Basics of Accounting (1339)
Q. 1 Define the following key terms: (20)
a) Capital
wealth in the form of money or other assets owned by a person or
organization or available for a purpose such as starting a company or
investing.
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b) Trade Discount
A trade discount is the amount by which a manufacturer reduces the
retail price of a product when it sells to a reseller, rather than to the end
customer.
c) Direct Expenses
Direct costs are costs which are directly accountable to a cost
object. Direct cost is the nomenclature used in accounting. The equivalent
nomenclature in economics is specific cost. By contrast, a joint cost is a cost
incurred in the production or delivery of multiple products or product lines.
d) Trade Debters
Trade debtors are invoices owed to you by customers. They're also
sometimes called debtors or accounts receivable. Trade debtors may additionally
refer to those customers who owe you money. Let's say you sell your product to a
customer on credit and send them an invoice for the sale.
e) Return Outward
Returns outwards are goods returned by the customer to the
supplier. For the supplier, this results in the following accounting
transaction: A debit (reduction) in revenue in the amount credited back to the
customer.
f) Revenue
Revenue is the income a company receives as a result of its
business activities, typically through the sale of goods or services, rents,
and other sources.
g) Voucher
A voucher is a form that includes all of the supporting documents
showing the money owed and any payments to a supplier or vendor for an
outstanding payable. The voucher and the necessary documents are recorded in
the voucher register.
h) Commission
Sales commission is a key aspect of sales compensation. It's the
amount of money a salesperson earns based on the number of sales they have
made. This is additional money that often complements a standard salary.
i) Purchases
To obtain by paying money or its equivalent
j) Assets
an item of property owned by a person or company, regarded as
having value and available to meet debts, commitments, or legacies.
Q. 2 Define Accounting
Cycle. Explain its different phases. (20)
The accounting cycle is the process of accepting, recording,
sorting, and crediting payments made and received within a business during a
particular accounting period.
The accounting cycle is a basic, eight-step process for completing
a company’s bookkeeping tasks. It provides a clear guide for the recording,
analysis, and final reporting of a business’s financial activities.
The accounting cycle is used comprehensively through one full
reporting period. Thus, staying organized throughout the process’s time frame
can be a key element that helps to maintain overall efficiency. Accounting
cycle periods will vary by reporting needs. Most companies seek to analyze
their performance on a monthly basis, though some may focus more heavily on
quarterly or annual results.
Regardless, most bookkeepers will have an awareness of the
company’s financial position from day to day. Overall, determining the amount
of time for each accounting cycle is important because it sets specific dates
for opening and closing. Once an accounting cycle closes, a new cycle begins,
restarting the eight-step accounting process all over again.
Understanding the 8-Step Accounting Cycle
The eight-step accounting cycle starts with recording every company
transaction individually and ends with a comprehensive report of the company’s
activities for the designated cycle timeframe. Many companies use accounting
software to automate the accounting cycle. This allows accountants to program
cycle dates and receive automated reports.
Depending on each company’s system, more or less technical
automation may be utilized. Typically, bookkeeping will involve some technical
support, but a bookkeeper may be required to intervene in the accounting cycle
at various points.
Every individual company will usually need to modify the eight-step
accounting cycle in certain ways in order to fit with their company’s business
model and accounting procedures. Modifications for accrual accounting versus
cash accounting are usually one major concern.
Companies may also choose between single-entry accounting versus
double-entry accounting. Double-entry accounting is required for companies to
build out all three major financial statements: the income statement, balance
sheet, and cash flow statement.
The 8 Steps of the Accounting Cycle
The eight steps of the accounting cycle include the following:
Step 1: Identify Transactions
The first step in the accounting cycle is identifying transactions.
Companies will have many transactions throughout the accounting cycle. Each one
needs to be properly recorded on the company’s books.
Recordkeeping is essential for recording all types of transactions.
Many companies will use point of sale technology linked with their books to
record sales transactions. Beyond sales, there are also expenses that can come
in many varieties.
Step 2: Record Transactions in a Journal
The second step in the cycle is the creation of journal entries for
each transaction. Point of sale technology can help to combine steps one and
two, but companies must also track their expenses. The choice between accrual
and cash accounting will dictate when transactions are officially recorded.
