Economics Lecture 2/3 (Double entry Book-Keeping and Advanced Book keeping)

Question 1

What are Double book entry rules based on?

Answer 1

assets (debit entry), expenses (debit entry), equity, creditors, income and provisions

Question 2

When Assets and Expenses (A and E) increase = … and When decrease …

Equity, Creditors, Income and Provision (E,C,I,P) increase = … and when decrease …

Answer 2

Asset and expenses (A and E) Increase = debit entry / Decrease = credit entry
Equity, Creditors, Income and Provision (E,C,I,P), Increase = Credit entry / Decrease = debit entry

Question 3

What is a Trade Creditor and Debtor ?

Answer 3

Creditor is someone the business owes money to and Debtor is the opposite

Question 4

An account -
A ledger -
Debit:
Credit:

Fill in the gaps

Answer 4

An account - is where cash/credit is held
A ledger - Intended to provide every transaction within the business
Debit: Decrease in liabilities or an increase in assets
Credit: Increase in capital, liability or revenue, decrease an asset or expense

Question 5

What is the accounting equation?

Answer 5

Capital = Total assets - to the sum of liabilities and shareholder equities

Question 6

Why do managers use financial performance?

Answer 6

To assess the business positives and negatives to boost areas of the business to upgrade the business

Question 7

How to calculate a loan?

Answer 7

P = (r * A) / (1 - (1 + r)^(-n))

P, represents the monthly payment
A, represents the amount borrowed
r, represents the monthly interest rate
n, is the number of months in the loan term

For the interest rate you divide it by 12 months to give the monthly figure

Question 8

Define bad debt

Answer 8

Bad debt (contra asset) is an amount of money that a creditor must write off if a borrower defaults on the loans. If a creditor has a bad debt on the books, it becomes uncollectible and is recorded as a charge-off.

Question 9

What are the two ways to estimate an allowance for bad debt?

Answer 9

The percentage sales method and the accounts receivable aging method.

Bad debts can be written off on both business and individual tax returns.

Debtor can’t or refuses to pay because of bankruptcy, financial difficulty, or negligence.

Question 10

The IRS allows to write off bad debt, what can they write off and what is ineligible?

Answer 10

IRS allows businesses to write off bad debt on Schedule C of tax Form 1040 if they previously reported it as income.

Bad debt may include loans to clients and suppliers, credit sales to customers, and business-loan guarantees. However, deductible bad debt does not typically include unpaid rents, salaries, or fees.

Question 11

Why is double book-keeping necessary, and is it a waste of time?

Answer 11

Double-entry bookkeeping is a widely accepted accounting method that has been used for centuries. It is based on the principle that every financial transaction has two equal and opposite effects on the accounting equation. While it may seem like a waste of time and money to record everything twice, there are several arguments for and against this method.

Arguments for Double-Entry Bookkeeping:

Accuracy: Double-entry bookkeeping provides a more accurate picture of a company’s financial position than single-entry bookkeeping. By recording each transaction in two accounts, it ensures that the books balance and that errors are caught quickly 2.

Transparency: Double-entry bookkeeping provides a clear and transparent audit trail of all financial transactions. This makes it easier to identify errors, track expenses, and prepare financial statements 3.

Compliance: Double-entry bookkeeping is required by law in many countries, including the United States and the United Kingdom. It is also a generally accepted accounting principle (GAAP) 1.

Arguments against Double-Entry Bookkeeping:

Complexity: Double-entry bookkeeping can be complex and time-consuming, especially for small businesses with limited resources. It requires a good understanding of accounting principles and can be difficult to learn 3.

Cost: Double-entry bookkeeping can be more expensive than single-entry bookkeeping, especially if you need to hire an accountant or purchase accounting software 3.

Not Suitable for All Businesses: Double-entry bookkeeping may not be suitable for all businesses, especially those with simple accounting needs. For example, a sole proprietorship with few transactions may find single-entry bookkeeping sufficient 2.

