2.3 Prepare financial information for an entity that operates accounting systems

Question 1

Prepayments…

Answer 1

…Are a current asset

Journal entry;

Prepayments XXX(debit)

Expense XXX(credit)

Question 2

Accrude Income (limited to interest and dividends received)…

Answer 2

…is a current asset

Journal entry;

Accrude Income XXX(debit)

Received XXX(credit)

Question 3

Accrude Expenses…

Answer 3

…are current liabilities

Journal entry;

Wages or Interest XXX(debit)

Accrude Expense XXX(credit)

Question 4

Income received in advance….

Answer 4

… is a current liability

Journal Entry;

Income Account XXX(debit)

Income Received in advance XXX(credit)

Question 5

Accounts Payable or Accounts Receivable…

Answer 5

… when an invoice or account has been received, incl GST

Journal Entry;

Expense (eg Advertising) XXX(debit)

GST XXX(debit)

Accounts Payable XXX(credit)

Journal Entry;

Accounts Receivable XXX(debit)

GST XXX(credit)

Income (eg Sales) XXX(credit)

Question 6

Depreciation…

Answer 6

… expense increasing (debit) and a contra asset increasing (credit) thereby decreasing the asset account

Journal entry;

Depreciation - item XXX(debit)

Accumulated Depreciation - item XXX(credit)

Question 7

Bad Debts…

Answer 7

… arrise from accounts receivable clients who are not going to pay their accounts. We record the loss as bad debts which is an administrative expense

Journal Entry;

Bad Debts XXX(debit)

GST XXX(debit)

Accounts Receivable XXX(credit)

Question 8

Doubtful Debts
…

Answer 8

… are accounts receivable that a firm is doubtful about receiving. The Debt is not written off but an allowance is created so that the prudence concept is followed (where assets (Acc Rec) is not overstated and expenses (Doubtful Debts) are not understated)

Journal Entry;

Doubtful Debts XXX(debit)

Allowance for Doubtful Debts XXX(credit)

Question 9

Valuation Of Inventory…

Answer 9

Journal Entry;

Cost of Goods Sold XXX(debit)

Inventory XXX(credit)

Question 10

What are Closing Entries used for?

Answer 10

They are used to transfer the temporary account balances (Income, expenses and drawings) to premanent accounts.

Question 11

What is Income Summary?

Answer 11

Incomes and expenses are closed off to an account called income summary which shows the income and expenses for the year and the difference is net surplus/deficit.

Closing Income;

Income Account XXX(debit)

Income Summary XXX(credit)

Closing Expenses;

income Summary XXX(debit)

Expense Account XXX(credit)

Question 12

Closing the income summary to Capital

Answer 12

After all expenses and income have been closed to the income summary the income summary (profit or loss) is closed to the Capital Account

Journal Entry;

Income Summary XXX(debit)

Capital XXX(credit)

Question 13

Drawings..

Answer 13

At the end of the financial year we close the drawings account to capital.

Journal Entries;

Capital XXX(debit)

Drawings XXX(credit)

Question 14

Accounts Receivable…

Answer 14

Look for;

• Invoices issued (debit)
• Bad debts written off (credit)
• Discount allowed (credit)
• Credit Notes issued (credit)

Question 15

Accounts Payable…

Answer 15

Look for;

• Invoices received (debit)
• Credit notes recevioed (credit)
• Discount received (credit)