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Practice each question, then open the answer or worked solution.
State the three fundamental steps in the accounting process.
The fundamental steps of the accounting process are:
1. Identifying and analyzing business transactions.
2. Recording of business transactions.
3. Classifying and summarizing their effect and communicating the same to the interested users of business information.
Why is the evidence provided by source documents important to accounting?
The importance of source documents in accounting is due to the following reasons:
1. It provides evidence of the transaction that has taken place.
2. It acts as a backup in times of auditing and tax assessment.
3. It acts as primary legal evidence, as journal entries are based on data from source documents.
Should a transaction be first recorded in a journal or ledger? Why?
The practice of recording a transaction in the journal, in the first instance, provides for a complete record of each transaction and also keeps a track of all debits and credits related to each transaction.
Are debits or credits listed first in journal entries? Are debits or credits indented?
Debit gets recorded in the journal first before credit, but both debit and credit are recorded in the journal before being recorded in the ledger. Debit entry is recorded without any margin, indent or spacing. However, for a credit entry, some spacing, margin or indent is essential. The symbol Dr. for debit entry is right aligned.
Why are some accounting systems called double accounting systems?
Accounting systems are called double accounting systems as they have two aspects to each transaction. Every transaction is recorded on the debit and credit sides simultaneously.
Give a specimen of an account.
The specimen of an account can be represented as:
Why are the rules of debit and credit same for both liability and capital?
Liability is towards creditors, while capital is the liability of a business towards its owners. Hence the same rules of debit and credit apply to both liability and capital.
What is the purpose of posting JF numbers that are entered in the journal at the time entries are posted to the accounts?
The number entered in a ledger at the time of posting entries into each account is called JF Number. It determines if transactions are properly posted or not. It is recorded at the time of posting. The purpose of posting JF in the ledger is to locate entries in the journal book and also to ensure that recording has been done in books of original entry.
What entry (debit or credit) would you make to: (a) increase revenue (b) decrease in expense, (c) record drawings (d) record the fresh capital introduced by the owner.
a. Increase in revenue
It will be credited as an increase in revenue increases capital.
b. Decrease in expense
It will be credited.
c. Record drawings
Drawings must be debited as it results in a decrease of capital
d. Record of fresh capital introduced by the owner
An increase in capital will be credited as it increases the liability of the business towards owners.
If a transaction has the effect of decreasing an asset, is the decrease recorded as a debit or as a credit? If the transaction has the effect of decreasing a liability, is the decrease recorded as a debit or as a credit?
Transactions that have a decreasing effect on an asset are always recorded on the credit side, and transactions that have a decreasing effect on the liabilities are recorded on the debit side.