ACCT1000 Lecture Notes - Lecture 5: General Ledger, Accounting Equation, Double-Entry Bookkeeping System

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ACCT – Module 5

Accounting cycle 1: Recording business transactions and accounting

for service entities – Part A

Methods of Accounting

Two types of accounting:

1. Cash Accounting

- A system of accounting concerned only with cash inflows and cash outflows

- Recognises revenue when it is RECEIVED

- Recognises expenses when they are PAID

2. Accrual Accounting

- A method which matches revenues for a given period with the expenses incurred in

earning those revenues. This is done by;

o Recognising revenues when they are EARNT

o Recognising expenses when they are INCURRED

Accrual accounting requirements

Accrual accounting enables the preparation of;

o Balance sheet

o Income statement

Most businesses worldwide (with the exception of some sole trader businesses) use

accrual accounting.

Business transactions

Business transactions are occurrences that affect the assets, liabilities and equity items in an

entity. A business transaction is recorded when:

- It can be reliably measured in monetary terms

- It ous at a’s legth

Under the entity concept, every entity must keep records of its business transactions

separate from any personal transactions of the owners.

Personal transaction and business events

- Personal transactions are transactions of the owners, partners, or shareholders that

are unrelated to the operation of the business

- Business events are occurrences that will probably affect the entity in some way, but

are not recorded as business transactions until an exchange of goods occurs

between the entity and an outside entity.

Definitions of elements of financial statements

Assets

A esoue controlled by the entity as a result of past events and from which future

economic benefits ae epeted to flo to the etit

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Three essential characteristics:

1. Increase future economic benefits

2. The entity must have control

3. There must be a past event

Cash

Amount of cash available to the entity. Can be in a bank account or in

hand.

Account

receivable

The amount owed by customers when goods or services are sold on

credit.

Inventory

The goods held by a retail store for sale to customers.

Supplies

Items (pen, paper, stationery) held for internal use. The amount of

supplies used is an expense.

Land

Land controlled by the entity. Land is not subjected to depreciation.

Buildings

Buildings controlled by the entity. Buildings are separately recorded

from the land they are situated on.

Vehicles

The motor vehicles controlled by the entity. Vehicles (if more than one

held) can either be recorded separately or combined

Prepaid

expenses

They amount of expenses that have been paid in advance (for instance

paig fo Jue’s et i Ma). Oe the seie fo hih the oe

has been paid is used, the expense is recognised.

Accumulate

depreciation

The total amount of depreciation recorded against a specific asset.

Since it reduces the carrying amount of the asset, it is a contra-asset

account. Compare with depreciation expense which is the depreciation

for a single period.

GST Outlays

The amount of GST that has been paid by the entity when goods and

services were bought. This will be refunded by the tax office.

Liabilities

A present obligation of the entity arising from past events, the settlement of which is

expected to result in an outflow from the entity of resources embodying economic

benefits

Three essential characteristics:

1. A present obligation

2. Must result in the decrease in future economic benefits

3. Must have resulted in from a past transaction or event

Bank

overdraft

The amount owing to the bank because the business has overdrawn their

bank account. This can be thought as a negative cash balance

Accounts

payable

The amount owed to the supplier after the goods or services are bought on

credit.

Loan

payable

The amount owed to lenders after money is borrowed. Usually loan

payable records the principle owing whilst interest payable records the

interest owing.

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Document Summary

Accounting cycle 1: recording business transactions and accounting for service entities part a. A system of accounting concerned only with cash inflows and cash outflows. Recognises expenses when they are paid: accrual accounting. A method which matches revenues for a given period with the expenses incurred in earning those revenues. This is done by: recognising revenues when they are earnt, recognising expenses when they are incurred. Accrual accounting enables the preparation of: balance sheet. Most businesses worldwide (with the exception of some sole trader businesses) use accrual accounting. Business transactions are occurrences that affect the assets, liabilities and equity items in an entity. It can be reliably measured in monetary terms. Under the entity concept, every entity must keep records of its business transactions separate from any personal transactions of the owners. Personal transactions are transactions of the owners, partners, or shareholders that are unrelated to the operation of the business.

