2. The Accounting Process

Question 1

what is the purpose of an account

Answer 1

• to accumulate detailed information regarding the changes in a specific asset, liability or shareholders equity item

Question 2

where are accounts maintained

Answer 2

• in a general ledger

Question 3

what is the standard format of a T-account

Answer 3

• the account name is on top of the T
• debit is always on the left
• credit is always on the right

Question 4

what is the significance of the type of account in a T-account

Answer 4

• the type of account determines whether an increase or decrease in a particular transaction is represented by a debit or credit

Question 5

what types of financial transactions have increases being debited and decreases being credited

Answer 5

• transactions that affect: assets
• dividends
• expenses

Question 6

what types of financial transactions have increases being credited and decreases being debited

Answer 6

• transactions that affect: liabilities
• share capital
• revenues

Question 7

what is the normal balance

Answer 7

• the side on which increases occur

Question 8

how would you calculate the account balance for cash and accounts payable

Answer 8

• for cash: account balance = sum of debits - sum of credits
• for accounts payable: account balance = sum of credits - sum of debits
• both of these amounts would be written on the normal balance side

Question 9

what does double-entry accounting mean

Answer 9

• that each transaction is recorded in at least 2 accounts
• where the total debits always equals the total credits

Question 10

if the sum of all debit balance accounts in the ledger must equal the sum of all the credit balance accounts, what is another interpretation of the accounting equation

Answer 10

• assets = liabilities + shareholder equity
• assets = debits, liabilities = credits and shareholder equity = credits
• so debits = credits + credits

Question 11

what is a trial balance

Answer 11

• an internal document that lists all the account balances at a point in time

Question 12

what is the link between the income statement and statement of changes in equity

Answer 12

• in the income statement, expenses are deducted from revenue to get the net income
• this net income is transferred to the statement of changes in equity as part of retained earnings

Question 13

what is the link between the trial balance an the statement of changes in equity

Answer 13

• the share capital and dividends are transferred from the trial balance to the statement of changes in equity
• share capital fills in the shares issued section
• dividends are subtracted from retained earnings

Question 14

what is the link between the statement of changes in equity and the balance sheet

Answer 14

• after the net share capital, retained earnings and total equity have been calculated
• they are transferred to the balance sheet to fill out the shareholders equity section

Question 15

what is the link between the trial balance and the balance sheet

Answer 15

• the accounts in the trial balance are used to fill in the assets and liabilities on the balance sheet

Question 16

what are financial transactions recorded into in practice

Answer 16

• a general journal

Question 17

what is a journal entry

Answer 17

• the debit and credit entry recorded in the general journal

Question 18

what is posting

Answer 18

• the process of transferring amounts from the journal to the matching ledger accounts

Question 19

what is the accounting cycle in very simple terms

Answer 19

• general journal
• general ledger
• trial balance
• financial statements

Question 20

what is the accounting cycle in 4 steps

Answer 20

• general journal: transactions are analyzed and journalized
• general ledger: transactions are posted to the appropriate general ledger accounts
• trial balance: a trial balance is prepared to prove the equality of the debits and credits
• financial statements: financial statements are prepared from trial balance amounts

Question 21

if given a general journal, how do do prepare the general ledger T-accounts

Answer 21

• list all of the accounts mentioned in the general journal and label them based on whether theyre assets, liabilities or SH equity
• draw the lists of T-accounts in their assets, liabilities or SH equity columns (the SH equity has 2 columns, one for share capital and dividends)
• go through the journal and input all the information in the matching T-accounts, INCLUDING the dates
• calculate the final balances for any T-accounts with more than 1 entry

Question 22

when preparing an income statement or balance sheet, what is the first thing you need to do

Answer 22

• write the the name of the org at the top
• the type of statement below that
• then the date below that