Understanding Bookkeeping

Answer to Accounting Test Question No. 1: 

1-D ;  2-D;  3-B;   4-D;   5-A;    6-C;   7-A;   8-C;  9-B;  10- C

11-D;  12-B;  13-D;  14-A;  15- A.

  Answer to Accounting Test Question No.2: 

1. FALSE;  2. TRUE;  3. FALSE;   4. FALSE;  5. FALSE;  6. FALSE;  7. TRUE

8. TRUE;  9. FALSE;   10.TRUE;  11.TRUE;  12. TRUE;  13 FALSE

Accounting Test Question No 1:PLEASE INDICATE THE CORRECT ANSWER:

1.     The accounting process involves all of the following EXCEPT:

         a. Analyzing and interpreting financial reports

b. Communicating financial information to users by preparing financial reports

c. Identifying economic transactions that are relevant to the business

d. Recording non-transaction economic events.

e. Recording transaction of economic events.

2.    Which of the following is an internal user of accounting for a company:

         a. Creditor

b. Customer

c. Investor

d. Production manager

e. Inland Revenue

3.      One of the following statements about users of accounting information is incorrect. The incorrect statement is:

         a. debtors are external users

b. investor is an internal user

c. management is an internal user

d. present creditors are external users

e. regulatory authorities are external users

4.    Which of the following statements about an account is true?

        a. In its simplest form, an account consists of two parts.

b. The left side of an account is the credit or decrease side.

c. There are separate accounts for specific assets and liabilities but only one account for owner’s equity items

d. An account is an individual accounting record of increases and decreases in specific asset, liability, and owner’s equity items.

e. Is an information system that identifies, records and communicates the non-economic events of an organization to interested users.

5.    A qualitative characteristics of accounting information do not include:

        a. accuracy

b. comparability

c. consistency

d. relevancy

e. reliability

6.      A credit may signify the following EXCEPT:

         a. An increase in a liability account

b. A decrease in cash account

c. An increase in an asset account

d. An increase in the owner’s capital account

7. The type of account with a normal debit balance is

         a. An asset

b. A revenue

c. A liability

d. An owner’s capital account

8. The journal entries to record the payment of account payable by cash is:

         a. Debit cash, credit account payable

b. Debit account receivable, credit account payable

c. Debit account payable, credit account receivable

d. Debit account payable, credit cash

9. One of the entries in recording the payment of note payable account is:

         a. Credit note payable account

b. Debit note payable account

c. Credit owner’s capital account

d. None of the above.

10. Liability, debts owed to outsiders, includes all of the following EXCEPT:

         a. Notes payable

b. Wages payable

c. Account receivables

         d. Account payable

11.   What would be the effect on the basic of accounting equation if Mr A as the owner of the company withdraw cash from the business and use the money to entertain his family members?

         a. Increase assets and decrease owner’s equity

b. Increase owner’s equity and decrease assets

c. The effect whether increase or decrease will be both on asset

d Decrease assets and decrease owner’s equity

12.   Which of the following events are NOT considered as business transaction?

         a. Pay rental in advance $1000

b. Received bank statement which showed debit balance of $12,000

c. Purchase supplies on account $5,000

d Receive invoice from supplier for the purchase of raw materials last week for $3,000

13.  Which of the following would be the best EXPLANATION for ledger?

         a. An accounting record in which transactions are initially recorded in chronological order

b. A list of accounts and their balances at a given time

c. A statement that summarizes the company’s assets and liabilities

d A list of accounts and the account numbers that identify their location in the ledger.

14.   Asset is a

         a. Resource owned by the business entity

b. Debts owned to outsiders

c. The owner’s right to the assets of the business

d None of the above.

15.  Which is the statement that BEST explained owner’s equity statement?

        a. Is a comprehensive statement which detail the causes of equity to increase or decrease since it starts the business

b. Is a statement which details the causes of equity to increase or decrease for certain period of time

c. Is a statement which details the equity planning to be incurred in the future

d Is a comprehensive statement regarding the equity planning in the past, current and future.

Accounting Test Question No 2

TRUE OR FALSE

1. The example of internal accounting user is a bank that has lent money to the business

         True False

2. Three types of businesses that operate for profit are manufacturing, merchandising and service business

          True. False

3. Independence is one of the characteristic of qualitative account information

         True. False

4. Accounting depends on concepts and principles that are independent from particular users

         True. False

5. Debit always increase account balances

        True. False

6. The statement that reports the financial position of the company is called Income Statement

        True. False

7. Financial accounting is governed by Generally Accepted Accounting Principles (GAAP)

         True. False

8. Bring personal asset into business will increase asset and increase owner’s equity

         True. False

9. Unearned revenue is one of the examples for asset account

         True. False

10. An example of liability account is a bank overdraft

         True. False

11. Owner’s equity is decreased by withdrawing made by the owner

           True False

12. The form listing the title and balances of the accounts in the ledger on a given date is the trial balance.

   True False

As bookkeepers, we need to at least understand the following:

ACCOUNTING ASSUMPTIONS:

