil from the store using cash. (Answer: debit Supplies, credit Bank). Next, ask

students if the Supplies account should still have a debit balance if the pencil was broken

or otherwise unusable. (Answer: There should not be a debit balance in the Supplies

account if there are no supplies.) This simple example will show students that adjusting

entries are needed to accurately estimate value, as the value of accounts can change

without transactions taking place.

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4 Have students record the definition of an adjusting entry. Ask them why adjusting entries

are important. (Answer: Since they usually affect revenues or expenses, they must also

affect the “bottom line” of business—net income.)

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pp. 270–272 5 Adjusting the Supplies account is relatively straightforward. Guide students

through the Adjusting Entries for Supplies section. Draw on the board the Supplies

T-account that appears on page 270. Tell the class that although the year-end balance is

$15 000, when counted, only $3000 of supplies were left. Write these balances in the

T-account as follows:

6 Ask students to explain the discrepancy. How could the supplies actually on hand be so

much less than the account balance? (Answer: The supplies were used up. Perhaps a

small portion was lost, stolen, or damaged.)

7 The balance in the Supplies account does not reflect reality. Inform the students that the

accounting clerks have done nothing wrong. Trying to update the Supplies account every

time someone printed a few sheets of paper, for example, would be silly. Yet at some

point, the account must be updated. Ask what this point is. (Answer: fiscal year end)

8 Students can think of adjusting entries in the following way: the unadjusted balance is

“What Is”, the inventory account is “What Should Be”, and the supplies expense is “The

Adjustment”. Ask students what they need to do to get the Supplies balance from what it

is to what it should be. Direct students to view the illustration at the bottom of page 271

Supplies

6 000

4 000

3 000

2 000

15 000

3 000 DRAFT



to show the $12 000 credit required in the Supplies account. Students are well aware that

the credit entry must have a corresponding debit entry – show that the $12 000 debit entry

goes in the Supplies Expense account.

9 Review what the preceding entry does. It adjusts the Supplies account to reflect reality,

and it records the real cost of using supplies during the year. Both the balance sheet and

the income statement are more accurate as a result.

Hint: Ask students if the owner of the business would be happy if the senior accountant failed to make the above entry. Why? (Answer: The owner would be quite unhappy. If the supplies expense were not recorded, net income would be higher, and more income tax would be paid.)

Textbook

pp. 272–274 10 Use T-accounts and a similar method of calculating account balances to cover the

adjustments for prepaid insurance, late invoices, and unearned revenue on pages 272 to

274. Tell your class that some students find adjustments challenging, but add that if they

think through adjustments in the way just presented, they will have few difficulties.

Hint: The example in the textbook outlining adjusting entries for prepaid expenses is helpful because it shows students that adjusting entries are used not just for assets.

Hint: Some students might be tempted to credit (or debit) Bank when preparing an adjusting entry. You can advise them that if they do so, they will receive a mark of zero for the entry. The senior accountant never writes a cheque when preparing an adjusting entry, so they should leave the Bank account alone. Furthermore, no money changes hands during adjusting entries – only the value of assets or expenses changes.

[H2] 8.1 Exercises

p. 276 1 Advise students to use T-accounts to analyze each item. The key is to realize that, from

left to right, the three headings of the vertical columns correspond to “What Is,” “What

Should Be,” and “The Adjustment.” (Note: students should know that taking an inventory

refers to counting the supplies on hand.)

p. 277 2 This is a simple review of the three adjusting entries in this section.

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3 Tell the students that someone had to do a physical inventory to produce the data in this

inventory sheet. You may want to inform them that “per M” means “per 1000.”

Textbook

p. 278 4 Students can divide the amount of the one-year policy by 12 in order to determine the

amount used each month. They can then multiply this answer by the number of months

that have expired to arrive at the insurance expense figure.

Alternatively, they can multiply by a fraction that has 12 as the denominator and the

months left in the policy as the numerator. This method will give the amount of unused or

prepaid insurance.

5 Students must take note of the length of each policy to succeed in this exercise; the

divisor (or denominator) will either be 12 or 24 depending on whether the policy in

question is for one year or two.

6 Make students aware that prepaid insurance is not the only type of prepaid expense.

Licences, memberships, and fees due to professional associations are other typical

examples.

[H2] Section 8.2 Adjusting Entries and the Worksheet

Now that students understand the adjustments required for supplies, prepaid insurance,

and late invoices, they need to learn to prepare these adjustments using a worksheet.

Stress that the worksheet is an informal document – it does not record any new data or

transactions, nor does it post information to accounts. Instead, it organizes information in

a clear and logical way that makes it easy to track adjustments and figure out the correct

values to extend to the income statement and balance sheet.

p. 279 1 After you define what a worksheet is, ask the class if they want to see the names of all the

debtors and creditors on a balance sheet. In giving their answers, students should point

out that the information would serve no important purpose and that it would make the

balance sheets of some companies extremely long.

