ACCT-1001EL Lecture Notes - Lecture 1: Double-Entry Bookkeeping System, Retained Earnings, Accounting Information System

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January 17, 2018

Accounting Lecture 2 — Chapter 3

Summary

1. Explain how the double -entry accounting system works, including how it overcomes

the limitations of the temple approach.

-Every transaction must be recorded in a way that affects at least 2 accounts, with the effects

of these entries being equal and offsetting

-The double-entry accounting system enables the use of a huge number of accounts and is

not limited to a ﬁxed number of columns as is the case with the template approach. This

allows the company to capture the information at the level of detail required to manage the

business, yet make it east to summarize the information for reporting purposes.

2. Explain the normal balance concept and how it is used within the double-entry

accounting system.

-The normal balance concept is used to determine whether an account normally has a debit to

credit balance.

-To determine an account’s normal balance, a “T” is drawn through the middle of the

accounting equation. Accounts on the left side of the “T” (assets) normally have a debit (DR)

balance, while accounts on the right side of “T” (liabilities and SE) normally have a credit (CR)

balance.

-An accounts normal balance illustrates what needs to be done to increase that account. The

opposite is don't to decrease it

-As retained earnings is a shareholders’ equity account, it normally has a credit balance.

Therefore, to increase it, we would credit it, and to decrease it, we would debit it.

-Following this, revenue accounts, which ultimately increase retained earnings, normally have

a credit balance. Expense and dividends declared accounts, which ultimately decrease

retained earnings, normal have a debit balance.

3. Identify and explain the steps in the accounting cycle.

The steps of the accounting cycle;

1. Start with opening balances

2. Complete transaction analysis

3. Record transactions in the general journal

4. Post transactions to the general ledger

5. Prepare a trail balance

6. Record ad post adjusting entries

7. Prepare an adjusted trial balance

8. Prepare ﬁnancial statements

9. Prepare closing entries

-At a minimum this cycle is repeated annually, but parts of it repeat much more frequently

(quarterly, monthly, weekly or even daily)

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January 17, 2018

4. Explain the signiﬁcance of a company’s decision regarding its chart of accounts and

the implications of subsequent changes.

-The chart of accounts outlines the type of information management wishes to capture to

assist them in management the business

-The chart of account sis dynamic and can be changed when the company enters into new

types of operations, opens ne location, requires more detailed information or requires less

detailed information

5. Explain the difference between permanent and temporary accounts

-Permanent accounts have balances that are carried over from one accounting period to the

-Temporary accounts have absences that are closed to retained earning at the end of each

accounting period. That is, they are reset to zero

-All of the accounts on the statement of ﬁnancial position (assets, liabilities, and shareholders

equity accounts) are permanent accounts

-All of the accounts on the statement of income (revenues and expenses) and dividends

declared are temporary accounts.

6. Identify and red transactions in the general journal and general ledger

-The general journal is chronological listing of all transactions. It contains detailed information

on each transaction

-Each journal entry must affect 2 or more accounts and the total dollar amount of debits in the

entry must be equal to the total dollar amount of credits. In other words, total DR = total CR.

-On a periodic basis (such as daily, weekly or monthly), the information record in the general

journal is posted to the general ledger

-The general ledger is used to prepare summary information for each account. The detail form

each journal entry affecting a speciﬁc amount is recorded in the general ledger account for

that speciﬁc account

-A trial balance is prepared to ensure that the total of all debits posted to the general ledger is

equal to the total of credits posted.

7. Explain why adjusting entries are necessary and prepare them.

-Adjusting entries are required at the end of each accounting period to record transactions that

may have been missed.

-There are 2 types of adjusting entries: accruals and deferrals

-Accrual entries are used to record revenues or expenses before cash is received oror paid

-Deferral entries are used to record revenues or expenses after cash has been received or

paid

-Depreciation is a type of deferral entry

-Adjusting entries never involve cash

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January 17, 2018

8. Explain why closing entries are necessary and prepare them!

-Closing entries are used to close temporary accounts and transfer the balances in these

accounts to retained earnings

-There are four closing entries;

1. Close all revenue accounts to the Income Summary Account

2. Close all expense accounts to the Income Summary Account

3. Close the Income Summary Account to Retained Earnings

4. Close dividends Declared to Retained Earnings

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Document Summary

Summary: explain how the double -entry accounting system works, including how it overcomes the limitations of the temple approach. Every transaction must be recorded in a way that affects at least 2 accounts, with the effects of these entries being equal and offsetting. The double-entry accounting system enables the use of a huge number of accounts and is not limited to a xed number of columns as is the case with the template approach. The normal balance concept is used to determine whether an account normally has a debit to credit balance. To determine an account"s normal balance, a t is drawn through the middle of the accounting equation. Accounts on the left side of the t (assets) normally have a debit (dr) balance, while accounts on the right side of t (liabilities and se) normally have a credit (cr) balance. An accounts normal balance illustrates what needs to be done to increase that account.

Related Questions

In this chapter we were provided a chart of accounts withsixteen accounts in exhibit 2 in the text.

From that chart of accounts select an account (try to pick onethat has not been discussed yet), in the subject box put theaccount title you selected, then do the following:

1. Assets, Liabilities, Owner's Equity, Revenues, and Expensesare the five categories (account types) that an account can beclassified as. Which category is the account you selected includedin?

