Q1.

“Accounting is ingrained in our society and it is vital to our economic

system.” Do you agree? Explain.

Ans: “Accounting is ingrained in our society and it is vital to our economic system”. In my opinion, I

agree with this point. Virtually every organization and person in our society uses accounting
information. Businesses, investors, creditors, government agencies, and not - for-profit organizations
must use accounting information to operate effectively. Identify and describe the steps in the
accounting process.

Q2. Identify and describe the steps in the accounting process.

Ans: The accounting process is the series of steps followed by the business entity to record the
business financial transactions that include steps for collecting, identifying, classifying, summarizing,
and recording the business transactions in the books of accounts of the company so that the
financial statements of the entity can be prepared. The profits and the business’s financial position
can be known after regular intervals of time. Steps in Accounting Process are

#1 – Identify the Transaction

#2 – Recording of the Transactions in the Journal

#3 – Posting in the Ledger

#4 – Unadjusted Trial Balance

#5 – Adjusting Journal Entries

#6 – Adjusted Trial Balance

#7 – Preparation of Financial Statements

#8 – Closing Entries

#1 – Identify the Transaction

Identifying the business transaction is the initial step in the process of accounting. The business
entity has to identify financial and monetary transactions. Therefore, only those transactions that
are monetary are recorded. Also, the transactions that belong to the business are to be recorded,
and not the owner’s transactions are included in the books of accounts of the business.

#2 – Recording of the Transactions in the Journal

After identifying the transactions, the second step of the accounting process is to create the
Journal entry for every accounting transaction. The point of recording transactions is based on the
policy followed by the entity for accounting, i.e. accrual basis or cash basis of accounting. In the
accrual basis of accounting, the revenues and expenses are recorded in the entity’s books in the
period when they are earned and incurred, respectively, regardless of the actual cash receipt and
payment. However, in the case of cash accounting, the transactions are recorded only when the
actual cash is received/paid. In a dual entry system, every transaction affects at least two
accounts, i.e., one account is debited, and another account is credited. For example, if the
purchases are made in cash, the purchases account will be debited (purchases increase), and the
cash account is credited (cash decreases).

#3 – Posting in the Ledger

After recording the transaction in the Journal, the individual accounts are then posted in the
general ledger. t helps the owner/accountant know each account’s balance individually. For
example, all the debits and credits of the bank account are transferred to the ledger account,
which helps to know the increase and decrease in bank balance during a period. Finally, we can
determine the ending bank balance from it.

#4 – Unadjusted Trial Balance

The company’s trial balance is prepared to check whether the debits are equal to the credits or
not. The trial balance’s main purpose is to identify any errors made during the above process. The
trial balance reflects all the accounts balances at the given time. After the preparation of the trial
balance, it is checked that the total of all credits is equal to the total of all debts, and if the total is
not the same, then an error is to be identified and corrected. There can be other reasons for the
error, but firstly, an accountant tries to locate the error by preparing the trial balance. Also, trial
balance helps to know the balances of all accounts in a summarized form.

#5 – Adjusting Journal Entries

When the accrual basis of accounting is followed, some of the entries are to be made at the end of
the accounting year, such as entries of expenses that may have been incurred but are not booked
in the Journal and entries of some income that may be earned by the business but are not yet
recorded in the books. For example, the interest amount on a fixed deposit is earned each year,
but it is accumulated in the fixed deposit amount. This interest income is to be recorded in the
books of accounts yearly because the interest is earned yearly, no matter the amount will be
received together after the maturity of the fixed deposit.

#6 – Adjusted Trial Balance

After all the adjusting entries are made, again, a trial balance is to be prepared before preparing
the financial statements to check that all the credits are equal to the debits after the adjustment
entries are made.

#7 – Preparation of Financial Statements

After all the above steps are completed, the financial statements of the company are prepared to
know the actual financial position, the profitability position, and the cash flow position of the
business. The statements that are prepared for knowing the above positions are a statement of
profit and loss for knowing the profitability position, the balance sheet for getting the financial
position, and the cash flow statement to know the changes in cash flows from the three activities
of the business (operating, investing and financing activities).

