Lecture 2-Journalizing/Recording

Question 1

What is an account?

Answer 1

is an individual accounting record of increases and decreases in a specific asset, liability, or equity item.

Question 2

What does an account consist of?

Answer 2

1) a title, (2) a left or debit side (Dr.), and (3) a right or credit side

Question 3

What is debit and credit?

Answer 3

Debit indicates the left side of an account while credit indicates the right

Question 4

Debit balance and credit

Answer 4

Debit balance if the total of the debit amounts exceeds the credits whereas an account shows the credit balance if the credit amounts exceed the debit amounts

Question 5

Double Entry system

Answer 5

the dual or two sided effect of each transaction is recorded in appropriate amounts. This system provides a logical method for recording transactions and also helps ensure the accuracy of the recorded amounts as well as the detection of errors.

Question 6

When do we capitalize the name?

Answer 6

Whenever we are referring to a specific account

Question 7

How must both sides be equal?

Answer 7

Increases and decreases in liabilities have to be recorded opposite from increases and decreases in assets. Thus, increases in liabilities are entered on the right or credit side, and decreases in liabilities are entered on the left or debit side.

Question 8

What do asset accounts show?

Answer 8

normally show debit balances. That is, debits to a specific asset account should exceed credits to that account.

Question 9

What do liability show?

Answer 9

normally show credit balances. That is, credits to a liability account should exceed debits to that account.

Question 10

What is share capital?

Answer 10

Companies issue share capital—ordinary in exchange for the owners’ investment paid in to the company.

Question 11

When does Share Capital increase or decrease?

Answer 11

Credits increase the Share Capital—Ordinary account, and debits decrease it.

Question 12

More on Share Capital

Answer 12

Knowing the normal balance in an account may help you trace errors. Occasionally, though, an abnormal balance may be correct.

Question 13

Retained Earnings

Answer 13

is net income that is kept (retained) in the business. It represents the portion of equity that the company has accumulated through the profitable operation of the business. Credits (net income) increase the Retained Earnings account, and debits (dividends or net losses) decrease it.
-Share capital—ordinary, retained earnings and liabilities: Same rules apply for debit and credit and the normal balances.

Question 14

Dividends

Answer 14

A company’s distribution to its shareholders. The most common form of a distribution is a cash dividend. Dividends reduce the shareholders’ claims on retained earnings. Debits increase the Dividends account, and credits decrease it.

Question 15

Revenues and Expenses

Answer 15

The purpose of earning revenues is to benefit the shareholders of the business. When a company recognizes revenues, equity increases. The effect of debits and credits on revenue accounts is the same as their effect on Retained Earnings. Expenses have the opposite effect. Expenses decrease equity.

Revenue accounts are increased by credits and decreased by debits. Expense accounts are increased by debits and decreased by credits. Because revenues increase equity, a revenue account has the same debit/credit rules as the Retained Earnings account. Expenses have the opposite effect.

Question 16

Question- Julie just rented space in a shopping mall. A friend has advised Julie to set up a double entry set of accounting records in which to record all her business transactions

Answer 16

ACTION PLAN *
Determine the types of accounts needed. Julie will need asset accounts for each different type of asset invested in the business and liability accounts for any debts incurred. * Understand the types of equity accounts. Only Share Capital—Ordinary will be needed when Julie begins the business. Other equity accounts will be needed later.
Solution
Julie would likely need the following accounts in which to record the transactions necessary to ready her hair salon for opening day:
Cash (debit balance) Equipment (debit balance) Supplies (debit balance) Accounts Payable (credit balance)
If she borrows money: Notes Payable (credit balance) Share Capital—Ordinary (credit balance)

Question 17

The recording process-steps

Answer 17

1. Analyze each transaction in terms of its effect on the accounts
2. Enter the transaction information in a journal
3. Transfer the journal information to the appropriate accounts in the ledger.

Question 18

The Journal

Answer 18

Companies initially record transactions in chronological order. Thus, the journal is referred to as the book of original entry. The journal makes several significant contributions to the recording process:
1. It discloses in one place the complete effects of a transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared.

