chapter 3 Flashcards
Source documents:
A paper, form or computer record prepared for every external transaction, that provides evidence that a transaction has occurred
Two Purposes:
1) Provides written evidence of a transaction and is used by accountants to support entries in the accounting records
2) Is an important part of controlling an entity’s resources
Types of transactions
External transactions: transactions involving an exchange of economic resources and/or obligations between the entity and one or more outside parties
2) Internal transactions: business activities in which only the single business entity participates, they affect the internal relationship between the entity’s assets, liabilities and equity
3) Non-transaction events: events in which there has not been an exchange of goods or services that may be recognised in the accounting system in the future if they result in a transaction
Asset accounts
Cash at bank
- Used to record deposits into and withdrawals from a bank account - Account is the bank account of the entity.
Accounts receivable (aka Trade Debtors or Debtors) - Amounts owed to entity by customers to whom entity has provided goods or services on credit - May be based on oral agreement but more commonly recognised when invoice is issued
Other receivables or debtors
- Entity may have receivables resulting from variety of other transactions
e. g. Cash advances made to employees, deposits made with another entity for goods or services to be received in future, GST receivable from ATO as a result of input tax credits, a tenant may owe the entity rent
Prepaid expenses
- Goods or services that have been paid for in advance but not yet received or used - Asset is recorded at time of payment and subsequently expensed as it is used
Land
- Used to record land controlled by the entity
Buildings
- Used to record buildings controlled by the entity
Plant and equipment
- Physical items used in the entity for a relatively long
period of time
- Any item not permanently attached to land or buildings
- Used to record acquisitions of delivery equipment, office furniture, computer equipment, factory equipment,
office furniture, computer equipment, machinery, motor vehicles, store and office fixtures, and store furniture
Liability accounts
Accounts payable (aka Trade Creditors or Creditors) - An obligation to pay amount to outside party (creditor) for the purchase of goods, supplies or services on credit
Unearned income
- Cash received from customers for goods yet to be delivered or services yet to be performed
- Not reported as income because entity has liability to customer until goods are delivered/services performed
- Amount is transferred from unearned income account (liability) to income account once goods/services fulfilled
Other current liabilities
- Entity may owe money to employees, ATO, or other parties for services received
Mortgage payable
- Used to record a particular kind of liability for which creditor has a claim secured by a mortgage deed against one or more of the entity’s assets
- Secured claim means that if entity is unable to pay obligation when due, creditor may force the sale of assets pledged as security to recover the debt
Equity accounts
Four main types of transactions affect equity:
1) Investment of assets in entity by the owner 2) Withdrawal of assets by the owner
3) Income earned
4) Expenses incurred
Capital
- Assets invested in the entity by the owner
- Recorded as increase in assets
- Recorded as increase in capital account established in name of owner
Drawings or withdrawals
- Used to record withdrawal of assets from the entity by the owner - Recorded as reduction in assets and equity
GST accounts
GST Payable/GST Collectable [Liability account]
- Any GST received or receivable by the entity from its customers - Represents GST owed to the ATO
GST Receivable/GST Outlays [Asset account]
- Any GST paid or payable by the entity to its suppliers - Represents GST refundable to the entity by the ATO
Income
represents increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than contributions from equity participants
Revenues
the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants
Gains
Represents income which does not usually arise from the ordinary activities of an entity
e. g. sale of assets (buildings, machinery etc.) which are used by the entity in carrying out its main activities
- May also arise if the entity has revalued upwards some of its assets e.g. if an entity has revalued its share investments up to market value
Expenses
The cost of services and economic benefits consumed or lost or liabilities incurred during the period, other than a withdrawal of capital or profits by the owner
General Journal:
the initial recording of a transaction from the entity’s source documents
- Better control achieved by recording transactions first in a journal
Advantages:
- Complete record of all transactions
- Presented in chronological order
- Useful for locating and reducing errors as debits and credits shown together
Trial balance
A statement listing all the accounts in the order that they appear in the general ledger and their current debit or credit balances. A trial balance is prepared to verify the equality of debits and credits made to the accounts
Limitations of the trial balance
May balance but still contain errors
- Trial balance does not does not show what the error is
Transpositions: an error in which the order of the digits of a number is altered
Slides: an error in which the decimal point is shifted to the left or right
- Transpositions or slides may be detected if the difference between two trial balance totals is divisible by 9
Correcting errors
• Error detected before posting
- Cross out with single line and insert correct amount
• Error detecting after posting
- Must be corrected with another entry
• Errors should not be erased or ‘whited out’
- This may give the impression of concealment or fraud
Steps in the acct cycle
- recognise & record transactions
- journalise them
- post to ledger acct
- prepare unadjusted trial balance
- determine adjusting entries / journalise them
- post to general ledger
- prepare adjusted trial balance
- journalise closing entries
- post closing entries to general ledger & balance accts
- prepare post closing trial balance of g.l.
- prepare financial statements
- journalise reversing entries
- post reversing entries to general ledger