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p. 280 2 Make copies of Master 8-1 (Figure 8.2) for students and a transparency for yourself.

3 Direct students’ attention to the $1480.90 balance in the Supplies account for Global

Logistics. Ask them what the balance represents. (Answer: The balance is the “what is”

figure; or, more specifically, the unadjusted balance in the ledger account, which

represents the beginning balance of supplies plus purchases during the year.)

4 Ask students how they could determine the amount of supplies that Global Logistics

owns on December 31. The answer is to count them. Figure 8.3 on page 280 shows

students how the staff of Global Logistics prepared the count (or inventory).

Stress that the physical inventory of $526 reflects the year-end reality of supplies (the

“what should be” amount).

5 Students should use the knowledge they gained in Section 8.1 to calculate how much the

Supplies account needs to be adjusted (credit $954.90). Use the transparency of

Master 8-1 to show how to record this on the worksheet. Have students work along with

you.

The debit amount will go to the Supplies Expense account, but since this account has a

zero balance, it does not appear on the trial balance. Write it in on the next available line

and enter the debit amount. (See Figure 8.4 for reference.)

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p. 282 6 Have students compare Figure 8.5 to Figure 8.3 and note the similarities. Then, repeat the

adjustment process on the worksheet for insurance and late invoices.

p. 285 7 Total and rule the debit and credit columns in the Adjustments section of the worksheet.

pp. 285–286 8 Show students how to extend the first four accounts in the eight-column

worksheet for Global Logistics, as seen in Figure 8.8.

Students should then complete the extensions and balance the worksheet.

p. 287 9 Instruct students to open their textbooks to page 287 and examine Figure 8.9 to check

their balancing and adjustments for Global Logistics. Point out that the worksheet

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balances for Supplies and Prepaid Insurance now match Figure 8.3 (the supplies

inventory) and Figure 8.5 (the insurance calculation). Tell students that when the

balancing figure represents a net income, the amount is placed in the outer two of the last

four columns.

Ask them why the net income is placed in the credit column of the balance sheet.

(Answer: Net income increases equity.)

Hint: Warn your class that a common error is failure to identify the balancing figure by omitting “Net Income” or “Net Loss” from the ACCOUNTS column.

10 Emphasize the fact that the worksheet is not a journal. Figures are recorded in pencil and

they are not posted to accounts directly from this working paper. Therefore, students

must journalize the debit and credit amounts that appear in the adjustment columns of the

worksheet.

11 Ask students how they think a net loss would be handled on a worksheet. (Answer: Net

loss is placed in the debit column of the balance sheet because net loss decreases equity.)

[H2] 8.2 Exercises

Textbook

pp. 288–289 1-2 These two exercises reinforce the essence of this section: completing worksheets

with adjustments. In both exercises, students then use the worksheet to prepare financial

statements. Exercise 2 also involves some analysis.

[H2] Section 8.3 Preparing for New Fiscal Years

This section familiarizes students with the terminology and mechanics of closing,

including how to prepare a post-closing trial balance. Students should recognize that

revenue, expense, and drawings accounts are temporary; that is, they collect data for only

one fiscal period at a time—usually a year. Tell them that they should not be surprised by

this because in Chapter 5, these accounts were separated out of the Capital account for

the purpose of obtaining information. Now that the information is displayed in the form

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of financial statements, closing returns the balances of the temporary accounts to Capital

and resets them to zero for the new accounting period.

Textbook

pp. 289–290 1 Focus your presentation on Figures 8.10 to 8.19 in the textbook. These

illustrations are quite effective for showing students the closing entries and their effects

on ledger accounts when posted.

Hint: Figure 8.10 is particularly important; it illustrates the changes that happen to

nominal accounts when moving to a new fiscal period.

2 To explain real versus nominal accounts, relate the accounts to the fiscal periods used for

the balance sheet versus the income statement. The balance sheet shows account balances

at a single point in time. In other words, the balance sheet reports the overall status (and

value) of the business, using real accounts. The income statement shows revenue and

expenses for a specific time period. In other words, it reports on the success of a company

for a fixed time period – a fiscal period – using nominal accounts. Therefore, nominal

accounts must be closed at the end of each fiscal period to allow for accurate

measurement of the next fiscal period. As an extension, closing the nominal accounts

affects the capital account.

pp. 291–292 3 If students understand the changes made to the trial balance in Figure 8.10, they

should have no difficulty seeing the changes to an income statement and balance sheet

when moving to a new fiscal period, as seen in Figure 8.11 and 8.12, respectively

Hint: Students should refer to Figures 8.10 to 8.13 when writing closing entries, to

see what is happening to all of the accounts as the fiscal period changes.

p. 293 4 For Closing Entry 1, stress that the income summary account is a temporary nominal

account used to make it easier to perform the closing entries.

