Unit 1 - Accounting Cycle for a Service Business

Question 1

Fundamental Accounting Equation

Answer 1

A = L + O/E
A - L = O/E

Question 2

What is the Debit and Credit Theory?

Answer 2

• T-ACCOUNT = 2 sides (debit + credit)

Debit - always associated with the left side of the t-account
Credit - always associated with the right side of the t-account

Question 3

What are the first 4 Accounting Standards?

Answer 3

1. The Business Entity Concept - accounting for a business organization –> kept separate from the personal affairs of the owner
2. The Continuing Concern Concept - Assumes that a business will continue to operate unless it is known that it will not
3. The Cost Principle - Accountants must record the value of the assets at their cost price
4. The Revaluation Model - Outlines an accounting procedure that allows accountants to change the value of the asset on the balance sheet if market value increases.

Question 4

What are the last 4 Accounting Standards?

Answer 4

5. The Objectivity Principle - States that accounting will be recorded on the basis of objective evidence. This means that accounting entries will be made on fact (source documents) and not on personal opinion or feeling.
6. The Revenue Recognition Principle - Requires revenue to be recorded in the accounts at the time the transaction is completed
7. The Matching Principle - Expenses must be recorded in the period they helped earn revenue.
8. The Time Period Concept - Accounting will take place over specific time periods (fiscal periods).

Question 5

Formula for Ending Capital

Answer 5

Beginning Capital + Net Income - Drawings = Ending Capital

Beginning Capital + Revenue - Expenses - Drawings = Ending Capital

Question 6

Rules of Debit and Credit

Answer 6

Assets –>
Increase = Debit
Decrease = Credit

Liability + O/E –>
Increase = Credit
Decrease = Debit

Question 7

Transaction Rules

Answer 7

1. At least 2 accounts must change
2. After the transaction L + O/E = A

Question 8

Increase to CAPITAL

Answer 8

• the company makes a sale
• owner invests money into company
• sell an asset for a gain

Question 9

Decrease to CAPITAL

Answer 9

• the company buys a service/repair
• owner withdraws money or an asset from the business
• company sells an asset for a loss

Question 10

EXCEPTIONAL BALANCES

Answer 10

1. If I take out more money than I have in my bank account
2. Someone returns something to us once they have paid off their account
3. We return something on account after we have paid it off
4. A recording mistake of the amount of a cheque is wrong

Question 11

Buying + Selling Goods and Services “On account”

Answer 11

1. Purchase
   Dr = what you purchased
   Cr = Accounts Payable
2. Sale
   Dr = A/R
   Cr = Capital
3. Payment
   Dr = A/P
   Cr = Bank
4. Receipt
   Dr = Cash
   Cr =

Question 12

Chart of Accounts

Answer 12

Assets —-> 100-199
Liabilities —-> 200-299
Equity (capital & drawings) —-> 300-399
Revenue —-> 400-499
Expenses —-> 500-599

Question 13

4 Accounts in the equity section of a LEDGER

Answer 13

Capital Account
Revenue Account
Expenses Account
Drawings Account

Question 14

Source Documents

Answer 14

• most of the activity in a business creates business papers or documents

summaries, necessary for:
1. proof of payment
2. proof of purchase
3. for references to be kept on file