Questions

Explain the differences between the three trial balances used in the accounting cycle and why it is important to prepare all three. (3 marks)

(1) The purpose of the unadjusted trial balance is to prove that the ledger is mathematically accurate. It is used primarily when scrutinizing account balances to decide which accounts need adjustments at the end of the accounting cycle. (2) The purpose of the adjusted trial balance is also to prove that the ledger is mathematically accurate following the posting of adjusting journal entries. The adjusted trial balance is then used to prepare all of the financial statements at the end of the accounting cycle. (3) Finally, the purpose of the post-closing trial balance is to prove the equality of the permanent account balances that are carried forward to the next accounting period. The post-closing trial balance provides evidence that the closing entries have been prepared and posted properly to the accounts and it also shows that the accounting equation is in balance at the end of the accounting period and the beginning of the next accounting

What are current assets and current liabilities and explain how they are different from non-current assets and non-current liabilities. (4 marks)

Current assets are normally cash and other assets that will be converted to cash, sold, or used up within one year from the balance sheet date. Current liabilities are obligations that are expected to be settled within one year from the balance sheet date or in the company's operating cycle. On the other hand, non-current assets are assets that will not be converted to cash, sold, or used by the business within one year of the balance sheet date or within its operating cycle. Basically that means that non-current assets are everything not classified as a current asset. Non-current liabilities are obligations that are expected to be paid after one year or longer.

Amber Rose (TRAP QUEEN SHAWTY BAE) believes that accounting would be more efficient if transactions were recorded directly in the ledger accounts. Explain to Amber the advantages of first recording transactions in the journal and then posting them to the ledger. (4 marks)

Debits and credits could be recorded directly in the ledger; however, this is not the recommended practice. The advantages of using the journal are: 1. It discloses in one place the complete effect of a transaction. 2. It provides a chronological record of all transactions. 3. It helps to prevent or locate errors, because the debit and credit amounts for each entry can be readily compared. The advantage of the last step in the posting process is to indicate that the item has been posted, and to provide a cross-reference.

Andre is puzzled as he reads the Reitmans' financial statements. He notices that the numbers have all been rounded to the nearest thousand. He thought financial statements were supposed to be accurate and he is now wondering what happened to the rest of the money. Respond to Andre's concerns. ( 3 marks)

It is likely that the use of rounded figures would not change the decisions made by the users of the financial statements. As well, presenting the information in this manner make the statements easier to read and analyze, thereby increasing their usefulness to the users.

Paul Dumas withdrew $10,000 from his business, Dumas Pharmacy, which is organized as a proprietorship. Dumas' accountant recorded this withdrawal as an increase in an expense and a decrease in cash. Is this treatment correct? Why or why not? (4 marks)

No, this treatment is not proper. While the transaction does involve a disbursement of cash, it does not represent an expense. Expenses are decreases in owner's equity resulting from business activities entered into for the purpose of earning profit. This transaction is a withdrawal of capital from the business by the owner and should be recorded as a decrease in both cash and owner's equity.

"Depreciation is a process of valuation that results in the reporting of the fair value of the asset." Do you agree? Explain. (2 marks)

No. Depreciation is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner. Depreciation results in the presentation of the carrying amount of the asset, not its fair value.

The name Prepaid Expense suggests that this account is an expense and belongs on an income statement. Instead the account appears on the balance sheet as an asset. Explain why this is appropriate and why prepaid expenses may need to be adjusted at the end of each period. (3 marks)

Prepaid expenses are costs paid before they are used or consumed. For example, rent or insurance is often paid in advance. Prepaid expenses need to be adjusted at the end of each accounting period to reflect the fact that part of the asset has been used up or consumed.

Roger is a business student at a college. He forgot to keep track of how much of school supplies he used during the semester. Explain to Roger how he can still determine his supply expense for the semester even though he didn't keep detailed records of what he used. (2 marks)

Roger can determine his supply expense for the semester by adding the amount of supplies he had at the beginning of the semester to the amount of supplies he purchased during the semester (asset). At the end of the semester, the remaining supplies are counted. The difference between the remaining supplies and the total of supplies on hand at the beginning of the semester and supplies purchased, gives the supplies used during the semester. The amount used is his supplies expense.