Keep in mind that accrual accounting requires the matching of revenues with
expenses so both must be booked at the time of sale.
Cash accounting requires transactions to be recorded when cash is
either received or paid. Double-entry bookkeeping calls for recording two
entries with each transaction in order to manage a thoroughly developed balance
sheet along with an income statement and cash flow statement.
Generally accepted
accounting principles (GAAP) require public companies to utilize accrual
accounting for their financial statements, with rare exceptions.
With double-entry accounting, each transaction has a debit and a
credit equal to each other. Single-entry accounting is comparable to managing a
checkbook. It gives a report of balances but does not require multiple entries.
Step 3: Posting
Once a transaction is recorded as a journal entry, it should post
to an account in the general ledger. The general ledger provides a breakdown of
all accounting activities by account. This allows a bookkeeper to monitor
financial positions and statuses by account. One of the most commonly
referenced accounts in the general ledger is the cash account which details how
much cash is available.
The ledger used to be the gold standard for recording transactions
but now that almost all accounting is done electronically, the ledger is less
of an active concern as all transactions are automatically logged.
Step 4: Unadjusted Trial Balance
At the end of the accounting period, a trial balance is calculated
as the fourth step in the accounting cycle. A trial balance tells the company
its unadjusted balances in each account. The unadjusted trial balance is then
carried forward to the fifth step for testing and analysis.
This is the first step that takes place once the accounting period
has ended and all transactions have been identified, recorded, and posted to
the ledger (this is usually done electronically and automatically, but not
always).
The purpose of this step is to ensure that the total credit balance
and total debit balance are equal. This stage can catch a lot of mistakes if
those numbers do not match up.
Step 5: Worksheet
Analyzing a worksheet and identifying adjusting entries make up the
fifth step in the cycle. A worksheet is created and used to ensure that debits
and credits are equal. If there are discrepancies then adjustments will need to
be made.
In addition to identifying any errors, adjusting entries may be
needed for revenue and expense matching when using accrual accounting.
Step 6: Adjusting Journal Entries
In the sixth step, a bookkeeper makes adjustments. Adjustments are
recorded as journal entries where necessary.
Step 7: Financial Statements
After the company makes all adjusting entries, it then generates
its financial statements in the seventh step. For most companies, these
statements will include an income statement, balance sheet, and cash flow
statement.
Step 8: Closing the Books
Finally, a company ends the accounting cycle in the eighth step by
closing its books at the end of the day on the specified closing date. The
closing statements provide a report for analysis of performance over the
period.
After closing, the accounting cycle starts over again from the
beginning with a new reporting period. Closing is usually a good time to file
paperwork, plan for the next reporting period, and review a calendar of future
events and tasks.
Q. 3 Differentiate between
single entry system and double entry.
(20)
Bookkeeping is a part of the process of maintaining accounting
records. It is divided into two parts: a single entry system and a double-entry
system. Usually, small sole proprietorship and partnership businesses do not
use a double entry bookkeeping system. Cash and credit transactions are the
only ones they need to keep track of. They will, however, want to know the
performance and financial status of their company at the end of the accounting
period. The accountants have various difficulties as a result of this. Most
small firms are focused on quickly setting up a system to pay vendors and
record income and are unaware that they must choose between single entry and
double entry bookkeeping. So, in this article, let's learn about the differences
between single entry and double entry systems and why they are used in
recording business transactions.
What is the Single Entry System in Accounting?
The single entry system in accounting is an accounting method in
which each accounting transaction is recorded with only one entry in the
accounting records. It is mostly used for entries in the income statement and
is concentrated on the results of the commercial enterprise. The term
'preparation of accounts from incomplete records' indicates the issues that
arise when accounts are prepared from incomplete transactions.
Basics of Single Entry System of Accounting
Single entry bookkeeping is
akin to handling your chequebook and is most likely to work for you if your
firm is small and uncomplicated with a low volume of activity.
When you employ single-entry
accounting, you keep track of transactions such as cash, tax-deductible
expenditures, and taxable revenue.
A single entry system is
distinct because each transaction is recorded with only one entry, similar to
your check register.
