Week 2/lecture 2 Flashcards
What is the difference between accrual and cash based (revenue & expenses?)
Accrual:
revenue recognised when assets increase or when liabilities decrease
expense recognised when assets decrease or liabilities increase
Cash based:
revenue recognised when cash goes up
expense recognised when cash is paid
What is the definition for revenue recognition and expense recognition?
Revenue recognition: increase in economic benefits due to increase in assets or decrease to liabilities that result in increase in equity (does not include contribution from owners i.e. contributed equity)
Expense recognition: decrease in economic benefits, reflected by decrease in asset or increase in liability which result in a decrease of equity (does not include distribution to owners)
What are the types of prepayments to adjust for?
Prepayments:
- prepaid expenses: where cash has been paid before expense has been occurred, recorded as asset until expenses occur. Initially this would be recorded as an asset. However, as time goes on this would be recorded in credit as supply will wear out.
e. g. supplier buys supplies (assets), after few months supply wears out, this will then be recorded in credit (decrease in assets) - revenue recieved in advance:
What is a general ledger?
For a general ledger, separate the debit and credit onto two different sides
A general displays a different cash ledger for equity, assets and liabilities
The ledger accumulates all the information about changes in specific account balances
How do closing entries operate?
difference between higher of the credit and debit is placed in the closing balance
What is a transaction?
External exchange of something of value between two or more parties
each transaction has dual effect on the accounting equation
How is equity calculated?
share capital + beginning balance in retained earnings + profit (or minus loss) - dividends
What are the steps in the recording process? What evidence does the purchase come in the form of?
1) Analyse each transactions effect on the account
2) Enter the transaction information on a journal
3) Transfer the journal accounts to the appropriate accounts in the ledger
Evidence:
- invoice
- receipt number
- printed receipt
How are transactions recorded? What is the general ledger?
Transactions are usually recorded in chronological order in a journal before they are transferred to the accounts
For each transaction, the account shows the debit and credit effects on specific accounts
The most basic form of a journal is the general ledger, an entry in the journal consists of:
- the date of transaction
2) accounts and amounts to be credited or debited
3) A narration- brief explanation of the transaction
The general ledger contains all the assets, liabilities and equity accounts. Accumulates all the information in specific account balances
What is the posting process?
it is the process of transferring journal entries to ledger accounts:
1) using the account number in the posting ref column, locate in the ledger the account to be debited and enter the ate the transaction occurred
2) to the right of the date, enter the name of the account to which the credit entry will be posted. This is called the cross- reference
3) Enter the amount to be debited
4) in the general journal, lace a tick beside the account number to signify that the entry has been posted on the ledger
5) Repeat step 1-5 for credit entey
What is the process that occurs after recording is complete? What happens before that?
A trial balance is prepared after recording is done
Before recording a trial balance, a a balance of each account in the ledger must be calculated. This is done as follows:
1) each side of the account is added and the total is written after leaving a line
2) The difference between the totals on each sides is calculated and that difference is written on the blank line of the side with the smallest total (closing balance)
3) Then on the line after the total, the date of the beginning of the next month and the opening balance is written on the opposite side to the closing balance
Trial balance:
list of accounts and their balances at a given time
It mains purpose is to uncover some type of errors within journaling and posting
Useful in the preparation of financial statements
The procedure of preparing a trial balance is as follows:
1) Account number, names and their balances
2) Total the debit and credit columns
3) Verify the equality of the two columns
What are the limitations of a trial balance?
It doesn’t guarantee that all transactions have been recorded or the ledger is correct
Following errors may not be detectable:
1) a transaction may not be journalised
2) a correct journal entry is not posted on the ledger
3) a journal entry is posted twice
4) incorrect accounts are used in journalising or posting
5) offsetting errors are made in recording the amount of a transaction