Does it matter in what order the accounts are listed on a trial balance? Explain. (4 marks)

Since accounts are given an account number in the chart of accounts, the trial balance is prepared in numerical order. Accounts are generally listed and assigned account numbers in the chart of accounts using the following numerical sequence: assets, liabilities, owner's equity, drawings, revenues and lastly expenses. This convention makes is easy for anyone to find an account either in the chart of accounts or in a trial balance.

Why do we credit the contra asset account Accumulated Depreciation - Equipment when recording depreciation instead of crediting Equipment? How is it presented in the financial statements? (2 marks)

The Accumulated Depreciation contra asset account is used in order to show both the original cost of an asset and the portion of the cost that has been allocated to expense to date. The Accumulated Depreciation account is offset (deducted) against the related asset account on the balance sheet in order to show the asset`s carrying amount.

What is the purpose of using an income summary account and what would happen if an income summary account was not used? ( 2 marks)

The Income Summary account is used to avoid having a lot of detailed entries on the permanent owner's capital account. The summary data posted to the Income Summary account are the totals of revenue and expense accounts. If an Income Summary account was not used, the owner's capital account would be credited when closing the individual revenue accounts and it would be debited when closing the individual expense accounts.

A company receives cash from a customer. List three different accounts that could be credited and the circumstances under which each of these accounts would be credited. (3 marks)

The accounts that could be credited are Revenue, Accounts Receivable and Unearned Revenue. Revenue would be credited for a cash sale. Accounts Receivable would be credited when a customer makes a payment on account for revenue that was previously earned and recorded. Unearned Revenue would be credited when a customer pays in advance.

Your friend, Amal, can never remember which accounts belong on the balance sheet and which belong on the income statement. Provide Amal with an explanation that will help her remember what to do. (3 marks)

The balance sheet depicts the accounting equation and so it reports the assets, liabilities and owner's equity of a business at a point in time. The income statement is a summary of the results of the business's operating activities aimed to increase profit. The income statement reports the revenues and the expenses for a period in time.

Jamal Nazari is doing the accounting for a company that has a December 31 year end. He is wondering if the heading on the trial balance should read "Year Ended December 31" or just "December 31", Which one is correct? Explain why. (2 marks)

The company should use "December 31" on its trial balance. The trial balance simply shows the balance in the accounts at a specific point in time.

Why is the owner's drawings account not closed with the expense accounts? Why is a separate entry required to close the account? (3 marks)

The drawings account is not closed with the expense accounts because it is not part of profit. Drawings represent the distribution of profit to the owner and are not used to calculated profit. Drawings are reported on the statement of owner's equity, not the income statement. The drawings account is closed in a separate entry and not with expenses because it is closed to the capital account, not the Income Summary account.

Maureen has just prepared a trial balance for a company and found that the total debits were $450 higher than the total credits. Assuming that the account balances in the ledger are correct, give Maureen three examples of things that she might have done incorrectly when preparing the trial balance. (3 marks)

The following are three types of errors that could cause the trial balance to not balance, in spite of the fact that the ledger accounts have correct balances. 1. When transcribing amounts from the ledger to the trial balance, an account balance was recorded at an incorrect amount or omitted. 2. Balances in the trial balance did not appear in the correct column. 3. The addition of the trial balance columns was not done correctly.

Wayne thinks that all events must be recorded in the accounting records. He argues that, if they aren't recognized, the records will be incomplete. Explain to Wayne why he is incorrect and provide him with two examples of events that are not recorded.(5 marks)

Wayne is incorrect. Not all events are transactions recognized in the accounting records. Only events that cause changes in assets, liabilities, or owner's equity and can be reliably measured in monetary terms should be recorded. For example, a business might sign a lease for a store. Although this event obligates the business for the payment of rent in the future, it is not yet a transaction as no assets have been exchanged by the business and its landlord. Another example is when an employee is hired. No transaction has occurred, and nothing will be recorded until the employee has started working and earning wages.

Can a business have a transaction in which only the left (asset) side of the accounting equation is affected? If yes, give an example. (4 marks)

Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset, such as when equipment is purchased for cash (resulting in an increase in the equipment account which is offset by a decrease in the cash account).