General Ledger Definitions

Question 1

Define Double Entry

Answer 1

The principal of double entry requires that every transaction will have an opposite and equal effect on two or more accounts in the accounting equation. For every debit entry there will be an equal or corresponding credit entry.

Question 2

Definition of a Trial Balance

Answer 2

A trial balance is a list of names and balances of each ledger on a particular day. The trial balance has a debit and credit column which are totalled and must always balance.

Question 3

Describe the purpose of preparing a Trial Balance

Answer 3

-Detects errors made in posting information in the general ledger.
-Provides a list of general ledger acount balances from which Balance Sheets and Income Statements can be accurately prepared

Question 4

List three common errors NOT found by preparing a Trial Balance

Answer 4

-Making an error of omission - failing to record a transaction in the general ledger or general journal
-Making an error of commission - making an entry in the wrong ledger account but on the correct side
-Making compensating errors - making two independent errors of equal amounts
-Making an entry on the wrong side of each ledger account
-Making an error of original entry - that is recording an incorrect amount on a source document or in the general journal

Question 5

List three common errors found by preparing a Trial Balance

Answer 5

-Failing to record part of a transaction in the ledger
-Making two debit entries or two credit entries in the ledger
-Making a transposition error in the ledger
-Incorrectly calculating a ledger account balance
-Leaving a ledger account balance out of the trial balance
-Recording a ledger account on the wrong side of the trial balance

Question 6

Define Asset (Conceptual Framework Definition)

Answer 6

An asset is a present economic resource controlled by the entity as a result of past events

Question 7

The 3 elements to a framwork definition of an asset

Answer 7

Resource controlled by the entity - A business has control over an asset, A business owner can decide how an asset will be used
Potential to produce economic benefits - An asset has the potential to produce economic benefits (cash/credit)
Result of past events - Purchased asset on (date) from (seller) on (credit/cash)
Right - A business has a right to an economic resource; recive cash from a customer, possess or use property, receive a service (rent office from another business)

Question 8

Define Liability (Conceptual Framework Definition)

Answer 8

A liability is a present obligation of the entity to transfer an economic resource as a result of past events.

Question 9

The 3 elements to a framwork definition of a Liability

Answer 9

Resilt of past event - A liability exists because of a transaction that took place on a past date (borrowed money in past - contract)
Transfer of enconomic resource - A business that has a liability to transfer an economic resource (will in future give money)
Existence of obligation - An obligation is a duty to another party that cannot be advoided (legal obligation - legal action will occur for non-returned money)

Question 10

Define Equity (Conceptual Framework Definition)

Answer 10

Equity is the residual (that is, remaining) interest in the assets of the entity deducting all its liabilities

Question 11

Define Income (Conceptual Framework Definition)

Answer 11

Income is increases in assests or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims

Question 12

Define Expense (Conceptual Framework Definition)

Answer 12

Expenses are decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims

Question 13

Define Accounting Equation

Answer 13

The value of the assets of a business will always equal the combined value of the liabilities and the equity (assets=libailities+equity)

Question 14

Explain the Monetary Principle

Answer 14

All business events can be measured in terms of money. A business event must be given a money value before it can be recorded in an accounting system.

Question 15

Explain the Materiality Principle

Answer 15

Information is material if the omission of this information from an accounting report could influence the investment decisions of the users of this report. An accounting report should contain all the material information.

Question 16

Explain the Historical Cost Principle

Answer 16

An asset is recorded in an accounting system at its acquisition value and this value is not changed as time pases.

Question 17

Explain the Accounting Period Principle

Answer 17

The life a business is divided into intervals of time known as accounting periods.
The length of an accounting period can be, for example, one month, six month or twelve months. An income statement is prepared for each accounting period. A balance sheet is prepared on the last day of an accounting period.

Question 18

Explain the Going Concern Principle

Answer 18

A business will exist for the foreseeable future.
The going concern principle allows assets (the resources of a business) to be valued at their purchase price in a balance sheet. However, assets that usually increase in value over time, such as, land, are shown at current market value in a balance sheet.

Question 19

Explain the Accounting Entity Principle (also known as, Business Entity Principle)

Answer 19

A business is seperate from the owner of the business. The personal actions of the owner are not recorded in the accounting system of a business.