Note: Some students may think the Capital account should be credited, not Income Summary. Although they have not given precisely the account you are looking for, they are on solid theoretical ground. In fact, this method would reduce the number of closing entries to three. But point out to them that, in practice, the Capital account would become quite untidy, and that is why many accountants prefer the additional step of creating the Income Summary account.

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p. 294 5 For Closing Entry 2, refer to Figure 8.15 and ask students what type of entry—debit or

credit—is required to bring the balance of each expense account down to zero. (Answer:

A credit entry equal to the debit balance must be made in each account.) Ask students to

give the debit portion this second closing entry. Students should have little trouble

identifying the Income Summary account and calculating the total expenses for the debit

amount.

Textbook

pp. 294–295 6 For the Net Income or Loss (Closing Entry 3), ask students to interpret the

balance of this account. (Answer: A credit balance represents the net income, and a debit

balance represents net loss.) Make students aware that this account summarizes the major

components of the income statement; that is why it is called Income Summary.

7 For Closing Entry 3, ask students whether Income Summary is a real or a nominal

account. (Answer: It is a nominal account that needs to be closed by transferring the

balance to the Capital account). If students have trouble with this, remind them of the

balance sheet calculation of equity (i.e., Beginning Capital plus Net Income minus

Drawings equals Ending Capital). Since they have already identified the balance of the

Income Summary account as net income (or a net loss), they should be able to determine

that it is closed out to Capital.

Hint: Remind students that Chapter 5 taught them that from the Capital account, revenue and expenses came; and, now, to the Capital account, they must return.

8 On page 294, ask students how they would prepare the closing entry for Global Logistics

if there were a net loss of $50 000. (Answer: Debit Capital $50 000 and credit Income

Summary $50 000.)

p. 295 9 Use the same strategy for presenting Closing Entry 4 as you did for Closing Entry 3.

Reminding students of the balance sheet formula should be a sufficient clue for

discovering the proper way to handle drawings (Beginning Capital plus Net Income

minus Drawings equals Ending Capital).

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10 Instruct students to open their textbooks to page 293 and examine Figure 8.13.

Emphasize that all the information for the closing entries is obtained from the worksheet.

Hint: You may wish to refer to the worksheet as the source document for the closing entries.

Textbook

p. 296 11 Introduce the post-closing trial balance (page 296), stressing that this step is necessary to

reduce the chance of errors that may occur during closing.

[H2] 8.3 Exercises

p. 298 1 This is a simple exercise that ensures students know the difference between nominal and

real accounts.

pp. 298–299 2 Once students complete this exercise, it will provide them with a good summary

to use when preparing for the chapter test.

p. 299 3 The questions are based on the theory of adjusting and closing entries.

pp. 299–300 4 Remind students that no calculations are necessary for journalizing the closing

entries; all figures can be obtained from the worksheet. Advise them to use Figure 8.13 as

a guide when completing this exercise.

pp. 300–301 5 This exercise gives students practice in completing the last three steps of the

accounting cycle.

[H2] Section 8.4 Adjusting for Depreciation

Depreciation is separated from the other adjustments and given a section of its own. This

way, teachers who feel that their classes are not ready this area of accounting can bypass

it for the time being.

Be careful how to interpret students’ awareness of depreciation. Many students are

familiar with the fact that an automobile depreciates over time. If nothing else, they will

have heard the familiar complaint of the new car buyer, “It depreciated $5000 the second

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I drove it off the lot!” But comments such as these deal with the market value of the

asset, not its depreciation.

Depreciation in an accounting sense is more concerned with spreading out the cost of

an asset over its estimated useful life than it is with the asset’s market value. Depreciation

complies with the matching principle, which requires that expenses should be reported

along with the revenues they helped to earn. If an automobile helped earn revenue in a

fiscal year, then some of its cost must be listed as an expense of that period.

Textbook

p. 302 1 Have students read the example of the $24 000 purchase of a van on page 302. To clarify

the situation, ask students what would be the effect on the income statements if the only

entries the business ever recorded for the purchase of the truck were a debit to Vehicles

of $24 000 and a credit to Bank of $24 000. (Answer: The expenses would be understated

and the net income would be overstated. Bring out, if noone mentions it without

prompting, that additional income taxes would have to be paid because the net income is

overstated.) Ask “Would the owner be very happy with paying taxes on income that was

tied up in a truck belonging to the business? What could be done to prevent this?”

(Answer: Record a portion of the cost of the truck as an expense each year, until it is sold

or has ceased to have value.)

2 Have students record the definition of depreciation and relate it to the provisions of the

matching principle.

