Introduction:
At its core, accounting might seem like a maze of numbers and technical jargon, but it's really the language of business. Understanding the basics of accounting can be incredibly empowering. This sets of questions breaks down essential accounting principles and practices. This might help you understand the outline of accounting with sample exercises.
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Which two principles determine the profit and loss of each accounting period?
In accrual-based accounting, two key principles govern the profit and loss for each accounting period: revenue recognition principles and matching principles. Revenue recognition principles dictate that revenues are reported in the financial performance statement during the period they are accrued or earned. In contrast, matching principles ensure that revenues and their corresponding expenses are recognized in the same period. This means that expenses are acknowledged alongside the income or revenues they pertain to, allowing for an accurate determination of profit or loss on the income statement for that period.
Accounting Procedure in an Accounting Cycle
- Journalizing- To analyze and record the business in the journals.
- Posting Transaction to the Ledger- To post all the transactions recorded in the journal books in each ledger account
- Making of Unadjusted Trial Balance- To determine whether any errors were encountered either in the debit or credit side that you post in the ledger.
- Analyzing Adjustment Data- To assemble data that normally required adjustments.
- Preparing Worksheet (Optional)- To show the flow of accounting data information between the unadjusted trial balance and financial statements.
- Journalizing and Posting Adjusting Entries (Adjustments)- To journalize and post adjusting entries that you get in Step 4
- Preparing an Adjusted Trial Balance- To confirm if the total debit and credit are equal.
- Preparing the Financial Statements- To present data needed by the users in order to make their economic decisions.
What errors can be found in the accounting worksheet?
- Errors occur in Trial Balance
- Columns that are added incorrectly.
- Amount on the trial balance that is entered incorrectly.
- Balances that you’ve entered are omitted or in the wrong column.
- Errors occur in Account Balance
- Balance that is computed incorrectly.
- Balance that that you’ve entered are omitted or in the wrong column.
- Errors occur during Posting
- Posting a wrong amount
- Credit mistakenly posted as debit or vice versa.
- Omission of debit or credit posting.
Transposition and slides are common types of errors that can be seen in worksheets. Transposition occurs when the digit orders are accidentally reversed while slides occur when the entire number is mistakenly added to a space either right or left such as displacement of a decimal point.
Errors may be discovered in various ways: 1.) Through audit procedures 2.) by looking at the trial balance, or 3.) by chance.
What is the "full disclosure principle"? And give your opinion on its importance?
According to GAAP, Principles of Full Disclosure (Full Disclosure Principles) states that all information should be included in an entity’s financial statements that would affect a reader’s understanding of those statements.
Disclosing information in financial statements is crucial, as it enhances their reliability and ensures a faithful representation. Financial statements serve as valuable tools for external users, such as investors, enabling them to make informed decisions about future actions, such as whether to invest or sell their stocks.
Describe the function of financial statements in your own opinion?
A financial statement is made because it provides reliable information, especially in financial aspects that are helpful to users both internal and external in making their economic decisions. It also shows the output of the performances on management.
What limitations exist in the analysis of financial statements?
They do not provide all information, are not designed to show the value of an entity but only an estimated value, cannot accommodate every specific request for information, and are based on judgment rather than exact data.
Explain the cost incurred by the manufacturing industry in the operation process according to the location where the cost occurred?
There are three types of manufacturing cost- direct material cost, direct labor cost, and factory overhead/manufacturing overhead/factory burden. Direct materials are the cost of any material that is significant in the manufacturing process. Direct labor is the salaries and wages of each employee who is responsible for converting material into its final product. Factory burden costs are costs other than direct materials and direct labor that are involved in the manufacturing process usually they are insignificant in nature.
Accounting Exercises
1. A freight company was established on 6/1. Please make a trial accounting entry for the following transactions:
6/1 A invests $5,000,000 in cash to establish A freight company as a sole proprietorship.
6/5 Purchase a truck with $500,000 on credit from Auto Company B , and agree to pay within 20 days.
6/15 Delivered to Taichung for Company C and received $15,000 in cash for shipping .
6/25 Pay the car payment of $500,000 to B Motor Company in bills ( 3 months, 3% interest rate ).