In conclusion, while double-entry bookkeeping may seem like a waste of time and money, it provides several benefits that make it a valuable accounting method. However, it may not be suitable for all businesses, and the decision to use it should be based on the specific needs of the business.

Question 12

The system provides the answers to 3 basic questions:

Answer 12

What profit has the business produced?
How the business owes?
What do they have acquired and the amount owed?

Question 13

What is the 6 main branches of accounting?

Answer 13

Auditing
Financial accounting and reporting
Financial management
Management accounting
Taxation
Insolvency

Question 14

The purpose of a financial statement…

Answer 14

It calculates what profit/losses has been produced over a period of time. Also, summary of what you own and what you are owed at the the end of a period

Question 15

UK Accounting Standards what is it and why was it created?

Answer 15

Accounting standard, set of principles, standards, and procedures that define the basis of financial accounting policies and practices. It is used to improve transparency and accountability of financial reporting.

They inform how businesses record, measure and disclose their financial transactions (Companies act 2006)

Question 16

If an adjustment is made to one side of the equation…

EVERY transaction …

Answer 16

If an adjustment is made to one side of the equation, you MUST make an identical adjustment either to the other side of the equation of the same side .

EVERY transaction must be recorded TWICE

Question 17

Name the 12 common accounts used in accouting

Answer 17

Capital - value of the investment in the business by the owner(s). It is that part of the business that
belongs to the owner; it can be described as the owner’s interest and/or equity

Cash - money (currency) that is readily available for use. It may be kept in physical form, digital form, or invested in a short-term money market product.

Creditors/payables - An entity or person to whom
money is owed

Income - money that you earn from various sources, such as wages, investments, and business profits. It is an important part of your financial health because it is the money that you use to pay for your living expenses and to save for the future.

Trade debtors/receivables - An entity or person who owes money to the business.

Sales - a transaction between two or more parties that involves the exchange of tangible or intangible goods, services, or assets for money. In some cases, assets other than cash are paid to a seller.

Stocks/Purchases -

Discounts - a reduction in the price of a good or service. It is usually expressed as a percentage of the original price

(Trade) Creditors - An entity or person to whom
money is owed.

Expenses - Type of expenditure that flows through the income statement and is deducted from revenue to arrive at net income

Varying Assets - equipment, inventory and accounts receivable.

Drawings/dividends - two ways business owners can be paid.

Dividends are paid out of the profits and reserves of a company, and are paid out of after-tax profits. The business owner then pays tax on the dividends.

Drawings can be taken out of the available cash of a business, and are treated as a loan. Interest needs to be paid back to the business.

Question 18

For depreciation there is an … account and a … account for the asset

Answer 18

Expense and Provision

Question 19

When calculating Depreciation what is recorded on the income statement?

Answer 19

When the final accounts are prepared the depreciation expense will be recorded on the income statement as an expense so that the net profit can be caluculated

Question 20

What is a Trail Balance?

Answer 20

A form of control system to check the accuracy of what has been done.

Question 21

Define Management accounting

Answer 21

A branch of accounting that focuses on the revenues and expenses of a business, as well as asset usage

Question 22

Define Taxation

Answer 22

when a taxing authority, usually a government, levies or imposes a financial obligation on its citizens or residents.

Question 23

Define Financial Management

Answer 23

process of planning, organising, directing and controlling the financial activities of a business. It involves making decisions about how to invest, finance, and distribute the funds of the enterprise. The main objective of financial management is to use capital efficiently and effectively to achieve the goals of the business

Question 24

Define Insolvency

Answer 24

An individual or company can no longer meet their financial obligations to lenders as debts become due. Before an insolvent company or person gets involved in insolvency proceedings, they will may be involved in informal arrangements with creditors, such as setting up alternative payment arrangements. Insolvency can arise from poor cash management, a reduction in cash inflow, or an increase in expenses.

Question 25

Define Going concern

Answer 25

company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company’s ability to make enough money to stay afloat or to avoid bankruptcy. If a business is not a going concern, it means it’s gone bankrupt and its assets were liquidated. As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s.