3 Have students record the formula for straight-line depreciation; then go over the straight-

line calculation for Tip Top Trucking with them.

pp. 303–304 4 In Lesson Note 1, students are to examine the effect on income statements if the

depreciation entries for a $24 000 van were neglected. Now, looking at Tip Top’s

purchase of a $78 000 truck, ask what the effect on the balance sheet would be if

depreciation were not recorded each year. (Answer: The value of the assets and equity

would be forever overstated because the original debit to the Truck account would never

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be altered, even if the truck itself were no longer in use.) Students will see the need for

reducing the value of such an asset on the balance sheet.

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pp. 304–305 5 Show the balance sheet presentation of accumulated depreciation and discuss

some of the information that can be derived from it (e.g., the trucks are new, they are not

likely to break down, they are still under warranty, and so on.)

7 Show students that it is easy to extract information from an account in such a way that it

will show on a financial statement. Simply create another account (or accounts). Review

the accumulated depreciation account that is shown on this page.

Hint: Remind students that they have created accounts before to reveal information hidden in an account (In Chapter 5, revenue, expense, and drawing amounts were removed from the Capital account to reveal information.)

p. 305 8 Identify Accumulated Depreciation as a contra account. Ask them if they have

encountered a contra account before. (Answer: Yes, they worked with the HST

Recoverable contra account in Section 6.3.) Draw parallels to HST Recoverable. (HST

Recoverable reduces a related account—HST Payable—to reveal the net value of the

liability. Accumulated Depreciation reduces a related account—in this case, Truck—to

reveal the net value of the asset.)

p. 306 9 After explaining the adjusting journal entry for depreciation, show students how to

complete the worksheet and prepare financial statements that include depreciation

accounts. Use the textbook illustrations or prepare transparencies of Master 8-2, 8-3, and

8-4.

p. 308 10 The chance is small that a fixed asset would be purchased on the first day of a fiscal year.

Therefore, students need to be able to adjust the straight-line calculation so they can

compute a monthly figure.

11 Ask students why the federal government is interested in the net income of a business.

After they give the obvious answer (taxation), explain that Canada Revenue Agency has a

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set of rules for calculating how much depreciation businesses are allowed to claim (i.e.,

the amount of Capital Cost Allowance). Review the table of Capital Cost Allowance rates

and use the board to review the calculations on page 309.

Textbook

p. 309 12 Use the calculations on this page to compare straight-line to declining-balance. Ask

students why businesses would like the fact that the declining balance method produces

larger depreciation figures in the early years of an asset’s life. (Answer: Larger amounts

of depreciation in the early years mean more expenses are applied against income. Lower

net income in the early years means lower taxes, which helps defray the cost of

purchasing assets in the first place. In short, declining-balance depreciation encourages

capital investments.)

Hint: To look further at depreciation, use examples students are familiar with – such

as a car and a computer. Both items have reduced salvage value each year, but the

computer loses value at a quicker rate because it goes obsolete faster. You could

contrast these examples to explain the difference between straight-line and declining-

balance depreciation. Ask students which calculation makes more sense, both in

terms of the useful life of the asset, and the effect on the business.

pp. 310–311 13 The 50% or Half-Year rule is presented as enrichment. CRA declares only 50% of

an asset’s cost is eligible for depreciation (CCA) in its first year, regardless of the month

purchased. The table on page 310 shows the impact of this rule. (Note: Keep in mind that

these comparisons are for an asset bought at the start of a fiscal year.)

[H2] 8.4 Exercises

p. 311 1 Students use the straight-line method (questions A to C) declining-balance method

(questions D and E) and half-year method (question F) to calculate depreciation for five

consecutive years. Draw their attention to the date of purchase of the fixed asset in each

case.

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p. 312 2 Using these calculations, students will be able to compare the results of the different

depreciation methods.

3 Students consider the impact of violating the matching principle with regard to

depreciation. Part B asks them to create a bar chart so they can better visualize this

impact.

Textbook

p. 313 4 This exercise tests students’ ability to prepare adjustments directly to T-accounts instead

of using worksheets and journal entries.

p. 314 5 Warn students to take care when extending the balances of the new expense accounts

created by the adjustments in this exercise.

6 This simple exercise gives students more practice calculating depreciation adjustments

using the declining-balance and 50% rule methods.

[H2] Section 8.5 A Spreadsheet for Worksheets

This is a brief but worthwhile section, especially for those students who have struggled

with adjusting and closing concepts. Try to book a computer lab so students can conduct

the exercise on their own. They will be thankful that spreadsheet references make it easy

to copy information throughout the worksheet. The exercise works well as a “catch-up”

for students who are behind, either with their understanding of the worksheet, or their

knowledge of spreadsheet software. For students who are ahead, you could ask them to

create and format an income statement and balance sheet based on the values in the

worksheet.

p. 315 1 The colour-coding as seen in Figure 8.24 makes it easy for students to see where the

worksheet needs to be extended.

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pp. 318–320 2 Use a simple example to show how the IF function works before before using it in

the context of a worksheet.