Question 20

Explain the principle and features of GST-Free Supplies

Answer 20

GST free supplies are products that have been specifically exempted from GST.
Examples:
-Fresh food
-Medical services
-Education (primary school, high school, university)
-Child care services
-Exports

Question 21

Explain the principle and features of Input Taxed Supplies

Answer 21

Input taxed supplies are products that GST is not charged on and it is not possible to claim a GST input tax credit for the purchase of goods and services associated with these products.
Examples:
-Residential Rent
-Financial Services
-Selling Residential Property
-Certain Fundraising Activities by CHARATIES

Question 22

Explain the principle and features of Taxable Supplies

Answer 22

A taxable supply is a product on which GST is charged.
Examples:
-Furthering an enterprise (selling a bed from a furniture store)
-Connected to Australia (imported to Australia, sold in Australia, exported from Australia)

Question 23

What is the purpose of Liquidity

Answer 23

Represents a business’s ability to generate the cash they need to repay debt financial commitments as they fall due (cash flow statement and balance sheet)

Question 24

What is the purpose of Financial Position

Answer 24

Deals with the economic resources of an eitity, its financial struture, its capacity to adapt to change and its liquidity (found on the balance sheet)

Question 25

What is the purpose of Performance

Answer 25

An eitity's ability to operate its assets efficiently and effectively in the conduct of its activities.

Question 26

Classification of income by Nature and Function

Answer 26

Nature - Sales revenue, interest income, rent recieved Function - operating revenue (e.g. sales from core business operations), non-operating revnue (e.g. interest income, dividends)

Question 27

Classification of expenses by Nature and Function

Answer 27

Nature - Wages, depreciation, raw material costs, electricity, rent Function - Costs of goods sol (direct costs of producing goods/services), administrative expenses (office expenses, salaries of office staff), selling + distribution expenses (marketing, commissions, delivery costs), finance expenses (Interest on loans, bank fees)

Question 28

Classification of assets by Nature and Function

Answer 28

Nature - Cash, inventory, accounts recievable, property, equipment Function - Current assets (cash, accounts recievable, inventory - used within a year), non-current assets (property, equipment, patents - long term use)

Question 29

Classification of liabilities by Nature and Function

Answer 29

Nature - loans, accounts payable, tax payable Function - current liabilities (accounts payable, short term loans - due within a year), Non Current liabilities (long term loans, bond payable - due after a year)

Question 30

Explain the cash accounting method

Answer 30

Revenue is recorded when cash is recieved, and expenses are recorded when cash is paid (small businesses)

Question 31

Explain the accrual accounting method

Answer 31

Revenue is recorded when earned, and expenses are recorded when incurred, regardless of when cash is recieved or paid (large businesses)

Question 32

Principles and Features for Accounting and Reporting GST

Answer 32

GST collected - when a business sells/services and charges GST GST paid (input tax credits) - when a business buys goods/services and pays GST, which can be claimed back

Question 33

Principles and Features for the Business Activity Statement (BAS)

Answer 33

A business activity statement is a tax reporting requirement for businesses registered for GST. It is submitted to the ATO to report GST collected and paid, along with other tax obligations. Key components: -GST collected on sales -GST paid on purchases (input tax credits) -Net GST payable or refundable Most reporting is Quarterly, sometimes monthly, rarely annually.

Question 34

Explain the fundamental concepts/conventions of documents in the accounting cycle

Answer 34

Business transactions are recorded using source documents, such as invoices, receipts, and bank statements These documents provide evidence of financial activities

Question 35

Explain the fundamental concepts/conventions of journals in the accounting cycle

Answer 35

Transactions are recorded in journals (books of original entry) based on double-entry accounting (debits and credits). Types: -Sales journal - records credit sales -Purchases Journal – Records credit purchases. -Cash Receipts Journal – Records cash inflows. -Cash Payments Journal – Records cash outflows. -General Journal – Records transactions not covered by other journals (e.g., depreciation, adjusting entries).

Question 36

Explain the fundamental concepts/conventions of ledgers in the accounting cycle

Answer 36

Entries from journals are transferred to the ledger, where accounts are grouped into: -Assets (e.g., cash, inventory, accounts receivable). -Liabilities (e.g., loans, accounts payable). -Equity (e.g., owner’s capital, retained earnings). -Revenue (e.g., sales, interest income). -Expenses (e.g., rent, wages, utilities).

Question 37

Explain the fundamental concepts/conventions of adjusting entries in the accounting cycle

Answer 37

Adjustments are made at the end of the accounting period to match income and expenses correctly. Common adjusting entries: -Accrued revenues (earned but not yet received). -Accrued expenses (incurred but not yet paid). -Depreciation (allocating asset cost over its useful life). -Prepaid expenses (e.g., insurance paid in advance).

Question 38

Explain the fundamental concepts/conventions of closing entries in the accounting cycle

Answer 38

At the end of the accounting period, temporary accounts (revenues and expenses) are closed to retained earnings (or owner’s capital for sole traders). This resets revenue and expense accounts for the next period.

Question 39

Explain the fundamental concepts/conventions of financial statements in the accounting cycle

Answer 39

Once all transactions are recorded and adjusted, financial statements are prepared: 1. Income Statement – Shows revenue, expenses, and profit/loss. 2. Balance Sheet – Shows assets, liabilities, and equity. 3. Cash Flow Statement – Tracks cash movements (operating, investing, financing activities). 4. Statement of Changes in Equity – Shows changes in owner’s capital or retained earnings.