Bookkeeping Basics Part 10

John owns a small bakery and also has a personal investment portfolio. He uses his personal bank account for both his business and personal transactions. He also has a separate bank account for his personal investment income and expenses. How should John apply the Economic Entity Assumption to his accounting records?

According to the Economic Entity Assumption, John should keep his business transactions separate from his personal transactions and from any other entities he is involved in. This way, he can clearly see how well his bakery is doing, how much money he is making or losing from his investments, and how much money he has available for his personal use. If he mixes his transactions in one or two bank accounts, he will not be able to track the performance of each entity accurately, and he may also violate tax laws or accounting standards

Put the steps of the accounting cycle in the order they are completed.

Accounting cycle steps: 1. Collect and analyze transactions 2. Record and post transactions 3. Prepare unadjusted balance 4. Prepare adjusting entries 5. Prepare adjusted trial balance 6. Prepare financial statements

You're a bookkeeper for a small restaurant that uses accrual accounting to record the financial transactions of the business. In June, you recorded all the transactions in the journal and posted them to the ledger. However, you realized that some adjustments are needed to reflect the correct financial position of the business. For example, you need to record the depreciation expense of the kitchen equipment, the accrued wages of the staff, and the prepaid rent for July. Question: How would you post adjusting journal entries?

Adjusting journal entries, which are entries that update previously recorded journal entries, ensures that the financial statements only have up-to-date and relevant information. Adjusting journal entries should not be done in bulk, and they should not alter or delete the original transactions. Instead, they should be created as separate journal entries and posted to the ledger in reference to the original transactions. This way, the bookkeeper can keep track of what adjustments were made and why.

What is a debit in accounting?

An increase in an asset or a decrease in a liability or equity.

Anything a business owns of value, or a resource of value, that has the potential to be transformed into cash.

Asset

Which type of account is accounts receivable?

Assets

The financial statement that reports a business's assets, liabilities, and equity at a specific point in time.

Balance sheet

Other than the transaction journal, what is another place that we can view the individual transactions that Craig has made?

General ledger

Samantha, a bookkeeper for a small business, discovers a significant financial discrepancy in the company's records. After careful investigation, she realizes that the error was made by her colleague, Mark, who is also responsible for maintaining the books. Samantha is conflicted about what to do next. What should Samantha do to uphold bookkeeper ethics?

Part of the Bookkeepers oath is to act with integrity and honesty. This includes reporting financial data in an accurate and timely manner, acknowledging mistakes and doing everything you can to fix mistakes when they are discovered. Samantha has discovered a significant financial discrepancy that could potentially harm the company. By reporting the discrepancy, Samantha is taking the appropriate course of action to address the issue and uphold bookkeeper ethics.

What is the second step in the accounting cycle?

Recording and posting journal entries is the second step in the accounting cycle, as it involves documenting the financial transactions of a business in chronological order. A journal entry consists of a debit and a credit entry that reflect the double-entry accounting system. A journal entry shows the accounts and amounts that are affected by a transaction. The other steps are performed after recording journal entries.

Income earned through business, gross proceeds or sales.

Revenue

The report covering the sources and uses of cash by a business.

Statement of cashflows

What is the purpose of step 6 of the accounting cycle, which is to prepare the financial statements?

Step 6 of the accounting cycle is to prepare the financial statements, which are how a business communicates or publishes its financial performance and position. These statements provide useful information to external users, such as investors, creditors, customers, suppliers, regulators, and tax authorities. CONTINUE

A U.S. corporation operating in several countries prepares its financial statements in U.S. dollars, using the monetary unit assumption accounting principle. What does this mean?

That only transactions or events that can be measured in monetary terms are recorded in the financial statements. The monetary unit assumption assumes that the currency unit is constant and does not change in purchasing power over time, so a company can record its transactions in terms of money without adjusting for inflation or deflation.

Emily, a bookkeeper for a small business, is reviewing the financial records of the company. She notices that there is an increase in Accounts Payable, a liability account, from recording a utility bill. Which of the following statements accurately explains the impact of this increase on the accounting equation?

The increase in liabilities will decrease the owner's equity. The accounting equation, which is Assets = Liabilities + Owner's Equity, helps maintain balance in financial records. In this scenario, an increase in liabilities means that the business owes more to external parties, such as loans or debts. As a result, the owner's equity, which represents the residual interest in the business, decreases from the expense of the utilities, which lowers Net Income and therefore owner's equity.