Question 19

Journalizing- example

Answer 19

Assume: On September 1, Softbyte SA shareholders invested €15,000 cash in the corporation in exchange for ordinary shares, and Softbyte purchased computer equipment for €7,000 cash.
Demonstrate: How do you enter the transaction data in the journal?

1.Date of the transaction.
2.Debit account title.
3.Credit account title.
4.Brief explanation of the transaction.
5. Reference column, which is left blank when the journal entry is made. This column is used later when the journal entries are transferred to the individual accounts.

Question 20

Journalizing definition

Answer 20

entering transaction data in the journal

Question 21

Simple and Compound Entries

Answer 21

Simple entry: Involves one debit and one credit account.
Compound entry: An entry that requires three or more accounts. The standard format requires that all debits be listed before the credits.

Question 22

Ledger

Answer 22

Ledger: The entire group of accounts maintained by a company. Provides the balance in each of the accounts as well as keeps track of changes in these balances. Companies may use various kinds of ledgers, but every company has a general ledger.

Question 23

Posting

Answer 23

the procedure of transferring journal entries in the ledger accounts
Steps are: 1. In the ledger, in the appropriate columns of the account(s) debited, enter the date in the journal page, and debit amount shown in the journal.
2. In the reference column of the journal, write the account number to which the debit
amount was posted.
3. In the ledger, in the appropriate columns of the account(s) credited, enter the date, jour-
nal page, and credit amount shown in the journal.
4. In the reference column of the journal, write the account number to which the credit
amount was posted.

Question 24

Chart of Accounts

Answer 24

Lists the accounts and the account numbers that identify their location in the ledger.
-Numbering system: Usually starts with the statement of financial position accounts and follows with the income statement accounts. -Number of accounts: Depends on the amount of detail management desires.

Companies leave gaps to permit the insertion of new accounts as needed during the life of the business.

Question 25

The Recording Process Illustrated

Answer 25

Follow these steps:
1- Determine what type of account is involved.
2- Determine what items increased or decreased and by how much.
3- Translate the increases and decreases into debits and credits.

Question 26

A trial balance

Answer 26

list of accounts and their balances at a given time. Proves the mathematical equality of debits and credits after posting.
Three steps of preparation: 1. List the account titles and their balances in the appropriate debit or credit column. 2. Total the debit and credit columns. 3. Verify the equality of the two columns. Copyright ©2019 John Wiley & Son, Inc

Question 27

Limitations of a trial balance

Answer 27

A trial balance may balance even when:
1- Transaction not journalized.
2- Correct journal entry not posted.
3- Journal entry posted twice.
4- Incorrect accounts used in journalizing or posting.
5- Offsetting errors made in recording the amount of a transaction.

Question 28

Trial Balance -Locating Errors

Answer 28

1.Determine the amount of the difference between the two columns of the trial balance. 2.Take one of the commonly useful steps as follows:

Question 29

Currency Signs and Underlining

Answer 29

Currency Signs
* Do not appear in journals or ledgers.
* Typically used only in the trial balance and the financial statements.
* Shown only for the first item and the total in the column.

Underlining
* A single line is placed under the column of figures to be added or subtracted.
* Totals are double-underlined.

Question 30

Increase and decrease asset you

Answer 30

debit for increase credit for decrease

Question 31

increase or decrease a liability

Answer 31

you credit whereas you debit

Question 32

if you want to increase an equity

Answer 32

you credit for increase debit for decrease

Question 33

if you want to increase or decrease a dividends

Answer 33

increase you credit or decrease you debit

Question 34

increase or decrease revenue

Answer 34

increase credit or decrease debit

Question 35

increase or decrease an expense

Answer 35

increase you debit decrease you credit

Question 36

increase or decrease ordinary shares

Answer 36

increase credit decrease debit

Question 37

what does on account mean?

Answer 37

it means credit so we are not paying for it right away so it’s a liability

Question 38

is ordinary revenue or unearned service revenue different?

Answer 38

yes bc unearned we havent serviced it yet so it falls under liabilities whereas ordinary revenue is equity

Question 39

where does prepaid insurance go?

Answer 39

In assets so we debit as it increases