Week 2| Double entry

Question 1

What are transactions?

Answer 1

Transactions are external exchanges of something of value between two or more entities

Question 2

What are events?

Answer 2

Events include price increases in assets during an accounting period of the allocation of the cost of the long-lived assets of an entity to different accounting periods

Question 3

Why must accounting transactions and events be recorded?

Answer 3

They must be recorded because they have an effect on assets, liabilities and equity

Question 4

What is transaction analysis? Does the accounting equation need to always be balanced? What is the equation ?

Answer 4

Transaction analysis is the process of identifying the specific effects of transactions and events on the accounting equation.
The accounting equation must always balance.
The equation is:
Assets= liabilities+equity

Question 5

How is each transaction analysed? What is a summary of the accounting transactions ?

Answer 5

Each transaction is analysed in terms of its effect on assets, liabilities and equity
The two sides of the accounting equation must always be equal
Assets Must equal liabilities plus equity
The cause of each change in equity must be indicated

Question 6

What three subheadings should equity consist of? What are revenues and expenses? What does the difference between revenues and expenses and where is it transferred to?

Answer 6

Share capital- original share holding
Retained earnings- the excess of revenue and expenses
Reserves- amounts held in reserve
Revenues: earnings of the firm
Expenses= cost of earnings
Both are accounted for in retained earnings
The difference between revenues and expenses is profit or loss which is the transferred to retained earnings

Question 7

What is the double entry system?

Answer 7

The double entry bookkeeping system was developed in Italy during 13&14th century
The system enabled the recording of profits, thus the identification of profitable and unprofitable businesses which lead to the development of the modern economy

The system uses and refers to debit and credits to a T-account

Question 8

What is the definition of an account? What is it often referred to?

Answer 8

An account is an individual accounting records of increases and decreases in a specific asset, liability or equity item
It is often referred to as a “T-account”
Debit is often abbreviated as DR
Credit: abbreviated as Cr

Question 9

How does the double entry system work for an account (T-account)

Answer 9

Double entry system:
Each transaction affects at least two accounts

Total debits must equal total credits
1. Dr/Cr procedures for assets and liabilities
Assets: debit increases, credit decreases
Liabilities: debit decreases, credit increases

Question 10

What is the debit and credit procedure for equity accounts? What is the procedure to record debit and credit for revenue and expenses?

Answer 10

Share capital:
Debit decreases, credit increases

Revenue and expenses:
Expenses: increase is debit, decrease is credit
Revenues:
Decrease is debit , increase is credit

Question 11

What are the steps in the recording process?

Answer 11

1. Analyse each transaction in terms of its effect on the accounts. I.e. classify each transaction twice- impact on two accounts
2. Enter transaction information in a journal
3. Transfer journal information to appropriate accounts in the ledger

Question 12

What is the journal?

Answer 12

The Journal is a chronological record of all transactions
The complete effect of a transaction is disclosed in one place: two accounts and a narration (to describe the transaction in words)
This helps prevent errors as debit and credit amount are easily compared

Question 13

What is the general ledger?

Answer 13

The general ledger contains are asset, liability and equity accounts
Individual asset accounts: equipment, land, supplies, cash
Individual liability accounts: interest payable, salaries payable, accounts payable, bank loan

Individual equity accounts:
Salaries expenses, service revenue, share capital, retained profits

Question 14

What is the posting process?

Answer 14

Posting is the procedure of transferring journal entries to ledger accounts

Steps in the process:

1. Enter date in account to be debited
2. Enter name of ledger account to be debited
3. Enter amount to be debited
4. Tick account no. In general journal to show entry is posted
5. Repeat steps 1-4 for the credit side

Question 15

What is the trial balance?

Answer 15

The trial balance is a list of all the accounts and their balances at a given time listed in order as they appear in the general ledger
It proves the mathematical equality if debits and credits after posting
Steps to prepare a trial balance:
1. List of account numbers, titles and balances
2. Total debit and credit columns
3. Verify equality of debit and credit columns

Question 16

What are the limitations of a trial balance?

Answer 16

Errors may not be detected in a trial balance

• a transaction is not journalists (overlooked)
• a journal entry is posted twice
  3. Incorrect amounts are recorded
  4. Incorrect accounts are used in recording and posting
  5. Debit and credits are reverse in the correct account
  6. A correct journal entry is not posted to the ledger
  7. Two recording errors have occurred, but they counteract one another

YET THE TRIAL BALANCR MAY STILL BE EQUAL

Question 17

Is the trial balance a necessary step in the recording process? What other statements or sheets can be prepared from the trial balance? What does trial balance need adjustment on?

Answer 17

The trial balance is a necessary step in the recording process.
From the trial balance, the income statement and balance sheet can be prepared
But, the trial balance may need adjustment depending on information that is available at the end of an accounting period. Example, information that an amount of wages have not been paid to an employee

Question 18

How do we close entries in the trial balance and other accounts?

Answer 18

The process of the trial balance involved the closing of the revenue and expense accounts. (I.e. re-set to 0) to enable performance for each period to be isolated
The revenue and expense accounts are closed to a summary account called income summary or profit and loss account
The income summary/profit or loss account balance (representing the net profit or loss) is transferred to the retained earnings account

Question 19

What happens after the remaining expense accounts have been closed?

Answer 19

After the remaining expense accounts have been closed, the balance of the Profit or loss/income summary account represents the net profit (or loss)
and is transferred or closed off to the retained profits account

Question 20

What is the retained earnings equation?

Answer 20

The equation is:

Beginning balance in retained earnings + profit (or minus loss) income statement (revenues minus expenses) - dividends