Week 2

Question 1

The accounting information system

Answer 1

An accounting information system is about recording information to produce financial statements that are used as a basis for decisions; it is like an athlete recording their performance so they can try ways to improve it. Accounting information system identifies, records, summarises and communicates the various transactions of a company.

Question 2

the Accounting Equation

Answer 2

Assets = Liabilities + Equity

Question 3

The Effects of Transactions on the Accounting Equation

Answer 3

• Transactions result in changes in assets, liabilities and owners equity
• Every accounting transaction must affect at least two accounts. This requirement is known as the dual nature of accounting.
• After each transaction is recorded the accounting equation must remain balance

Question 4

Debit and Credit Rules

Answer 4

•Assets are debit in nature
•Debits = Credits
•Accounting equation: A = L + E
–Therefore, Liabilities and Equity must be credit in nature
•Income increases Equity; credit increases Equity
–Therefore Income must be credit in nature
•Expenses decreases Equity; debit decreases Equity
–Therefore Expenses must be debit in nature

Question 5

Debit versus Credit

Answer 5

The left side of the account is the debit side and the right side of the account is the credit side.

Question 6

A debit indicates:

Answer 6

• an increase in an asset
• a decrease in a liability
• a decrease in a shareholders’ equity item.

Question 7

A credit indicates:

Answer 7

• a decrease in an asset
• an increase in a liability
• an increase in a shareholders’ equity item.

Question 8

T-account Normal Balances: assets

Answer 8

Increases in assets appear on the left side of T-accounts

Decreases in assets appear on the right side of
T-accounts

Question 9

T-account Normal Balances: liabilities

Answer 9

Decreases in liabilities appear on the left side of T-accounts

Increases in liabilities appear on the right side of T-accounts

Question 10

T-account Normal Balances: Retained Earnings

Answer 10

Decreases in equity appear on the left side of T-accounts

Increases in equity appear on the right side of T-accounts.

Question 11

Can t-accounts be used on their own

Answer 11

While T-accounts are useful to help analyse how individual transactions flow and accumulate within various accounts, journal entries formalise the reasoning that supports the transaction.

Question 12

General Journal

Answer 12

General journal is where transactions are first recorded into the accounting system.

Question 13

General journal has the following advantages:

Answer 13

–Complete record of all transactions
–Presented in chronological order
–Useful for locating and reducing errors as debits and credits shown together

Question 14

General Ledger

Answer 14

• A ledger is a collection of accounts and their balances.
• Companies have various types of ledgers containing different accounts, but the most basic type is the general ledger.
• The general ledger is really nothing more than a collection of T-accounts, which means that it contains both the activity and balances of all company accounts.

Question 15

Recording Transactions into the Accounting System

Answer 15

•When an accounting transaction is recorded in the general journal or journalised, the amounts recorded in the debit and credit columns are transferred to the debit and credit columns of the respective
T-accounts in the ledger.
•The process of copying or transferring the information from the journal to the ledger is called posting. Posting results in up-to-date account balances.
•Companies look to the ledger for balances in their accounts.

Question 16

Write a brief explanation of the terms debit and credit and how they are used in an accounting information system. Explain why debit and credit cannot mean good and/or bad.

Answer 16

For accounting, debit simply means the left side of an account, while credit simply means the right side of an account. All accounts have either a debit or a credit balance, and when recording an accounting transaction, journal entries will either debit or credit the account. After all entries are made, the debits and credits are added up separately, and then the smaller amount is subtracted from the larger. The difference is the account balance. Because debit means left and credit means right, they cannot mean good or bad, because they affect different accounts in different ways.

Question 17

Borrowed $30 000 from bank) credit account

Answer 17

Notes payable

Question 18

Issued $10 000 shares in exchange for cash. Credit account

Answer 18

Ordinary shares