Hint: The IF function is an advanced spreadsheet technique. If students are having

difficulty understanding it, they can manually create the balancing figure if they have

extended and adjusted the worksheet and know which columns the balancing figure

should appear in. Warn them, however, that this method is inflexible and will not

work if net income turns to net loss (or vice versa).

[H2] 8.5 Exercises

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p. 320 1 This is exercise extends the use of a spreadsheet worksheet to create an income statement

and balance sheet – which is the ultimate goal of the worksheet.

[H2] Section 8.5 Spreadsheet Extensions

p. 320 1 This is a challenging exercise that asks students to use the IF function to make their

balance sheet and income statement work for a net income or net loss situation. Many

students will have difficulty with this because no instructions are given for how to use the

IF function in the balance sheet or income statement.

[H2] Chapter 8 Review Exercises

p. 322 1 This brief exercise allows you to stress that it makes little difference what clerks do with

accounts needing adjustments. The senior accountant will have a sound understanding of

adjustments and so can always make an entry that ensures that year-end account balances

reflect reality.

2 Warn students not to forget the effects of closing when they follow the history of a

Supplies and a Supplies Expense account for two years.

pp. 322–323 3 Reviewing Figure 8.5 on page 282 may help students complete this exercise.

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pp. 323–325 4-6 These exercises give students ample opportunity to show that they can complete

the accounting cycle well. Exercise 4 does not include depreciation, which gives teachers

who skip that section the chance to assign a major review exercise.

Textbook

pp. 326–327 7 This is the most challenging exercise of the Review Exercises. You may want to

assign it as an in-class exercise and use it for evaluation. (Note: When calculating the

second adjustment, students must increase the trial balance amount for Supplies and

Materials by adding the late invoice from the first adjustment. Instead of warning them to

do this, however, advise them to simply check the balance sheet debt column when the

worksheet is extended and to ask the following question of themselves: Is the final debit

amount of Supplies and Materials the same as the physical count? It should be.)

pp. 327-328 8 This exercise offers a bit of a twist to see if students understand closing entries.

[H2] Questions For Further Thought

p. 328 1-9 These questions provide an opportunity to apply the accounting theory covered in the

chapter. Some of the questions can be completed orally.

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[H1] Chapter 9 Accounting for Cash

This chapter focuses students’ attention on what is arguably a business’s most valuable

asset—cash. Chapter 9 lessons can be taught and exercises assigned at various points in

your course. In the textbook, this chapter is presented right after students have completed

the accounting cycle. Covering it early will expose students to bank reconciliation, a skill

they might need if they participate in career preparation programs that place them in the

business community.

[H2] Section 9.1 Accounting for Cash Receipts

A business owner often talks about cash flow. This term describes the act of money

flowing both into and out of a business. Every business owner hopes the inflow described

in this section will be greater than the outflow.

1 Divide your whiteboard into different sections and ask students what purchases they plan

to make today, this week, this month, and this year. How do they plan to pay for them?

Record a sampling of their responses. Make sure that you participate as well because

your purchases will add a dimension of experience that students typically cannot provide

(e.g., mortgage payments, car payments, airline tickets, etc.).

2 Circle the cash (coins and bills) transactions on the board. See if the pattern for cash

transactions is similar to what the textbook states. That is, the volume of cash transactions

should be high, but the value of individual purchases will tend to be small. Ask students

why this is so. Draw out the features of cash transactions from your questioning and have

students record them in their notes. Features making cash popular should include ease of

use, anonymity (no personal data is exchanged), and immediate exchange of value.

Factors that make cash less desirable for high value transactions are portability and

security. Also, ease of use of cash is lost with higher value payments. (Walking around

carrying thousands of dollars in order to make a large payment is not convenient.)

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Textbook

p. 338 3 Students are unlikely to use credit cards unless they have privileges on a parent’s or

guardian’s account. Therefore, use one of your credit card transactions to explain how the

exchange of value occurs.

Question students about the advantages and disadvantages of credit cards. Students

often find credit card fraud interesting. Search online for cases of actual fraud and present

them to the class.

p. 339 4 The growth of debit card use has been remarkable. You will very likely discover that

students have had a wealth of experience with this method of payment.

5 Some students may have received wage payment via a paper cheque but now, many

employers are paying even their part-time workers with direct deposits to employee bank

accounts. Ask students if they have ever been paid in this way.

