Recording Transactions

Question 1

external transactions

Answer 1

involve an outside party

exchange of economic resources and/or obligations

sale of inventory

purchase of supplies

Question 2

internal transactions

Answer 2

transformation of economic resources

- use of office supplies

Question 3

non-transactional events

Answer 3

not usually recorded, but may be in the future

- receiving an order from a customer

Question 4

transactions of a business entity

Answer 4

an entity which are expected to provide future economic benefits to the entity

the initial source of assets for any business is an investment by the owner

cash is useful as a medium of exchange or as a measure of value, but it is essentially a non‐productive asset

Question 5

source documents

Answer 5

prepared for every external transaction

support entries in accounting records

important element in control system

common source documents include

• tax invoice = specific requirements as per ATO
• purchase order
• cash register tape
• credit card slip
• cheque butts

Question 6

definition: the accounting cycle

Answer 6

the steps and procedures, culminating in the preparation of financial statements

Question 7

definition: interim statements

Answer 7

statements prepared for external users before the end of the annual period

Question 8

t-accounts

Answer 8

convenient way to show individual accounts

illustrate effects of transactions on an account

still used in practice for quick calculations

Question 9

running balance accounts

Answer 9

provides all the information in a t-account

also provides a balance after each transaction

used in formal accounting systems

Question 10

balance sheet

Answer 10

asset accounts

• cash at bank
• accounts receivable
• other receivables and debtors
• GST outlays
• prepaid expenses
• land
• buildings
• plant and equipment

liability accounts

• accounts payable
• unearned income
• other current liabilities
• GST payable and receivable = entities simply have one GST‐related general ledger account called GST net payable
• mortgage payable

equity accounts

• investment of assets by the owner
• withdrawal of assets by the owner
• income earned
• expenses incurred
• can be capital or drawings accounts

Question 11

income statement

Answer 11

revenue

• represents income that arises in the course of ordinary activities of an entity
• usually through the provision of services or sale of goods

gains

• represents incomes that does not usually arise in the course of ordinary activities of an entity
• usually of a non-recurring or sporadic nature

expenses

• the cost of services and economic benefits consumed or lost or liabilities incurred during the period
• profit = when total income exceeds total expenses
• loss = when total expenses exceeds total income

Question 12

general ledger

Answer 12

collection of all the individual accounts of an entity

organised in the order they appear in the balance sheet and income statement

each account has a specific identification number

Question 13

chart of accounts

Answer 13

listing of ledger account titles and related numbers

used as a reference point when analysing transactions

a good chart of accounts will reveal the

• type of organisation
• nature of its activities
• sources of incomes and expenses

Question 14

general journal

Answer 14

once analysed, a transaction is recorded first in the general journal

a journal has the following advantages

• complete record of all transactions
• presented in chronological order
• useful for locating and reducing errors as debits and credits shown together

Question 15

recording transactions in a journal

Answer 15

transaction is analysed for its effects on the various ledger accounts, before it is entered in the journal

the principles of double-entry accounting are observed for each transaction

• two or more accounts are affected by each transaction
• the sum of debits equals the sum of credits
• the accounting equation remains in balance

Question 16

posting from journal to ledger

Answer 16

transferring amounts entered in the journal to the proper ledger accounts

classifies the effects of all transactions on each individual asset, liability, equity, income and expense account

general journal records each transaction

general ledger records effect transactions on each individual account

Question 17

trial balance (format)

Answer 17

a list of all of the accounts in the order in which they appear in the general ledger with their current balances

debits in one column and credits in another

the dollar amounts of accounts with

• debit balances are listed in one column
• credit balances are listed in a second column

the totals of both columns must be equal, so the ledger is ‘in balance’

Question 18

limitations of the trial balance

Answer 18

may balance but still contain errors

if it doesn’t balance there is definitely an error but not told what the error is

if the difference between the two trial balance totals is divisible by 9, it may be an indication of two common errors called transpositions and slides

if there is an error, the account balances need to be recalculated