What is the main purpose of the adjusting process in accounting?

The main purpose of the adjusting process in accounting is: • To record changes in the liabilities and assets of a business that occur as a result of time or business activity. • To record transactions that have not been entered in the accounting records during the accounting period. • To correct errors and misstatements in financial statements that can result from inaccurate records or faulty assumptions.

Which section will the credit card transaction be shown on the balance sheet?

Total liabilities

You're the owner of a small landscaping business that provides lawn care services to residential customers. You charge $100 per service, and you usually get paid at the end of each month. In June, you provided 1 service each to 10 different customers, but only 8 of them paid you by June 30. The other 2 customers paid you on July 5.

Under accrual accounting, revenue is recognized when it is earned, regardless of when cash is received. Therefore, you would report $1,000 as revenue for June since you provided 10 services at $100 each. Under cash-basis accounting, revenue is recognized only when cash is received. Therefore, you would report only $800 as revenue for June since you received payment from 8 customers at $100 each. The payment from the other 2 customers would be reported as revenue in July under cash-basis accounting.

The Reliability Assumption

A company must have proof of what it records in its financial statements.

The Conservatism Assumption

A company must record its assets and revenues at the lowest possible value and its liabilities and expenses at the highest possible value.

When Craig sells mulch, the sales revenue appears as credit on his business's books. What does this mean?

A credit is a decrease in assets or expenses or an increase in liabilities, owner's equity or revenue.

When Craig, the owner of a landscaping business, buys equipment, the purchase appears as a debit on his business's balance sheet. What does this mean?

A debit is an increase in assets or expenses or a decrease in liabilities, owner's equity or revenue.

What is a credit in accounting?

A decrease in assets or expenses or an increase in liabilities, owner's equity or revenue.

Which of the following events would most likely cause an auditor to issue a negative going concern opinion for a company?

A high debt-to-equity ratio indicates that the company is heavily reliant on debt financing and may have difficulty meeting its repayments. This could jeopardize the company's ability to continue its operations in the long term.

What is an asset in accounting?

A resource with economic value that a business owns or controls.

The list of all of the accounts and sub-accounts used to categorize transactions.

Chart of accounts

Craig considers the investment in the business he owns as equity. What does this mean?

Equity is an owner's stake in the company, how much the owner has invested into the business or withdrawn from the business over time.

Costs associated with the action of running a business.

Expenses

You're a bookkeeper for a small bakery. You use a double-entry accounting system to record the financial transactions of the bakery. On June 1, you received a $500 cash advance from a customer for a large cake order that will be delivered on June 15. You issued a receipt to the customer and deposited the cash in the bank. Question: How would you record this transaction in the double-entry accounting system?

In the double-entry accounting system, every transaction has equal and opposite effects in at least two different accounts. A debit increases an asset account or decreases a liability or equity account, while a credit decreases an asset account or increases a liability or equity account. In this case, receiving cash from the customer increases the asset account Cash, so it is debited by $500. However, since the bakery has not delivered the cake yet, it has not earned the revenue, so it increases the liability account Unearned Revenue, which is credited by $500. This transaction keeps the accounting equation in balance: Assets = Liabilities + Equity.

The report that shows a business's revenues and expenses during a particular period.

Income statement

Money a business owes to others.

Liability

You're a bookkeeper for a small law firm that provides legal services to clients on a monthly retainer basis. You use accrual accounting to record the financial transactions of the firm. In June, you billed 10 clients for a total of $20,000, but only 8 of them paid you by June 30. The other 2 clients paid $2,000 each on July 10. You also incurred $5,000 in expenses for rent, utilities, and supplies in June, which you paid on June 30. Question: How would you report your revenue and expenses for June under the matching principle?

Under the matching principle, revenue and expenses should be recognized in the same period as when they are earned and incurred, regardless of when cash is received or paid. Therefore, you would report $20,000 as revenue for June since you bill 10 clients for the legal services you provided in that month. You would also report $5,000 as expenses for June since you incurred them for the rent, utilities, and supplies you used in that month.

Which section includes the account for the credit card purchases for the period?

Which section includes the account for the credit card purchases for the period?