On the board, select the transactions that are completed with direct transfers. Mortgage

payments and bank charges are typical examples. If you use the internet to pay bills, you

can relate your own experiences to your students’. Most students may already be aware

of this method since they have grown up knowing of the ability to send and receive

money online, even if they are not personally involved.

pp. 339–340 6 Instruct students to read about the first two types of physical cash receipts. They

should have no trouble with the concept of mail receipts, which briefly reviews

information they first encountered in Chapter 6.

pp. 340–341 7 Ask if any students have worked as cashiers and, if so, draw on their experiences

working with cash registers. (If your school has a school store, students may have used a

cash register there.) Inquire about procedures that must be done at the end of a day. From

the discussion, the class should know that the cash must be counted and then compared to

a total indicated by the source documents (which, in the case of a cash register, would be

a printout or an eletronic notification.) Tell students that the process of comparing the

actual cash received with the source documents is known as proving the cash or

balancing the cash.

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8 Give the following example: Cash receipts for the day were counted at $2000, but the

cash register tape indicated receipts should have been $2100. Assuming that the cashier

does not have to make up the shortfall, ask students to give the accounting entry. Write

their responses on the board in T-accounts.

Students should not have problems debiting Bank by $2000. Do not let them credit

Sales by $2000, though; this would not reflect reality. Agree on a credit to Sales of $2100

– in other words, what should have been collected as sales revenue. Ask them what

account they should use to make the debits equal the credits. If they have trouble, remind

them what they would have debited in Chapter 4 (Answer: Capital.) They should then

have no trouble seeing that an expense account is needed. Agree on the title, “Cash Short

or Over.”

9 Referring to the same example, ask what entry would be required if a count of the cash

receipts revealed a total of $2150. (Answer: Debit Bank, $2150, credit Sales, $2100, and

credit Cash Short or Over, $50.) Inform students that it is common practice to use the

same account for recording both shortages and overages. (If you use Quickbooks, you

could point out the similarity between the Cash Short or Over and HST Payable accounts;

both are single accounts for recording debit and credit transactions.)

Textbook

p. 340 10 Have students open their textbooks and lead them through the slightly more detailed

examples that start on this page. Make sure they know the meaning of float or change

fund.

Inform students that the Cash Short or Over account is listed as an expense, even

though it receives both debit and credit entries. Accountants do this because they feel

confident that this account will usually wind up with a debit balance. Ask the class why

this is so. If they hesitate, tell them to consider human nature. They usually will agree

with the last sentence of this section, “…customers who have been given too little change

are more likely to complain than those who have been given too much.”

11 To turn the concept of cash short or over into an activity, simulate a business by giving

groups of students play money and allowing them to purchase items (which could be

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anything that is available in your class – such as whiteboard markers, pens, or pencils.)

Ask students to accidentally underpay or give back too much cash. Ask students to write

the journal entries when the cash register receipt does not equal the actual cash count

minus the float.

Textbook

pp. 344–345 12 Have students read the information about current accounts and business deposits.

[H2] 9.1 Exercises

p. 346 1 This exercise provides a review of the terms presented in this section.

p. 347 2 This cash proof exercise uses the same cash proof form as illustrated in this section.

3 This cash proof seems more complex, but reassure students that the basic process is the

same. The source documents will indicate how much cash was received in the day, and

then this amount is compared to the actual cash received.

p. 348 4 Students can complete this exercise quickly; it tests their understanding of the Cash

Short or Over account.

5 Students complete a common yet important clerical task in accounting—completing a

deposit slip.

[H2] Section 9.2 Accounting for Cash Payments

This section covers three ways businesses can make payments: by cheque, by electronic

payment, and by cash (specifically, petty cash). (Students already learned about

electronic transfers in Section 9.1). While cheques are much more common, at this stage

of accounting, students need to spend more time learning how to handle petty cash.

Accordingly, more time is devoted to this subject.

p. 349 1 The second paragraph reveals why cheques are the dominant payment system—

businesses use them to clear their accounts payable. In fact, virtually all payments in a

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business are made by cheque. They can and do make some payments electronically—as

consumers do—but present accounting systems in business still revolve around cheques.

Textbook

pp. 350 2 Some students may have misconceptions about petty cash, regarding it as a little box of

money that business people can dip into with little or no accountability. This section

teaches them that internal control and accounting procedures for petty cash are important.

Hand out copies of Master 9-1, 9-2, and 9-3 to the class. (Instead of using the masters,

make up your own petty cash transactions as you teach the lesson.)

3 Mention that although most payments are made by cheque, paying by cash is sometimes

convenient or necessary. Ask the class for examples; they should come up with items like

money for lunch, payments to couriers, incidental purchases at stores, etc.

4 Introduce the concept of a petty cash fund and the Petty Cash account. Ask students for

the classification of this account. (Answer: current asset). Tell them that they are going to

act as cashiers of the petty cash by preparing vouchers and replenishing the fund.

Hint: Dealing with cash short or over is similar to dealing cash receipts and cash

payments; the major difference is the creation and replenishment of the petty cash

fund.

5 Refer students to their copies of Master 9-1, which shows transactions for a petty cash

system. (Tax is omitted from these sample transactions.)

Have a receptacle at the front of the room to act as a petty cash box. Include a supply

of play money and paper slips to act as vouchers.

