Lecture 2 - Double entry and trial balance Flashcards
Purpose of a trial balance
- error detection
- financial statement preparation
- verification of double entry system
Errors of a trial balance
Does not detect all errors
omission errors- if a transaction is left out the trial balance won’t catch it out
compensation errors- If two errors cancel each other out, the trial balance remains balanced but is still correct
What is a trial balance
A trial balance is a statement that lists all ledger account balances at a specific date to check if total debits = total credits
It helps ensure the accuracy of double entry book keeping
What is a T account
A T account is a simple way to represent ledger accounts in bookkeeping - it helps track debits and credits
Left side of T account =Debit
Right side of T account= Credit
How to do a trial balance
1 - Gather ledger balances- review all the T accounts and determine the final balance for each account
2- list the accounts- create a worksheet or list where you record every accounts
3- Total the columns
4- compare the totals
Assets and type of assets
Resources owned by the business
Fixed asset- resources for long time use e.g- property,machinery,vehicles
Current asssets- Reesources that the business expects to turn into cash within a year
e.g- cash, marketable securities, inventory , accounts recievable
In trial balances how is the debit balance determined
In TB’s debit balance is the balance b/d( brought down)
Give some accounts that normally have a debit balances and credit balances
Debit balances- Asset accounts, expense accounts
Credit balance- capital, liabilities , revenues , bank overdraft
What are non-current liabilities
Non-current liabilities, also known as long-term liabilities, are financial obligations that a company is required to settle beyond one year from the date of the balance sheet.
Examples of non-current liabilities include:
Long-term debt: Loans or bonds payable that have a maturity date beyond one year.
Lease obligations: Long-term lease agreements that the company will be paying off over multiple years.
Pension liabilities: Obligations to pay employee retirement benefits in the future.
Deferred tax liabilities: Taxes that are owed but will not be paid in the current period.
Long-term provisions: Estimated future costs related to legal claims, warranties, or environmental liabilities that are expected to be paid over a long period.
Current liabilities, how do they differ from non-current liabilities
Current Liabilities:
Due within 1 year
Short-term debts (e.g., accounts payable, short-term loans, taxes payable)
Non-current Liabilities:
Due after 1 year
Long-term debts (e.g., long-term loans, pension obligations, deferred taxes)
Capital expenditure
Capital expenditure refers to the money a company spends to acquire , improve or maintain long term assets such as property, buildings , machinery, or equipment
- long term investment
increases asset value
- not expensed immediately
Revenue expenditure
revenue expenditure refers to the money a company spends on day to day operations and routine maintenance. These expenses are necessary for running the business and are fully expensed in the period they are incurred
- short term costs
- not capitalized - rev expenditures are not added to the value of assets are recorded as expenses on the income statement
examples:
- salaries
-rent, utilities, and office supplies
-repairs and maintenance
difference between Revex and Capex
Capital Expenditure (CapEx):
Long-term investment in assets.
Used to acquire or upgrade fixed assets (e.g., property, equipment, buildings).
Benefits last for more than 1 year.
Example: Buying machinery, constructing a new facility.
Revenue Expenditure (RevEx):
Short-term costs for day-to-day operations.
Expensed in the period they are incurred.
Benefits are consumed within 1 year.
Example: Salaries, utilities, repairs, and maintenance
where does Capex appear on
Capital expenditure appears in the statement of financial position under non-current assets
where does Revex appear
Revenue expenditure appears in the statement of profit and loss(aka income statement)
Accruals
In accounting, accruals refer to the recognition of revenues and expenses when they are incurred, rather than when cash transactions occur.
Accrued Revenue: If you earn money but haven’t gotten paid yet, you count it as income anyway.
Accrued Expense: If you owe money for something but haven’t paid yet, you still count it as an expense.
Prepayments
Prepayments are amounts paid in advance into the next accounting period
