Lecture 2 - Recording business transactions

Question 1

Define a ‘business transaction’

Answer 1

Any event that has a financial impact on the entity that can be measured reliably in monetary terms.

Question 2

Mention the 8 steps of the accounting cycle

Answer 2

1) Analyze business transaction
2) Record journal entries
3) Post journal entries
4) Prepare unadjusted trial balance
5) Record and post adjusted journal entries
6) Prepare adjusted trial balance
7) Construct financial statements
8) Close the books

Question 3

Mention 6 different types of assets

Answer 3

1) Cash
2) Accounts receivable
3) Notes receivable
4) Inventory
5) Prepaid expenses
6) Property, plant and equipment PPE

Question 4

Mention 3 types of liabilities

Answer 4

1) Accounts payable

2) Notes payable

3) Accrued liabilities

Question 5

Mention 5 layers to Shareholders’ equity

Answer 5

1) Income
2) Expenses
3) Share capital
4) Retained earnings
5) Dividends

Question 6

Explain the rules of credit and debit for each of the three elements in the accounting equation

Answer 6

1) Assets
-Increases - debit
-Decreases - credit

2) Liabilities
-Increases - credit
-Decreases - debit

4) Shareholders’ equity
-Increases - credit
-Decreases - debit

Question 7

Explain the rules of credit and debit of the 5 elements of shareholders’ equity as well as what is a contra account to what?

Answer 7

1) Share capital
-Increases - credit
-Decreases - debit

2) Retained earnings
-Increases - credit
-Decreases - debit

3) Dividends is a contra account to retained earnings.
-Increases - debit
-Decreases - credit

4) Income
-Increases - credit
-Decreases - debit

5) Expenses is a contra account to income
-Increases - debit
-Decreases - credit

Question 8

What does posting mean?

Answer 8

Copying information from the journal entry to the specific accounts

Question 9

What is the normal/ending balance?

Answer 9

The total difference between the account. A quick summary measure to see which side it ends on - credit or debit

Question 10

Answer the following questions concerning the Trial Balance:

1) What is the point of a trial balance and why is it prepared?
2) What does it list and in which order?
3) Is it a reliable measure?

Answer 10

1) Show that total debits equal total credits for all accounts. Is usually prepared at the end of the financial year and facilitates the preparation of the financial statements.

2) It lists all of the (t-)accounts with their ending balances. Assets are listed first, then liabilities and finally shareholders’ equity.

3) It has its limitations in terms of proof as there can still be mistakes (such as wrong input data, data entered twice or omitted, a debit entered as a credit and vice versa). Therefore it is just regarded as an initial safety step.