Put $75 of play money into the cash box to establish the fund. Ask students where the

money came from. (Answer: the bank via a cheque.) They should easily understand the

journal entry required: a debit to Petty Cash, $75, and a credit to Bank, $75. Write this

entry in T-accounts on the board.

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6 Have students fill out the first petty cash voucher (see Master 9-2) for the May 2

transaction on Master 9-1. Imitate what would actually happen by putting a voucher into

the petty cash box and removing $3.75.

Mention that the money in the petty cash box no longer equals the amount shown in

the T-account; the Petty Cash account is allowed to become inexact.

7 Point out that the money in the petty cash box plus the voucher for $3.75 equals $75.

Then, guide students as they complete the rest of the transactions on Master 9-2. (You

can carry on with the simulation at the front of the class.)

8 After all the vouchers have been written, ask students how much cash is left in the petty

cash box (Answer: $4.45). Tell students that the fund needs to be replenished so that it

can be used for future payments.

9 Ask where the money will come from to replenish the amount in the petty cash box back

to $75. (Answer: A cheque will be drawn on the business’s bank account.) Write the

credit of $70.55 in the Bank T-account on the board.

10 Ask students to give the debit portion of the replenishment entry. With luck, you will get

the incorrect response of a debit to Petty Cash of $70.55. You can then calculate the

balance of the Petty Cash T-account ($145.55) to accentuate the serious nature of this

error. Clearly, the Petty Cash box does not contain, nor will it ever contain, $145.55.

11 Refer students to the top portion of Master 9-3. Ask them to write a summary that

includes account titles for each voucher, the amount of each voucher, and the total of all

the vouchers. The total of all the charges is $70.55.

12 Keeping students’ attention focused on the incorrect replenishment entry, ask how the

amounts listed on the summary of charges will ever get to the accounts in the ledger. The

answer is that they will not if the replenishment entry is not changed. Through the

discussion, students will see that the expenses listed on the summary of charges will

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become the debit portions of the replenishing entry. Instruct students to make this entry

on Master 9-3.

Textbook

p. 353 13 Have students open their textbooks and review the textbook presentation. Students should

note how HST is summarized in the journal entry on page 353.

[H2] 9.2 Exercises

1-2 In Exercise 1, students prepare a journal entry to establish a petty cash fund; in Exercise

2, they make an entry to increase a petty cash fund. These activities will not take long.

p. 354 3-4 In these exercises, students practise the procedures they learned in this section.

p. 355 5 You may wish to have students complete this exercise orally, or you could use it as a

quiz.

[H2] Section 9.3 Accounting Controls for Cash

Students find cases of fraud and theft intriguing. To introduce this section, instruct

students to read Case Study 1 on page 390, “Cola Profits Go Flat”—a true story!

pp. 355–356 1 After completing Case Study 1, define internal control and cover the six points

beginning on this page.

Hint: Search online for “internal control failure” to gather other recent examples of

how a lack of controls can cost companies millions of dollars. You could also use pop

culture examples, such as the scheme devised in the movie Office Space, where

employees steal money from a company by diverting fractions of pennies into their

personal bank account.

p. 356 2 At this time, have students read the textbook material under the heading, “Procedures for

the Control of Cash,” and assign the 12 mini-cases that are given in Exercise 1 on pages

362 to 364.

Hint: Surveyl your class to see if any students work part-time and if they deal with

cash (perhaps as a cashier or clerk.) Get students to think about policies or

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regulations they follow that might be in place to ensure proper internal control. They

should have examples, especially if they have just gone through the 12 mini-cases of

Exercise 1. Student examples of internal control will make it easier for students to

relate the importance of internal control to their own lives.

3 When you take up the mini-cases in Exercise 1, have students close their textbooks. Tell

them that the accounting clerk for Boxwell and Company received the bank statement

dated March 31, which revealed a cash balance of $1204.90.

The clerk then checked the ledger to discover a March 31 cash balance of $1157.76.

Write these figures on the board. Ask the class who was probably wrong: the bank or the

business. (Answer: Both have balances that are out of date; their correctness cannot be

verified until they are brought up to date.)

Textbook

pp. 357–362 4 After you define bank reconciliation, use the board to demonstrate the procedures

described on pages 357 to 362 to prepare the bank reconciliation statement for Boxwell

and Company. Have students work along with you; they can compare their work and

notes to the material in the textbook upon completion.

[H2] 9.3 Exercises

pp. 362–364 1 These mini-cases can be completed in small groups. It may be wise to assign them

immediately after presenting the topics of internal control and procedures for the control

of cash on pages 355 to 356.

pp. 364–365 2 Tell students that the three records for Paul Swartz (the previous reconciliation

statement, the personal record, and the bank statement) are the only information

individuals have access to when they reconcile their bank account balances. Items such as

outstanding cheques, service charges, and so on can be determined from careful

examination of these documents. (Students will have trouble with this exercise if they

neglect the previous month’s statement.)

