Recording Transactions

Question 1

Outline recording process

Answer 1

1. Business transactions
2. Journal entry
3. Ledger (T accounts/running balance)
4. Trial balance
5. Financial statements

Question 2

Rules of debits and credits: Assets

Answer 2

Debit: Increase
Credit: Decrease

Question 3

Rules of debits and credits: Liabilities

Answer 3

Debit: Decrease
Credit: Increase

Question 4

Rules of debits and credits: OE

Answer 4

Debit: Decrease
Credit: Increase

Question 5

More detailed accounting equation:

Answer 5

Assets + drawings + expenses= liabilities + Capital + Revenue

Question 6

What do assets equate to in more detailed accounting equation:

Answer 6

Assets= liabilities + capital-drawings + revenue - expenses

Question 7

Trial balance

Answer 7

after posting journals to general ledger, prepare a trial balance to ensure the GL balances completely.

Question 8

How to locate trial balance errors?

Answer 8

• additions correct?
• all accounts listed?
• balances of each account are listed properly?
• review accounts for reasonableness
• check you haven’t omitted balance of an account by mistake (Dr balance -Cr balance = missing value)
• Check you haven’t recorded on wrong side
  (Dr bal-cr bal)/2 = amount on wrong side
• Check for transposition errors
  (Dr bal-cr bal)/9

Question 9

Limitations of trial balance

Answer 9

missing transactions
posting incorrect journal entry
journal entry posted twice
offsetting errors made in recording the amount of a transaction

Question 10

How does OE increase and decrease?

Answer 10

increases by owner investing in business, revenues

Decreases by owner’s drawings from business, expenses

Question 11

Classification of current assets:

Answer 11

• assets that aren’t held on a continuing basis, expected to be converted into cash in the next 12 months/consumed by then, principally held for trading

Question 12

Classification of current liabilities

Answer 12

short term amounts due for repayments to outside parties within 12 months (of the Statement of financial position- income statement operating cycle)

Question 13

Can you defer payment after 1 year of income statement date for current assets?

Answer 13

NO

Question 14

Classification of NON-current assets:

Answer 14

Don’t satisfy current assets criteria, intended to be used to generate wealth (not for resale), continuing, long term basis,
Can be tangible (property, land, equipment, plant) or intangible (cash at bank, systems)

Question 15

Classification of NON-current liabilities:

Answer 15

not liable for payment within the next 12 months after income statement date (eg mortgage loan)

Question 16

If a non-current liability has to be paid within 12 months what happens?

Answer 16

It switches over into a current liability.

Question 17

Why do we classify assets?

Answer 17

It helps to identify financial obligations to be shortly met, indicating how long-term financing can be raised.

Question 18

what happens to the respective accounts when someone is entitled a dividend revenue yet to be paid?

Answer 18

Owners Equity decreases (retained profits)
Liability increases (dividend payable)

Question 19

what happens to accounts when commission to sales personnel is yet to be paid (ie after the end of financial year)?

Answer 19

Expense increases (commission expense)
Liabilities increases (commission payable)

Question 20

sales revenue that has been received, but for a service not yet performed?

Answer 20

Revenue decreases (sales)
Liability increases (unearned revenue)

Question 21

how do you record interest that has to be paid at the end of the year when it’s the end of the financial year? WHat occurs if you’re adjusting at the end of the financial year?

Answer 21

You debit what has become an expense so far (ie up till June 30) which is half of the total to be paid.
Dr interest expense (half of total to be paid)
Cr Interest payable (250)

Liabilities and expenses both increase.