MUHASEBE I

Prepaid Expenses. Companies might pay certain expenses in advance, such as insurance and rent. A prepaid expense is considered as an asset because the prepayment provides a future benefit for the business. Prepaid Rent, Prepaid Insurance, and Supplies are examples of prepaid expenses. The correct answer is E.

Notes Receivable. A note receivable is similar to an account receivable, but a note receivable is more formal than Accounts Receivable because the customer signed a formal note. Notes receivable usually includes interest. the correct answer is E.

The most typical liability accounts:

Accounts Payable. The Accounts Payable account is the opposite of Accounts Receivable. A or The company promises to pay a debt in the future. Arises from a credit purchase.

Notes Payable. A note payable is the opposite of a Note Receivable. The Notes Payable account includes the amounts the company must pay because the company signed a written promise to pay a debt amount in the future. Notes payable, like notes receivable, usually involves interest.

Unearned Revenue (Advances from customers). The obligation occurs when a company receives cash from a customer in advance but has not provided the product or service. The company gives promise to provide services or deliver goods in the future.

Accrued Liabilities. An accrued liability is a liability for an expense you have not yet paid. In another words, an amount owed but not paid yet. Interest Payable, Salary Payable, and Income Tax Payable are typical accrued liability accounts for most companies.

The correct answer is D.

Posting is the procedure of transferring journal entries to the ledger accounts. The correct answer is D.

Assets, distributions, and expenses increase by debiting (on left side) and normally show debit balance. The correct answer is C.

Liabilities, contributions, and revenues increase by crediting (on right side) and normally show credit balance. The correct answer is C.

Dr./Cr. Rules for Assets: Assets increase on left side by debiting while decrease on right side by crediting and normally show debit balance.

Dr./Cr. Rules for Liabilities: Liabilities increase on right side by crediting while decrease on left side by debiting and normally show credit balance.

Dr./Cr. Rules for Contributions (Owner’s capital): Contributions increase on right side by crediting while decrease on left side by debiting and normally show credit balance.

Dr./Cr. Rules for Distributions (Owner’s withdrawals): Distributions increase on left side by debiting while decrease on right side by crediting and normally show debit balance.

Dr./Cr. Rules for Revenues: Revenues increase on right side by crediting while decrease on left side by debiting and normally show credit balance.

Dr./Cr. Rules for Expenses: Expenses increase on left side by debiting while decrease on right side by crediting and normally show debit balance.

The correct answer is B.

Dr./Cr. Rules for Assets: Assets increase on left side by debiting while decrease on right side by crediting and normally show debit balance.

Dr./Cr. Rules for Liabilities: Liabilities increase on right side by crediting while decrease on left side by debiting and normally show credit balance.

Dr./Cr. Rules for Contributions (Owner’s capital): Contributions increase on right side by crediting while decrease on left side by debiting and normally show credit balance.

Dr./Cr. Rules for Distributions (Owner’s withdrawals): Distributions increase on left side by debiting while decrease on right side by crediting and normally show debit balance.

Dr./Cr. Rules for Revenues: Revenues increase on right side by crediting while decrease on left side by debiting and normally show credit balance.

Dr./Cr. Rules for Expenses: Expenses increase on left side by debiting while decrease on right side by crediting and normally show debit balance.

The correct answer is A.

Dr./Cr. Rules for Distributions (Owner’s withdrawals): Distributions increase on left side by debiting while decrease on right side by crediting and normally show debit balance. The correct answer is A.

Companies might sell their goods and services on account and receives a promise for future collection of cash. The Accounts Receivable account holds a customer’s promise to pay in the future for services or goods sold on account. Arises from a credit sale. The company collects cash from the customer sometime after the sale. The correct answer is A.

Assets are economic resources that provide a future benefit for a business –something the business
owns. Most firms use the following asset accounts:
• Cash 
• Accounts Receivable

• Notes Receivable
• Prepaid Expenses. 
• Land 
• Buildings
• Equipment, Furniture, and Fixtures.