Related Questions

How do you reply to this post? Minimum of 150 words. Thank youin advance!

Cash Basis accounting is a very straight forward, single-entryapproach that can work for small businesses that do not have toomany accounts or financial transactions to manage nor do theymaintain large amounts of assets.

Some of the few advantages for this approach is that since it isa straightforward, you receive cash for products sold or servicerendered with minimal delay in between transactions, bookkeeping issimple enough that anyone can understand which âeliminates theneed to a trained bookkeeper or accountantâ(Business-Case-Analysis.com). This works well for soleproprietorship operating businesses if there are no financialstatement requirements to be published. It makes it easier for thebusiness to keep tract of their revenues within a few transactionssince it only records when cash is received or expenses are paid.âCash accounting ensures that taxes are not paid on monies thathave not yet been received; this improves cash flow and ensuresthat funds are available for tax expenditures.â(Mysmp.com).

Some of the disadvantages using cash basis is since it is asingle entry, vice double entry, there is more room for errorunlike accrual where double entry is used, every credit is indirect relation to every debit, there is a way to verify entries.Also, since it can only record revenues when cash is received orexpenses are paid, it does not have to ability to account forpromissory notes and accounts receivable. This significantly lowerstheir possibility for bigger revenue since they can only recordactual movement of cash when it happens. This simplicity also worksagainst the business, âBecause cash accounting is so simple, itdoes not allow for tracking the actual dates of sales andpurchases. Additionally, it usually does not provide a means ofmatching these transactions to specific items of inventoryâ(Mysmp.com). Because this approach can only record actual movementor revenue when it happens, the balance sheet could be inaccuratelyrecorded and could contribute to errors leading to missed paymentsof monies owed or missed revenues owed to them.

Reference:

https://www.business-case-analysis.com/cash-basis-accounting.html

www.mysmp.com/fundamental-analysis/cash-accounting.html

yellowprairie-dog170

Investment and financing decisions, which may beshort-term or long-term decisions are best describedas:

financial decision making.

economic decision making.

accounting decision making.

Mutual funds, pension funds, investment dealers andinsurance companies are best described as examples of:

corporate finance.

market intermediaries.

financial intermediaries.

Farmers and Merchants Bank lends money to Ruth topurchase a car from Steven Toyota. Ruth is going to insure the carwith Allstate Insurance. Which party is best described as thecreditor?

Ruth

Steven Toyota

Allstate Insurance

Farmers and Merchants Bank

Which of the following would not be described as adebenture?

An unsecured loan

A loan secured by collateral

A loan secured by the âfull faith and creditâ of theissuer

Morgan Stanley was the investment banking firm that tookFacebook from being a closely held company to issuing stock to thepublic for the first time. Which of the following terms mostclosely describes this?

money market security.

issuing commercial paper.

initial public offering (IPO).

debt security backed by the general credit of theissuer.

Which of the following transactions does not take placein the primary market? An investor:

buying a newly issued municipal bond.

buying shares of an initial publicoffering.

selling one hundred shares of stock through a stockbroker.

buying a U.S. Treasury bill through the governmentauction.

The majority of home purchases in the U.S. are securedwith a mortgage. A mortgage is:

an unsecured loan.

an equity investment in the property.

a debt obligation secured by a specificproperty.

Which form of business would most likely describe thefollowing, a college student other students, a retired woman whobabysits children, a teenager who mows lawns, and a partyclown?

Partnership

Corporation

Sole proprietorship

Limited liability company

Flow-through taxation is a characteristic for all butthe following forms of business?

Partnership

Corporation

Sole proprietorship

Limited liability company

Your sister wants to start a tee shirt business on e-Baywith you to help pay for college tuition. All of the following areadvantages to partnerships that you should both consider, except____________?

Easy to form

Access to capital

Business income is taxed once, at the individualpartnerâs level

Which of the following takes into account takes intoaccount the opportunity cost of funds?

Net profit

Economic profit

Accounting profit

When we talk about capital structure, this refersto:

the cash, inventory, and accountsreceivable.

mix of debt and equity to finance anenterprise.

the investment in plant, property andequipment.