Entries are entered as
positive or negative values in one column.
You can keep a two-column
ledger with single-entry bookkeeping, one for revenue and one for expenditures.
Each transaction is recorded on a single line, therefore, it is
still termed as single-entry.
The single entry system is an incomplete accounting system used by
small business owners with a modest number of transactions.
Only personal accounts are opened and maintained by a business
owner in this accounting system.
Sometimes auxiliary books are kept, and sometimes they aren't.
Because the business owner does not open real and nominal accounts, it is
impossible to prepare a profit and loss account or a balance sheet to determine
the business organisation's exact profit or loss or financial position.
Large, complex businesses
should avoid this sort of bookkeeping. It does not keep track of accounts like
inventory, payables, or receivables. Single-entry bookkeeping can be used to
determine net income, but it cannot be used to create a balance sheet or
monitor asset and liability accounts. Instead of debiting and crediting a
series of books as in double-entry bookkeeping, transactions are recorded as a
single entry.
Types of Single Entry Accounting System
The various forms of single entry bookkeeping methods are listed
below:
Pure Single Entry: Only personal accounts are kept in this system,
which means no information about cash and bank balances, sales and purchases,
and so on is available. This approach exists on paper and has no practical use
due to its failure to offer even basic information like cash, etc.
Simple Single Entry: Only personal accounts and a cash book are
maintained in this system. Even though these accounts are handled on a
double-entry basis, postings from the cash book are made only to personal
accounts, with no other accounts in the ledger. Cash collected from debtors or
money paid to creditors is stated on the issued or received bills, depending on
the situation.
Quasi Single Entry: Personal accounts, a cash book, and a few
auxiliary books are all here. Sales, Purchases, and Bills are the three primary
auxiliary books handled under this system. Discounts, which are entered into
personal accounts, are not kept in a separate record. In addition, there is
some limited information about a few key elements of expense, such as labour,
rent, and rates. In reality, this is the way that is most commonly used to
replace the double-entry system.
What is Double Entry System of Bookkeeping?
The accounting system of double entry accounting, often known as
double entry bookkeeping, mandates that every company transaction or event be
documented in at least two accounts. The accounting equation is based on the
same premise.
Every debit must be matched with an equal amount of credit. To put
it another way, debits and credits must be equal in each accounting transaction
and totalled.
Basics of Double Entry System of Accounting
For their accounting needs, most firms, including small
enterprises, use double-entry bookkeeping. Each account has two columns, and
each transaction is split between two accounts in double-entry accounting. Each
transaction has two entries: a debit in one account and a credit in another.
The system is complete, accurate, and compliant with Generally
Accepted Accounting Principles (GAAP) due to a two-fold effect. Every
transaction is recorded according to a detailed method. The technique begins
with preparing source documents, then moves on to the diary, ledger, and trial
balance, and finally to the preparation of financial statements.
Because this system performs a full-fledged recording of
transactions, there are fewer chances of fraud and embezzlement. Errors are
easily recognised. Due to the two-fold nature, the accounts can also be
reconciled. The use of a Double Entry System of accounting to record
transactions is also recommended by tax laws. However, this process is
time-consuming as compared to a single-entry system.
The accounting equation that underpins the double-entry system is
as follows:
Assets = Liabilities plus Equity
Assets are the resources that a company owns.
Liabilities are obligations that a company owes to another party.
After all obligations and liabilities have been paid, the sum owing
to the business's owners is called equity.
Types of Double Entry Accounting System
You need to know about
various accounts if you want to master the art of double entry bookkeeping.
These sorts of accounts are the deciding factor behind the types of
double-entry accounting.
The following accounts are taken into consideration when recording
transactions under the double-entry system:
Asset: This account keeps track of all of a company's assets. Cash,
accounts receivables, equipment, and inventory accounts are examples of asset
accounts. When there is an influx of assets, the asset account increases, and
when assets are removed, the asset account declines.
Liability: The liabilities account reveals all of the money the
company owes to other businesses. Accounts Payable and Notes Payable are two
examples of liability accounts. Liabilities grow as a corporation borrows money
and buys goods and services on credit. In contrast, as liabilities are paid
off, the account balance decreases.