#8 – Closing Entries

Finally, the accounting cycle ends with this step. These entries transfer the temporary account
balances to a permanent account. The temporary accounts are the accounts whose balances end in
a single accounting year, such as sales, purchases, expenses, etc. These balances are first transferred
to the income statement and then to the permanent account, i.e., the profit/loss is transferred to
the retained earnings account. It should be cleared that only temporary accounts are closed, not the
permanent ones (accounts that are balance sheet accounts such as fixed assets, debtors, inventory,
etc.)

After closing entries are made, the trial balance is again prepared to check that the debit equals the
credit, and the accounting cycle starts again with the beginning of another accounting year.

Q3. (a) Who are internal users of accounting data? (b) How does

accounting provide relevant data to these users?

Ans: Internal users of accounting information are managers who plan, organize, and run the
business. These include marketing managers, production supervisors, finance directors, and
company officers.

Managerial accounting provides internal reports to help users make decisions about their
companies. Accounting provides guidelines and standards on how to prepare and present financial
statements or reports. It helps in the preparation and presentation of the balance sheet, cash flow,
and income statements.

Q4. What uses of financial accounting information are made by

(a) investors and (b) creditors?

Ans: Investors use accounting information to decide whether to buy, hold, or sell ownership shares
of a company.

Creditors use accounting information to evaluate the risks of granting credit or lending money.

Financial accounting provides economic and financial information for investors, creditors and other
external users. The information needs of external users vary considerably. Equity investors use
financial information to predict future earnings and cash flows in their efforts to identify securities
that will provide high returns. Creditors use financial information to predict whether companies can
generate enough cash in the future to cover debt payments.

5. “Bookkeeping and accounting are the same.” Do you agree?

Explain.
Ans: Disagree.

The accounting process includes the bookkeeping function. Bookkeeping usually involves only the
recordings of economic events. It is therefore just one part of the accounting process. In total,
accounting involves that entire process of identifying, recording, and communicating economic
events. Bookkeeping focuses on documenting financial transactions and is more transactional and
administrative. Accounting is more subjective, providing firm conclusions based on financial facts.

6. Benton Travel Agency purchased land for $90,000 cash on

December 10, 2020. At December 31, 2020, the land’s value has

increased to $92,000. What amount should be reported for land on

Benton’s balance sheet at December 31, 2020? Explain.

Ans: $90,000

7. What is the monetary unit assumption?

Ans: The Monetary unit assumption requires that companies include in the accounting records only
transaction data that can be expressed in money terms. This assumption enables accounting to
quantify economic events. The monetary unit assumption is vital to applying the historical cost
principle.

This prevents the inclusion of some relevant information in the accounting records.

8. What is the economic entity assumption?

Ans: An economic entity may be a company, a governmental unit, a school district. The economic
entity assumption requires that the activities of the entity be kept separate and district from the
activities of its owner and all other economic entities

9. What are the three basic forms of business organizations for profit oriented

enterprises?

Ans: The 3 Most Common Business Structures

When you’re starting a new business, you’ll need to decide how it will be structured. There are three
common types of businesses—sole proprietorship, partnership, and corporation—and each comes
with its own set of advantages and disadvantages.

Here’s a rundown of what you need to know about each one.

Sole Proprietorship

In a sole proprietorship, you’re the sole owner of the business. This type of business is straight-
forward and easy to launch and there may be fewer administrative requirements compared to a
partnership or corporation.

One of the most significant disadvantages of a sole proprietorship is unlimited personal liability,
meaning you are fully responsible for any and all debts and obligations of the business. Creditors can
make a claim against any assets in your name—your home, vehicle, investments—and family
members could also be liable.

Keep in mind the weight of the company will rest on your shoulders alone, and there could be a lack
of continuity for your business if you’re unavailable. It’s also worth noting that it can be difficult to
raise capital on your own (but not impossible).

Partnership

A partnership is a non-incorporated business created between two or more people. It’s fairly easy
and inexpensive to form this type of business and start-up costs are usually split equally between
partners. A legal agreement should be drawn up to outline how profits will be shared.

Similarly, there’s no legal separation between you and your business. Your personal liability is
unlimited, but you’re also financially responsible for any business decisions your partner makes—so
if a contract is broken or debts are incurred without your knowledge, you’re still on the hook
financially.

While you’ll have a partner (or partners) to help you manage the business, it can be challenging to
find the right person or people to work with, and conflicts could create problems for the business.
But if the partnership is right, your business could flourish!