• Economic Entity concept:- also known as Separate Business Entity Principle where a business is accounted SEPARATELY from other business entities, including its owner. The business records should be separated and distinct from personal records of business owner.
• For example, Mr A is the owner of a limited company XYZ Co. Mr X owned many personal assets like bungalows, exotic cars,etc. Assuming the limited company XYZ Co is being liquidated by the creditors, the personal assets of Mr X will not be touched by the creditors. Due to this business entity principle/concept, only the company is being affected. (more…)

The purpose of closing journal entries is to transfer the balances of ALL TEMPORARY accounts to the owner’s capital account.Temporary accounts are also known as nominal accounts which are all revenue accounts; all expense accounts & owner’s drawing. These nominal or temporary accounts are so called because after they have been used to accumulatedata, the total of these accounts are transferred to permanent accounts showing the chanes in the owner’s equity account for a period of time. This process is called the closing process.

These closing process involve:

• using closing journal entries
• normally done at the end of an accounting period
• these closing entries will make thiese temporary accounts into ZERO balances.

The closing process essentially provide three tasks:

1. closs off all the revenue and expense accounts
2. closs off the drawings account
3. help to draw up the Income Statement since the expense and revenue balances are closed off to the Income Statement. The Income Statement is then closed by transferring the net profit or loss to the owner’s equity account.

The above are represened by the following accounting double entry:-Revenues:

Debit Revenue

Credit Income Summary

Expenses:

Debit :Income Summary

Credit :Expense Account

Income Summary:

Debit :Income Summary

Credit :Owner’s Capital

Owner’s Capital:

Debit :Owner’s Capital

Credit :Income Summary

Drawings:

Debit:Owner’s equity(capital) account

Credit:Owner’s drawing account

However, permanent or real accounts are not close which are:

• all asset accounts
• all liability accounts
• owner’s capital account

An ADJUSTED Trial Balance is prepared after ALL ADJUSTING ENTRIES like prepaid expense, unearned revenue,accrued revenue, accrued expenses have been journalized and posted.

The purpose is to prove the equality of the total debit and credit balances in the ledger after ALL ADJUSTMENTS have been made.

Financial Statements can be prepared directly from the adjusted trial balance

The following steps to prepare a bank reconciliation statement is narrated below:

1. When the bookkeeper received the Bank Statement he has to first check all the entries in the Cash Book for THAT PERIOD against the Bank Statement.
2. All items appearing on BOTH the Cash Book and the Bank Statement will be ticked (check-marked)
3. For items that are not ticked, the bookkeeper needs to know the nature and detail of each item.
4. The bookkeeper needs to WRITE UP the Cash Book by entering those items that are on the Bank Statement but not in the Cash Book. The Cash book is then balanced to get the ADJUSTED Cash Book Balance.
5. With step 1-4 completed, we are ready to prepare a Reconciliation Statement. The bookkeeper can start with Balance as per adjusted Cash Book or Balance as per Bank Statement.

SEE PART 4 FOR A SIMPLE ILLUSTRATION ON PREPARING THE BANK RECONCILIATION STATEMENT.

In Part 1, we discuss the necessity for the reason(s) for doing a Bank Reconciliation statement.

Very often because of timing challenges, we can see the following items that appeared in the Bank Statement but NOT in the Bank Account of the company’s Cash Book:-

Basically, the bank reconciliation statement is to reconcile the timing difference between the Cash Book and the Bank Statement which are as follows:

As the company’s bookkeeper, you are recording the transactions in your company’s bank account in the Cash Book. How do you know that all the entries recorded are accurate and also you have taken up all the appropriate transactions? The answers lie in reconciling all the items in your bank account with a statement given by your bank on a regular basis. The statement given by the bank is called a bank statement which gives details of money drawn out and deposits made by your company. The statement that gives the final answers after reconciling the difference between  the items in the company’s bank account and the items in the bank statement is known as a BANK RECONCILIATION STATEMENT

From the company’s viewpoint:

• whenever a company deposits money in the bank, the Cash Book is debited and vice versa credited when a firm draws out money.

From the bank’s point of view:

• on the bank statement, the entries are the REVERSE of those in the Cash Book. To the company, a deposit at the bank is an asset and it is recorded as a debit in the Cash Book. But to the bank, a deposit by a customer is a liability as it has to make payment to the customer on demand. So the bank will credit any deposit made by a customer in the bank’s books. A withdrawal of money will be debited in the bank’s books.

Let’s recap:

In the event that your trial balance doesn’t balance, go through the following bookkeeping tips/steps in the suggested order to ensure that the error can be detected soonest possible:

1. Find out the exact amount of your error: by how much are you out of balance?
2. Is the error $10,$100 or $1,000? You probably failed to carry when adding or to borrow when subtracting or you may have made a slide error in posting. (more…)

A Trial Balance that balances DOES not necessarily prove that all the transactions have been recorded or that the accounting process is error-free.

Numerous errors or mistakes can exist even though the trial balance totals are in agreement. This can be categorized in two parts namely:

• Errors that CAN BE REVEALED by the Trial Balance and (Part1)

• Errors that CANNOT BE REVEALED by the Trial Balance(Part2)

(more…)