chapter 3- measuring business transactions

Question 1

to measure a transaction:

Answer 1

when did the transaction occur?
what value should be placed on the transaction?
how should the components of the transaction be categorised?

Question 2

recognition

Answer 2

when a business transaction should be recorded
recognition point (RP) - predetermined time at which the transaction should be reported

Question 3

valuation

Answer 3

assigns a monetary value to a business transaction
cost - the exchange price associated with a business transaction at the RP
value - the cost at the time of the transaction

Question 4

the cost principle

Answer 4

the practice of recording transactions at cost
market value of an asset may change over the years but its recorded costs remains in the accounting records
the market value is the RESULT of the actions of independent buyers & sellers who agree on a price

the cost principle is used because the cost is VERIFIABLE

Question 5

classification

Answer 5

assigning all the transactions in which a business engages to appropriate categories/accounts

Question 6

accounts

Answer 6

the basic storage unit for accounting data, are used to accumulate amounts from similar transactions

a filing system consisting of accounts is used to sort out or classify all the transactions that occur in a business

Question 7

ledger

Answer 7

an accounting system has a separate account for each asset, liability, and each component of stockholders’ equity, + revenues and expenses

the group of company accounts is called a ledger/ general ledger

Question 8

DOUBLE ENTRY SYSTEM

Answer 8

every time money is taken out of one account in the company, its recorded as DEBIT, and put into another account, recorded as CREDIT

This keeps track of where money is taken from and where it WENT TO, preventing mistakes in record keeping/issues when records are lost
- this makes the monetary value of debits and credits EQUAL
- this makes the whole system be IN BALANCE

Question 9

general journal

Answer 9

aka book of original entry
entries are made in chronological order
a separate entry is made for each transaction (JOURNALISING)
later, the debit and credit portions of the entry are transferred to the general ledger