ACC 12 THEORY OF ACCOUNTS CHAPTER 4

CHAPTER 4 ACCOUNTING PROCESS QUESTION 4-1 What are the steps in the accounting cycle? ANSWER 4-1 1. Analyzing the business documents or transactions. This means that the accountant determine the impact of the transactions on the financial position as represented by the basic equation “assets equal liabilities plus equity.” 2. Journalizing – This is the process of recording the transactions in a journal. 3. Posting – Transactions as classified and recorded in the journal are transferred to the appropriate accounts in the general ledger and subsidiary ledger, if appropriate. 4. Preparing the unadjusted trial balance 5. Preparing the adjusting entries 6. Preparing the financial statements 7. Preparing the closing entries 8. Preparing a postclosing trial balance 9. Preparing the reversing entries Actually, the accounting process can be classified into two parts, namely recording phase and summarizing phase. The recording phase includes analyzing the transaction, journalizing and posting. The summarizing phase includes the unadjusted trial balance, adjusting entries, financial statements, closing entries, postclosing trial balance and reversing entries. The postclosing trial balance, reversing entries and worksheet are optional. QUESTION 4-2 What constitute the accounting records of an entity? ANSWER 4-2 1. Business or source documents – These pertain to the original source materials evidencing a transaction. Examples are sales invoices, purchase invoices, official receipts, debit and credit memorandum, check stubs and minutes book. 2. Books of original entry – These pertain to the journals. Aside from the general journal, large entities maintains special journals such as sales journal, purchases journal, cash receipts journal and cash disbursements journal. 3. Books of final entry – These are the ledgers – general ledger and subsidiary ledgers. QUESTION 4-3 What is a journal? ANSWER 4-3 The most fundamental journal is the general journal, often called simply as journal A journal is a chronological record of transactions. A general journal entry consists of the transaction date, the accounts and amounts to be debited, the accounts and amounts to be credited, and a brief explanation of the transaction. A simple journal entry consists of one debit and one credit. A compound journal entry consists of two or more debits or two or more credits. QUESTION 4-4 What are the special journals and explain the nature of the transactions recorded in each type? ANSWER 4-4 Although all transactions could be recorded in a general journal, an entity usually has several special journals in addition to the general journal in order to facilitate the efficient recording of large number of similar transactions. Such special journals and the nature of transaction recorded are: 1. Sales Journal – Only sales of merchandise on credit are recorded. 2. Cash receipts journal – Receipts of cash from any source are recorded. 3. Purchase journal – As a rule, purchase merchandise on credit are recorded. However, sometimes a purchase journal is expanded to record all credit purchases, including merchandise, equipment and supplies. 4. Cash disbursement journal – All payments of cash for any purpose are recorded. It is to be pointed that when an entity uses special journals, it uses the general journal to record all transactions that do not fit into the special journals. For example, the purchase of land by issuing share capital is recorded in the general journal. Moreover, adjusting entries, closing entries and reversing entries are recorded in the general journal. QUESTION 4-5 What is a ledger? ANSWER 4-5 The general ledger, often called simply as the ledger, is a group of accounts. An account is the accounting device used in summarizing the effects of transactions on each asset, liability, equity, revenue and expense. In other words, each account is a record of information about: a. Asset b. Liability c. Equity d. Income e. Expense The accounts used by a particular entity are usually expressed in the form of chart of accounts. A chart of accounts is a listing of all the entity’s general ledger accounts in a systematic form/ QUESTION 4-6 What is a subsidiary ledger? ANSWER 4-6 In addition to a general ledger, most entities maintain subsidiary ledgers. A subsidiary ledger is the device used in storing the details of certain general ledger accounts. The general ledger accounts are actually the controlling or main accounts supported by the details in the subsidiary ledgers. Examples of subsidiary ledgers: 1. A single accounts receivable account is carried in the general ledger, with the individual customers’ accounts recorded in the accounts receivable subsidiary ledger. 2. A single accounts payable account is carried in the general ledger, with the individual creditors’ accounts recorded in the accounts payable subsidiary ledger. 3. Share capital account in the general ledger is supported by individual shareholder’s accounts in a shareholders’ subsidiary ledger. 4. Cash account may be carried in the general ledger supported by individual depository bank accounts in the subsidiary ledger. QUESTION 4-7 Explain the three classes of accounts. ANSWER 4-7 1. Real accounts – represent assets, liabilities and equity. These are also known as permanent accounts because they are carried from one accounting period to another. 2. Nominal accounts – represent revenues and expenses. These are also known as temporary accounts because they are closed at the end of every accounting period. 3. Mixed accounts – represent those with real and nominal element. For example, an entity pays P100,000 one-year insurance premium on July 1, 2011 and the same is originally debited to insurance expense account. The insurance expense account is mixed on December 31, 2011 because it is composed of two elements, namely expired and unexpired. QUESTION 4-8 Distinguish contra accounts from adjunct accounts. ANSWER 4-8 Contra Accounts are offset accounts or accounts which are deducted from the related account. Examples include allowance for doubtful accounts, accumulated depreciation, discount on bonds payable and sales returns and allowances. Adjunct accounts are accounts which are added to the related account. Examples are freight in and premium on bonds payable. QUESTION 4-9 What do you understand by the voucher system? ANSWER 4-9 A voucher system is a system of internal control over all cash disbursements. Under this system, a voucher must be prepared for every cash disbursement that is to be made. Accordingly, a voucher is prepared not only for payment of purchases on account but also for all transactions requiring cash payment, including cash purchases, payment of bank loan, payment of expenses and cash purchase of property, plant and equipment. QUESTION 4-10 What are the elements of a voucher system? Explain fully. ANSWER 4-10 1. Voucher – is the business document or written authorization for every cash disbursement. 2. Voucher register – is the journal where all vouchers are recorded in numerical sequence. The voucher register is similar to an expanded purchases journal and thus, replaces the purchases journal. The proforma entry to record a voucher is debit asset, expense or equipment and credit vouchers payable. 3. Check register – is the journal where all checks issued are payment are recorded. Since the checks are entered in the check register in numerical sequence, this record provides a convenient reference for cash payments. The check register is a modified cash disbursements journal and thus replaces the cash disbursements journal in a voucher system. The proforma entry to record a cash payment in the check register is debit vouchers payable and credit cash in bank. 4. Unpaid vouchers file – After the vouchers are entered in the voucher register, they are filed in an unpaid vouchers file in the order of required date of payment so that the company will not miss discounts. This file serves as the subsidiary for the vouchers payable account. 5. Paid vouchers file – After a voucher is paid, it is removed from the unpaid vouchers file and places in the paid vouchers file. This file is useful in the case of an audit and where a question on payment arises.