2. The double-entry accounting system has specific rules forrecording debits and credits based on the type of account. Describehow these rules apply to the account you selected. How is theaccount increased and how is it decreased?

3. The normal balance of an account can be either a debit or acredit depending on whether increases in the account are recordedas debits or credits. What is the normal balance of the account youselected?

4. Think of a transaction that your account would be used in. Donot copy an entry from the book. Describe and illustratejournalizing the transaction, in the proper journal entryformat.

QUESTION 1

Accounting is an information and measurement system thatidentifies, records, and communicates relevant, reliable, andcomparable information about an organization's businessactivities.

True

False

QUESTION 2

We use the accounting equation to identify what a company ownsand owes. The accounting equation is:

Assets = Liabilities + Equity

Assets = Liabilities â Equity

Assets = Liabilities + Revenues

Equity = Liabilities + Revenues

QUESTION 3

______ are beliefs that distinguish right from wrong. Thesebeliefs are accepted standards of gauging good and dishonestbehavior.

Accounting Standards

Ethics

Generally Accepted Accounting Principles

FASB

QUESTION 4

The _____ is a collection of all accounts within a companyâsaccounting system.

We use the accounting equation to identify what a company ownsand owes. _____ are resources a company owns or controls, _____ areclaims creditors have against a companyâs assets, and _____ is theownerâs claim on a companyâs assets.

QUESTION 6

In double entry accounting a credit to an asset account willrepresent an increase in the asset account balance; and a debitwill represent a decrease in the asset account balance.

True

False

QUESTION 7

The purchase of supplies on credit will ____ assets and ____liabilities.

During the accounting cycle, we analyze transactions toprepare statements.

True

False

QUESTION 9

The supplies account for a company has a $1,000 debit balanceat the beginning of the year. Supplies of $2,000 were purchasedduring the year and debited to the Supplies account. A December 31physical count shows $500 of supplies remaining at the end of theyear. Assume no other adjusting entries are made during the year.Using the 3-step process for creating adjusting entries, calculatethe adjustment amount for supplies (no journal entry isrequired).

During the accounting cycle, to complete step 7 youwould:

Prepare post-closing trial balance--Test clerical accuracy ofthe closing procedures.

Prepare adjusted trial balance--Summarize adjusted ledgeraccounts and amounts.

Prepare statements--Use adjusted trial balance to preparefinancial statements.

Close--Journalize and post entries to close temporaryaccounts.

QUESTION 11

The three financial statements that should be prepared duringthe accounting cycle are the:

Balance sheet, adjusted trial balance, income statement

Balance sheet, unadjusted trial balance, Statement of OwnerâsEquity

Income statement, adjusted trial balance, Statement of OwnerâsEquity

Balance sheet, Income statement, Statement of OwnerâsEquity

QUESTION 12

An optional working paper, which is not a required report oran accounting record, but is used to prepare a company's unadjustedtrial balance, adjusting entries, adjusted trial balance, andfinancial statements is a(n):

Adjusted trial balance

Worksheet

Post-closing trial balance

Unadjusted trial balance

General ledger

QUESTION 13

The two goals for completing the closing process are:

To identify accounts for closing and record the closingentries

To journalize and post transactions

To post transactions and prepare post-closing trialbalance

To reset revenues, expenses, and withdrawal account balancesto zero at the end of each period, and help summarize an accountingperiodâs revenues and expenses.

QUESTION 14

Fill in the Blank: The _____ describes a companyâs financialposition â by the types and amounts of assets, liabilities, andequity -- at a point in time.

QUESTION 15

Return on Assets is useful in evaluating management, analyzingand forecasting profits, and planning activities.

True

False

QUESTION 16

The Income Statement:

Identifies cash inflows (receipts) and cash outflows(payments) over a period-of-time.

Summarize adjusted ledger accounts and amounts

Describes a companyâs revenues and expenses along with theresulting net income or net loss -- over a period-of-time due toearnings activities

Resets revenues, expenses, and withdrawal account balances tozero at the end of each period.

QUESTION 17

An internal control system consists of the policies andprocedures used to:

Protect assets and Ensure reliable accounting

Urge adherence to company policies and Promote efficientoperations

All of the above

None of the above.

QUESTION 18

The cost-benefit principle is the second limitation of_______.

Bank reconciliations

Petty cash controls

Voucher system of controls

Internal controls

QUESTION 19

The Unadjusted Trial Balance columns of a company's work sheetshows the Store Supplies account with a balance of $750. TheAdjustments columns shows a credit of $425 for supplies used duringthe period. The amount shown as Store Supplies in the Balance Sheetcolumns of the work sheet is:

A company shows a $600 balance in Prepaid Rent in theUnadjusted Trial Balance columns of the work sheet. The Adjustmentscolumns show expired rent of $200. This adjusting entry resultsin:

$200 decrease to net income

$200 increase to net income

$200 different between the debit and credit columns of theUnadjusted Trial Balance

An error in the Balance Sheet

QUESTION 21

This semester we have discussed four major financialstatements. List the 4 financial statements and describe them. Makesure to include how they flow together.

QUESTION 22

Explain the purpose of adjusting entries at the end of aperiod.

peararmadillo281

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

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ACCT-1001EL Lecture Notes - Lecture 1: Double-Entry Bookkeeping System, Retained Earnings, Accounting Information System

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