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p. 365 3 Here, students must analyze a completed bank reconciliation statement. They will need a

good understanding of certified cheques to answer question F.

Textbook

pp. 366–367 4 Unlike the reconciliation for Paul Swartz, this one is for the business of Wagner

and Wagner. Students must therefore remember to make journal entries after they

complete the reconciliation statement.

[H2] Section 9.4 The Cash Flow Statement

The cash flow statement, while tangential to most of the concepts discussed in this

course, is an important financial statement, particularly as IFRS has made it a reporting

requirement. Students should find the concept of cash in-flows and out-flows easy to

understand.

It is useful to go back to review the fundamental accounting equation when

teaching this section, to show students that neither capital nor revenue is the same as

cash. Some students may still be confused. For example, a business could have a healthy

amount of capital, but also have a lot of money tied up in long-term assets that easily

cannot be converted to cash. Capital and income is important, but a business must also

have a healthy cash flow to remain a going concern.

p. 367 1 The cash flow statement, as defined in the book, is nothing more than a report of the

debits and credits in a businesses cash account(s), which, at this level, is generally just the

Bank account, and possibly a Petty Cash account. This definition frames the cash flow

statement in a way that students can relate to based on what they have learned earlier in

the course.

p. 369 2 Some students confuse investing and financing activities. Stress that these labels are

given from the perspective of the business, not the individual – long-term assets are an

investment in the business, and borrowing funds finances the business.

3 The analysis provided in the Usefulness of the Cash Flow Statement section does a good

job at showing the strengths and synergies of the three financial statements presented so

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far in the textbook. Consider the cash flow statement, income statement, and statement of

financial position of Brainwaves Educational Consultants (Figures 9.14 to 9.16). Ask

students to provide their own analysis of the statements. You may need to guide students

in this exercise, as the amount of information provided to them may be overwhelming.

[H2] 9.4 Exercises

Textbook

p. 372 1 This question asks students to categorize business transactions for the cash flow

statement as operating, investing, or financing.

2 This quick exercise integrates what students learned about depreciation in Section 8.4 and

requires students to use all three financial statements to find the missing $2000.

p. 373 3 This exercise lets students practise creating the cash flow statement, and offers students

the chance to do some analysis of the situation.

[H2] Section 9.5 A Spreadsheet for Cash Flow

This optional section is challenging, both in terms of concept (the cash flow statement)

and execution (advanced spreadsheet functions). It involves in-depth use of the

IF function, first introduced in Section 8.5, and requires students to use patience and

problem-solving skills to prepare the cash flow statement. This is a useful section for

students to complete if they are planning to continue with accounting at the post-

secondary level. Or, if some students are ahead in their work, consider assigning them the

exercise from this section.

p. 374 1 As mentioned in the textbook, it is possible for students to use the Fill Handle to fill in

Column I without changing the cell formatting. In Excel, once you use the fill command,

a small box will appear with an icon showing cells and a plus sign. Click the box and

choose “Fill Without Formatting” to complete this task.

pp. 376–377 2 There is no Cash Flow T-account. Looking at the Cash Flow “T” worksheet on

page 377 is useful for understanding the cash inflows and outflows of the business, but

Cash Flow itself is not an account.

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Textbook

p. 378 3 You may want to show a demonstration of a simple IF statement before proceeding to the

Cash Flow from Operations section on page 378. The IF function for Current Account

Adjustments requires referencing other worksheets, and nesting the Absolute Value

function. This procedure can become confusing if students are not already comfortable

with how the IF fuction works.

4 If students are having difficulty with the exercise in this section, consider showing them a

full demonstration. Invite students to ask questions as you set up your spreadsheet file.

[H2] 9.4 Exercises

p. 383 1 This exercise asks students to use cell references from a Cash Flow T worksheet to

create a new Cash Flow Statement.

2 This exercise asks students to take their existing spreadsheet, and update the data to

create a Cash Flow Statement for a different company. Despite some new terminology

introduced in this question, students should find this exercise easier than Exercise 1

because they have already set up all of the functions and references in their spreadsheet

file.

[H2] Chapter 9 Review Exercises

p. 385 1 Students have to sort through vouchers and a chart of accounts to prepare a petty cash

summary. Remind them that they do not have to prepare the accounting entry for the

replenishment.

pp. 386–388 2-3 Students use company documents and a bank statement to complete bank

reconciliation duties. In each exercise, advise students to take note of the previous

month’s reconciliation statement while they hunt for discrepancy items, especially for

outstanding cheques.

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[H2] Questions for Further Thought

Textbook

p. 389 Consider using these short cases to generate class discussion.

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[h1] chapter 8 completing the accounting cycle [h2]...

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