This section describes typical owner’s equity accounts. The owner’s claims to the assets of the business is called owners’ equity. A company has separate accounts for each element of owner’s equity. Remember the extended version of accounting equation!
• Owner,Capital. Owner’s Capital account represents the net contribution of the owner in the business.
• Owner, Withdrawals. The amounts taken out of the business by the owner appear in a separate account titled Withdrawals, or Drawing.
• Revenues. The company will receive assets (for example, cash) in exchange for goods sold and services rendered. 
• Expenses. Expenses use up assets or create liabilities in the course of operating a business. The cost of operating a business is called expense

A chart of accounts is a created list of the account names used by an organization to define each class of items. A chart of accounts is used to organize a company’s accounts. Chart of accounts is simply a list of account names that a company uses in its general ledger for recording various business transactions. It provides guidance to accountants or other relevant persons in using specific account names while recording transactions.

Any entry made on the left side of the account is a debit (abbreviated Dr.), and any entry made on the right side is a credit (abbreviated Cr.). These terms are used to describe the place of entries in recording process not for “increase” or “decrease”. For example, entering an amount on the left side of an account is called debiting while crediting refers to the act of making an entry on the right side of an account. Also, if the sum of the left side exceeds the sum of the right side of an account, a debit balance occurs. other words, debit balance shows the difference between total amounts of the left and the right side where debit amount exceeds the credits. In reverse situation, when the credit amount exceeds the debits, credit balance occurs. Credit balance shows the difference between total amounts of the right and the left side where credit amount exceeds the debits.

The accounting equation provides the analytical framework that we use throughout this book to understand the effects of transactions and events on the financial statements. This equation requires that a company’s assets exactly balance, or offset, an equal amount of financing provided by creditors and owners of the corporation. Each transaction must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, one or more accounts must be debited, or entered on the left side of the account, and one or more accounts must be credited, or entered on the right side of the account, and the total monetary amount of the debits must equal the total dollar amount of the credits. The equality of debits and credits provides the basis for the double-entry system of recording transactions. Under double-entry system, debit and credit procedure is used to keep the accounting equation in balance by using appropriate accounts instead of using plus and minus procedure.

Date column includes the dates of transactions. Note that transactions are recorded in chronological order. The titles of the accounts used in the recording and the explanations of each transaction are shown in the next column. References of each account are mentioned. Debit and credit amounts for each account are entered. This is called journalizing. The followings are the items which could be seen in a journal entry:
1. The date of transaction.
2. The debit account title (it shows an increase in assets in this journal entry). Note that, debit accounts are entered first at the left margin of the column.
3. The credit account title (it shows an increase in owner’s equity in this journal entry). Note that, credit accounts are entered on the next line and right margin of the column.
4. Explanation of the transaction.
5. Numerical identifications of the accounts which are used later in posting.
6. Debit amount.
7. Credit amount.

The journalizing and posting process has five steps:
Step 1: Identify the accounts and the account types (asset, liability, or equity).
Step 2: Decide whether each account increases or decreases and then apply the rules of debits and credits.
Step 3: Record the transaction in the journal.
Step 4: Post the journal entry to the ledger.
Step 5: Determine whether the accounting equation is in balance

A trial balance is a list of accounts and their balances at a given time. The trial balance proves the mathematical equality of debits and credits after posting. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting.The trial balance does not prove that the company has recorded all transactions correct. There may be errors in classification or measurement even the equality is provided. It indicates only that the debits and
the credits are equal.

In addition to proving the equality of debits and credits, the trial balance is also used to prepare the financial statements. The trial balance is normally prepared at the end of every accounting period and is the basis for preparation of financial statements. The income statement is prepared using the revenue and expense accounts from the trial balance. The net income relates to the increase (or in the case of a net loss, the decrease) in owner’s equity.

Businesses will have a lot of financial transactions with customers, suppliers, creditors, employees, tax authorities, governmental agencies, and others. Financial transactions are economic events that affect a company’s financial position. Therefore, you need to understand both the recording of transactions and combining of those transaction records to prepare financial statements