ACC 106 ACCOUNTING PROCESS

Question 1

Discuss what accounting cycle is and identify the steps in accounting process.

Answer 1

Accounting cycle is the steps or procedures used in recording transactions to preparation of financial statements. It implements the accounting process, and it has 10 steps, namely:

1. Identifying and analyzing transactions from source documents;
2. Recording or journalizing;
3. Posting to the ledger;
4. Unadjusted Trial Balance;
5. Adjusting entries;
6. Adjusted Trial Balance;
7. Preparation of Financial Statements;
8. Closing entries;
9. Post-closing trial balance; and
10. Reversing entries

with steps (4), (6), (9) and (10) being optional, but is preferred for the purpose of best internal control.

Question 2

Explain the 2 systems of recording transactions.

Answer 2

Accounting records of a business entity.
1. Source documents - these documents are the evidences of a transaction that took place. e.g. sales invoice, vouchers, and others
2. Books of accounts
a. journal
b. ledger

The 2 systems of recording transactions
1. double entry system
- in this system, each transaction is recorded through the use of debit and credit. it has two concepts:
a. duality - which means that each transaction has a 2-fold effect on a value, meaning a transaction affects atleast two accounts.
b. equilibrium - each transaction must be recorded in equal amounts of debit and credit.

the double entry system is in line with the PFRS because because profit or loss is computed under transaction approach which basically means income less expenses = profit or loss.

accounts recognized under this system:
A L EQ I E
the books under this system are:
a. journal,
b. sales journal,
c. ledger
d. subsidiary ledger
e. other important books

2. single-entry system
   - records transaction with a simple narrative. Profit or loss is determined through capital maintenance approach which compares only the beginning and ending balances of equity. capital maintenance approach is not in line with PFRS because profit or loss is not determined through transaction approach. moreover, internal controls are not enhanced under this approach because transaction records are usually inadequate.

the accounts affected:
cash, AR, AP, and equity

books affected:
cash books and subsidiary ledgers (personal accounts)

Question 3

type of book of accounts that is used only under double-entry system

Answer 3

journal

Question 4

book of account that is used under both 2 systems of recording

Answer 4

subsidiary ledger

Question 5

two basis of accounting that can be applied under both 2 systems of recording

Answer 5

accrual basis and cash basis

Question 6

Distinguish accrual to cash basis.

Answer 6

Accrual basis: income or expenses are recognized when it is earned or incurred.

Cash basis: income or expenses are recognized when it is received or paid.

Question 7

Explain adjusting entries.

Answer 7

Adjusting entries are entries made prior to the preparation of financial statements to update certain accounts so they reflect the correct balances in the designated time which is normally the end of the period or December 31.

All aje affects one balance sheet account and one income statement account. Moreover, all aje affects the comprehensive income account.

Question 8

What are the 2 purposes of AJE?

Answer 8

1. to take up unrecorded income and expenses of the period (e.g. accruals for income and expenses)
2. to split mixed accounts into their real and nominal elements (e.g. adjusting prepayments and unearned income)

Question 9

Discuss the 2 methods of initial recording of income.

Answer 9

Income
Advanced collections of income may be intially recorded using either (1) liability method, or (2) income method.

1. Liability method - advanced collections of income is initially credited to a liability account. At the end of the period, the earned portion is recognized as an income, and the unearned portion remains as a liability.
2. Income method - advanced collections of income is initially credited to an income account. At the end of the period, the unearned portion is recognized as a liability, while the earned portion remains as an income.

Question 10

Discuss the 2 methods of initial recording of expenses

Answer 10

1) Asset method - prepayments of expenses are initially debited to an asset account. At the end of the period, the incurred portion is recognized as expense, while portion not used remains as asset.

2) Expense method - prepayments of expenses are initially debited to an expense account. At the end of the period, the unused portion is recognized as an asset and the incurred portion remains as expense.

Question 11

Discuss Trial Balance.

Answer 11

Trial balance includes the list of all accounts in ledger and their balances. It checks the equality of total debits and credits. Unadjusted Trial balance as it relates to internal control is crucial to adjusting entries and preparation of financial statements because you can not proceed to those steps unless total debits and total credits are equal.