The uncertainty associated with the use of debt tofinance a business enterprise is best described as:

financial risk.

business risk.

operating risk.

The mix of debt and equity that is used to finance abusiness enterprise is best described as theenterpriseâs:

assets.

working capital.

capital structure.

capital expenditures

Generally accepted accounting principles (GAAP) are bestdescribed as a(n):

organization that establishes the accounting principlesfor U.S. financial reporting.

accounting standards promulgated by the InternationalAccounting Standards Board (IASB.)

set of basic principles and conventions that are appliedin the preparation of financial statements.

organization that establishes the accounting principlesfor business entities in the European EconomicCommunity.

Which reporting convention requires recording revenueand expenses when the transaction occurs, regardless of when cashchanges hands?

Cost basis

Cash basis

Accrual basis

The summary of the companyâs performance over a periodof time, typically a fiscal quarter or fiscal year

Balance sheet

Statement of stockholderâs equity

Income statement

Statement of cash flows

_______ is the cash flow from the day-to-day operationsof the business; the result of subtracting the increase in newworking capital from traditional cash flow.

Cash flow from investing

Cash flow from financing

Simple cash flow

Cash flow from operations

The debt ratio is classified as which type ofratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

Inventory turnover, accountsreceivable turnover, fixed asset turnover, and total asset turnoverare all classified as which type of ratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

ABC Company attempts tomanage its earnings by extending the useful life of all of itsequipment. Which of the following will not be an outcome of thischoice by management?

Income will be higher than it would have been underprior accounting methods.

Equipment values will be higher than they would havebeen without the change.

Depreciation expense will be lower than it would havebeen under prior accounting methods.

Depreciation expense will be higher than it would havebeen under prior accounting methods.

It is important for a companyto know the level of sales at which it covers all its variable andfixed operating costs. This level of sales is best described asthe:

gross profit margin.

contribution margin.

operating break even.

operating profit margin.

The minimum return thatinvestors expect to earn on the investment in stock is bestdescribed as:

growth rate.

risk premium.

capital gains yield.

required rate of return

If a company returns more than the required rate ofreturn on a stock, what happens to the value of thatstock?

The stock price falls.

The stock price rises.

The stock price stays the same.

When market rates are greaterthan the dividend rate, preferred shares will tradeat:

par.

a discount.

a premium.

byzantiummoose662

NEED ASAP PLEASE

Question 1

Which one of the following is not an externaluser of accounting information?

		Customers
		Investors
		Regulatory agencies
		All of these are external users

3 points

Question 2

The first step in solving an ethical dilemma is to

		identify and analyze the principal elements in thesituation.
		identify the alternatives.
		recognize an ethical situation and the ethical issuesinvolved.
		weigh the impact of each alternative on variousstakeholders.

3 points

Question 3

Generally accepted accounting principles are

		income tax regulations of the Internal Revenue Service.
		standards that indicate how to report economic events.
		theories that are based on physical laws of the universe.
		principles that have been proven correct by academicresearchers.

3 points

Question 4

Which of the following events is not a businesstransaction?

		Issuance of stock in exchange for cash.
		Hired employees.
		Incurred utility expenses for the month.
		Earned revenue for services provided.

3 points

Question 5

When assets are distributed to the owners of a corporation,these distributions are termed

		depletions.
		consumptions.
		dividends.
		a credit line.

3 points

Question 6

If total liabilities increased by $8,000, then

		assets must have decreased by $8,000.
		stockholders' equity must have increased by $8,000.
		assets must have increased by $8,000, or stockholders' equitymust have decreased by $8,000.
		assets and stockholders' equity each increased by $4,000.

3 points

Question 7

If total liabilities increased by $30,000 and stockholders'equity increased by $20,000 during a period of time, then totalassets must change by what amount and direction during that sameperiod?