Capital: The equity account captures the owner's capital and
additional investments and profits into the business. When a corporation
suffers losses, the equity account is depleted, as is the case when the owner
draws cash for personal use.
Income: The amount earned by a firm from the sale of goods or the
provision of services is referred to as income or revenue. It also includes
other sources of revenue, such as rent, commissions, interest, dividends, and
so forth.
Expense: Expenses refer to all costs incurred or money spent by a
company to generate revenue. It's worth noting that an expense occurs when the
benefits of the money spent are depleted within a year. When a benefit lasts
more than a year, it is referred to as Expenditure.
Q. 4 The following are the
transections of a business for the month of January 2018, you are required to
show the effect of the transections in the Accounting Equation.
(20)
Jan, 02 Started a
business with cash Rs. 400,000.
Jan, 07 Deposited Rs. 170,000 into bank.
Jan, 09 Purchased
building and payment made by cheque Rs.500
Jan, 13 Good purchased by cash Rs. 35,000.
Jan, 18 Paid Rs. 7,500 as
Salaries expenses.
Jan, 20 Owner withdraw Rs.
10,000 for personal use.
|
Date |
Particualrs |
Dr. |
Cr. |
|
Jan 02 |
Cash To Capital |
400000 |
400000 |
|
Jan 07 |
Bank To cash |
170000 |
170000 |
|
Jan 09 |
Building To bank |
500 |
500 |
|
Jan 13 |
Inventory To cash |
35000 |
35000 |
|
Jan 18 |
Salaries
expense To cash |
7500 |
7500 |
|
Jan 20 |
Drawings To cash |
10000 |
10000 |
Q. 5 What is General
Journal? Why is it called a Book of Original Entry and Day Book? `
(20)
For accounting purposes, a journal is a physical record or digital
document kept as a book, spreadsheet, or data within accounting software. When
a business transaction is made, a bookkeeper enters the financial transaction
as a journal entry. If the expense or income affects one or more business
accounts, the journal entry will detail that as well.
Journaling is an essential part of objective record-keeping and
allows for concise reviews and records-transfer later in the accounting
process. Journals are often reviewed as part of a trade or audit process, along
with the general ledger.
Typical information that is recorded in a journal includes sales,
expenses, movements of cash, inventory, and debt. It is advised to record this
information as it happens as opposed to later so that the information is
recorded accurately without any guesswork at a later date.
Having an accurate journal is not only important for the success of
a business, by spotting errors and budgeting correctly, but is also imperative
when taxes are filed.
Using Double-Entry Bookkeeping in Journals
Double-entry bookkeeping is the most common form of accounting. It
directly affects the way journals are kept and how journal entries are
recorded. Every business transaction is made up of an exchange between two
accounts.
This means that each journal entry is recorded with two columns.
For example, if a business owner purchases $1,000 worth of inventory with cash,
the bookkeeper records two transactions in a journal entry. The cash account
decreases by $1,000, and the inventory account, which is a current asset,
increases by $1,000.
Using Single-Entry Bookkeeping in Journals
Single-entry bookkeeping is rarely used in accounting and business.
It is the most basic form of accounting and is set up like a checkbook, in that
there is only a single account used for each journal entry. It is a simple
running total of cash inflows and cash outflows.
If, for example, a business owner purchases $1,000 worth of
inventory with cash, the single-entry system records a $1,000 reduction in
cash, with the total ending balance below it. It is possible to separate income
and expenses into two columns so a business can track total income and total
expenses, and not just the aggregate ending balance.
The Journal in Investing and Trading
A journal is also used in the investment finance sector. For an
individual investor or professional manager, a journal is a comprehensive and
detailed record of trades occurring in the investor's own accounts, which is
used for tax, evaluation, and auditing purposes.
Traders use journals to keep a quantifiable chronicle of their
trading performance over time in order to learn from past successes and
failures. Although past performance is not a predictor of future performance, a
trader can use a journal to learn as much as possible from their trading
history, including the emotional elements as to why a trader may have gone
against their chosen strategy.
The journal typically has a record of profitable trades,
unprofitable trades, watch lists, pre- and post-market records, notes on why an
investment was purchased or sold, and so on.
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