Corporation

A corporation is a legal entity separate from its shareholders. Corporations offer flexible structure
and an ability to divide ownership with shares, but that makes them more complex, so it’s always a
good idea to speak with a lawyer before incorporating. This type of business may also more
expensive to set up than others.
Your business can be incorporated at the provincial/territorial or federal level, but either way,
corporations are closely regulated. You’ll need to keep extensive records and file documentation
annually with the government.

It’s worth noting that conflicts can occur between shareholders and directors, which could impact
the business and your involvement in it.

For what to do after you decide on a business structure, read about what else you need to do before
you can register your business.

10. Helen Rupp is the owner of a successful printing shop. Recently,

her business has been increasing, and Helen has been thinking about

changing the organization of her business from a proprietorship to a

corporation. Discuss some of the advantages Helen would enjoy if

she was to incorporate her business.

Ans:

11. What is the basic accounting equation?

Ans: We can express the relationship between assets, liabilities, and owner's equity as an
equation, as shown below

Assets = LIabilities = Owner's Equity

This relationship is the basic accounting equation

12. a. Define the terms assets, liabilities, and owner’s equity.

b. What items affect owner’s equity?

Ans: Assets

The business users its assets in carrying out such activities as production and sales. The common
characteristic possessed by all assets is the capacity to provide future services or benefits. Assets are
showed on a company's balance sheet, and they are increasing the value of a firm or benefit the
firm's operations.

Liabilities

Liabilities are claims against assets that is, existing debts and obligations

Owner's Equity

The ownership claim on total assets is owner's equity. It is equal to total assets minus total liabilities.
Items affected Owner's equity.

There are two items effect owners’ equity

Revenue: Revenues are the gross increase in owner's equity resulting from business activities
entered into for the purpose of earning income.

Expenses: Expenses are the cost of assets consumed or services used in the process of earning
revenue. Expenses decreased the owner's equity that result from operating the business.

13. Which of the following items are liabilities of Siebers Jewelry

Stores?

a. Cash.

b. Accounts payable.

c. Owner’s drawings.

d. Accounts receivable.

e. Supplies.

f. Equipment.

g. Salaries and wages payable.

h. Service revenue.

i. Rent expense.

14. Can a business enter into a transaction in which only the left side

of the basic accounting equation is affected? If so, give an example.

15. Are the following events recorded in the accounting records? Explain

your answer in each case.

a. The owner of the company dies.

b. Supplies are purchased on account. c. An employee is fi red.

d. The owner of the business withdraws cash from the business

for personal use.

16. Indicate how the following business transactions affect the basic

accounting equation.

a. Paid cash for janitorial services.

b. Purchased equipment for cash.

c. Invested cash in the business.

d. Paid accounts payable in full.

17. Listed below are some items found in the financial statements of

Tony Gruber Co. Indicate in which financial statement(s) the following

items would appear.

a. Service revenue.

b. Equipment.

c. Advertising expense.

d. Accounts receivable.

e. Owner’s capital.

f. Salaries and wages payable.

18. In February 2020, Ola Gott invested an additional $12,000 in her

business, Gott’s Pharmacy, which is organized as a proprietorship.

Gott’s accountant, Sal Costa, recorded this receipt as an increase in

cash and revenues. Is this treatment appropriate? Why or why not?

19. “A company’s net income appears directly on the income statement

and the owner’s equity statement, and it is included indirectly in

the company’s balance sheet.” Do you agree? Explain.

20. Bayler Enterprises had a capital balance of $186,000 at the beginning

of the period. At the end of the accounting period, the capital

balance was $189,000.

a. Assuming no additional investment or withdrawals during the

period, what is the net income for the period?

b. Assuming an additional investment of $13,000 but no withdrawals

during the period, what is the net income for the period?

21. Summarized operations for Bayles Co. for the month of July are

as follows.

Revenues recognized: for cash $20,000; on account $70,000.

Expenses incurred: for cash $26,000; on account $40,000.

Indicate for Bayles Co. (a) the total revenues, (b) the total expenses, and

(c) net income for the month of July.

22. The basic accounting equation is Assets = Liabilities + Owner’s

equity. Replacing the words in that equation with dollar amounts,

what is Apple’s accounting equation at September 26, 2015? (Hint:

Owner’s equity is equivalent to shareholders’ equity.)