Journal Entries
6/1 Cash 5,000,000
A, Capital 5,000,000
To record A’s cash investment
6/5 Truck 500,000
Accounts Payable 500,000
To record purchase of Truck on credit
6/15 Cash 15,000
Service Income 15,000
To record service rendered
6/25 Car 500,000
Notes Payable 500,000
To record purchase of car in bill
Interest Expense 5,000
Interest Payable 5,000
To record interest expense (500,000*3%*1/3)
2. Company A purchased a batch of stationery for $10,000 in cash on December 2. After the physical inventory on December 31, there was $3,000 remaining. Please make a trial entry for the adjustment at the time of purchase and at the end of the period (according to the actual conversion method).
Journal Entries
12/2 Purchase 10,000
Cash 10,000
To record purchases for cash
12/31 Merchandise Inventory, end 3,000
Income and Expense Summary 3,000
To record remaining inventory
3. Company A prepaid the rent in cash of $240,000 for one year on June 1, and the lease start date was June 1. (Return from real to fictitious) Please try to make an entry for the adjustment at the time of prepayment and the end of the period (the method of recording real to fictitious).
Journal Entries
6/1 Prepaid Rent 240,000
Cash 240,000
To record prepaid rent
12/31 Insurance Expense 120,000
Prepaid Rent 120,000
To record rent expense
4. A and B set up a store in partnership. At the beginning of 2011, the capital balance of A was $300,000, and the capital balance of B was $200,000. The two parties agreed in the contract that the profit and loss should be distributed at a ratio of 3:2. Please try to make an entry for new partner C in the following situations:
4.1. C buys A ’s 1/3 interest for $120,000 in cash and B ’s 1/2 for $13,000 in cash .
4.2. C invests $300,000 in cash to acquire 1/2 of the partnership store.
Journal Entries
4.1. A, Capital 100,000
B, Capital 100,000
C, Capital 200,000
To record admission of C
4.2. Cash 300,000
C, Capital 300,000
To record investment of C
A, Capital 60,000
B, Capital 40,000
C, Capital 100,000
To record bonus to new partner
5. On June 10th, Company A paid the employees' salary of $120,000 in May, and withheld the salary income tax of $5,000 and the labor and health insurance premium of $3,000. The balance was paid to the employees from the bank deposit account.
Journal Entry
6/10 Salaries and Wages 120,000
Withholdings Tax Payable 5,000
Labor and Health Insurance Premium Payable 3,000
Cash in Bank 112,000
To record the employees’ salaries and their mandatory contribution
6. Company A received a refund of $26,250 ( including business tax 5%) from Company B on June 10 .
Journal Entry
6/10 Sales Returns and Allowances 26250
Business Taxes 25000
Cash 1250
To record refunds from Company B
7. Company A sold a total of 1,000 units of merchandise in 111. The unit price of the merchandise sold was $500, the variable cost was $300, and the annual fixed cost was $30,000. The company wants to use the advertising strategy to increase sales by 15%, but it has to spend $50,000 in advertising costs . Should Company A implement this strategy?
No, there will be a decrease of net income by 20,000 if it is implemented.
Not Implemented: 1000(500-300)-30,000=170,000
Implemented: (1000(500-300)*1.15)-(30,000+50000)=150,000
8. Company A has a net profit of $20,000 for the current period, income tax expenses of $3,000, interest expenses of $2,000, and operating expenses of $5,000. What is the interest coverage ratio of Company A ?
Answer and Solution
Interest Coverage Ratio= (20,000+3,000+2000)/2000 =12.5
9. Company A 's assets and liabilities at the end of 110 : cash of $300,000, prepaid rent of $50,000, land
$2,000,000, Inventory $500,000, Machinery $150,000, Short-term loan $150,000, Long-term loan
$60,000, $10,000 prepaid insurance. What is the company's quick ratio?
Answer and Solution
Quick Ratio=300,000/150,000=2.0
Disclaimer: Should you notice any inaccuracies in the answer, kindly leave a comment on this blog. I am committed to assessing and correcting any errors. Thank you for your understanding.
Conclusion
In conclusion, this document provides a concise overview of key accounting principles and procedures essential for effective financial management. It covers profit and loss determination, the accounting cycle, and the importance of accuracy in financial reporting. Additionally, it highlights the practical application of accounting entries, the significance of financial statements, and the relevance of financial ratios for assessing a company's health. Overall, it equips readers with the tools needed to confidently navigate their business's financial landscape.
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