		$50,000 decrease
		$10,000 decrease
		$10,000 increase
		$50,000 increase

3 points

Question 8

Misra Company compiled the following financial information as ofDecember 31:

Revenues	$ 340,000
Retained Earnings, Beginning	$ 60,000
Equipment	$ 80,000
Expenses	$ 250,000
Cash	$ 90,000
Dividends	$ 20,000
Supplies	$ 10,000
Accounts payable	$ 40,000
Accounts receivable	$ 70,000
Common Stock	$ 80,000

Misra's assets on December 31 are

		$180,000.
		$250,000.
		$360,000.
		$ 490,000.

3 points

Question 9

Mofro's Computer Repair Shop started the year with total assetsof $300,000 and total liabilities of $200,000. During the year, thebusiness recorded $500,000 in computer repair revenues, $300,000 inexpenses, and Mofro paid dividends of $50,000. Stockholders' equityat the end of the year was

		$200,000.
		$100,000.
		$250,000.
		$300,000.

3 points

Question 10

A balance sheet shows

		assets, liabilities, and stockholders' equity.
		expenses, dividends, and stockholders' equity.
		revenues, expenses, and dividends.
		revenues, liabilities, and stockholders' equity.

3 points

Question 11

At September 1, Foli Co. reported retained earnings of $136,000.During the month, Foli generated revenues of $20,000, incurredexpenses of $12,000, purchased equipment for $5,000 and paiddividends of $2,000. What is the amount of retained earnings atSeptember 30?

		$136,000
		$142,000
		$8,000
		$137,000

3 points

Question 12

Grayton Industries purchased supplies for $1,000. The Companypaid $500 in cash and agreed to pay the balance in 30 days. Thejournal entry to record this transaction would include a debit toan asset account for $1,000, a credit to a liability account for$500. Which of the following would be the correct way to completethe recording of the transaction?

		Credit an asset account for $500.
		Credit the Retained Earnings account for $500.
		Credit another liability account for $500.
		Debit the Retained Earnings account for $500.

3 points

Question 13

Radio Moscow Industries purchased supplies for $1,000. They paid$400 in cash and agreed to pay the balance in 30 days. The journalentry to record this transaction would include a debit to an assetaccount for $1,000, a credit to a liability account for $600. Whichof the following would be the correct way to complete the recordingof the transaction?

		Credit an asset account for $400.
		Credit another liability account for $400.
		Credit the retained earnings account for $400.
		Debit the retained earnings account for $400.

3 points

Question 14

A credit to a liability account

		must be accompanied by a debit to an asset account.
		indicates an increase in the amount owed to creditors.
		is an error.
		indicates a decrease in the amount owed to creditors.

3 points

Question 15

In recording business transactions, evidence that an accountingtransaction has taken place is obtained from

		business documents.
		the Internal Revenue Service.
		the public relations department.
		the SEC.

3 points

Question 16

On June 1, Leno Inc. buys a copier machine for her business andfinances this purchase with cash and a note. When journalizing thistransaction, the company's accountant will

		make a simple entry.
		use two journal entries.
		make a compound entry.
		list the credit entries first, which is proper form for thistype of transaction.

3 points

Question 17

A three column form of account is so named because it hascolumns for

		debit, credit, and balance.
		debit, credit, and date.
		debit, credit, and account name.
		debit, credit, and reference.

3 points

Question 18

The first step in designing a computerized accounting system isthe creation of the

		general ledger.
		general journal.
		trial balance.
		chart of accounts.

3 points

Question 19

Chik Chik Company showed the following balances at the end ofits first year:

Cash	$ 6,000
Prepaid insurance	$ 9,400
Accounts receivable	$ 7,000
Accounts payable	$ 5,600
Notes payable	$ 8,400
Common stock	$ 2,800
Dividends	$ 1,400
Revenues	$ 44,000
Expenses	$ 35,000

What did Chik Chik Company show as total credits on its trialbalance?

		$51,400
		$60,800
		$62,200
		$70,200

3 points

Question 20

Which of the following time periods would notbe referred to as an interim period?

		Monthly
		Quarterly
		Semi-annually
		Annually

ACCT1000 Lecture Notes - Lecture 5: General Ledger, Accounting Equation, Double-Entry Bookkeeping System

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