Question

• Journal Entries (how to prepare and post)
• Reconciling accounts
• Fixed Assets
• Accrual Accounting
• Depreciation
• Bad debt and how to apply it (indirect and direct method)
• T-Charts and knowing which accounts to use – Natural Balance of Accounts
• Trial Balance

define

Answer 1

                       Journal Entries (how to prepare and post)

Accountants use special forms called journals to keep track of their business transactions. A journal is the first place information is entered into the accounting system.

A journal is similar to a diary for a business

Date	Account	Debit	Credit

You can see that a journal has columns labeled debit and credit. The debit is on the left side, and the credit is on the right. Let’s look at how we use a journal.

There are some rules you need to follow

Include a date of when the transaction occurred.

The debit account title(s) always come first and on the left.

The credit account title(s) always come after all debit titles are entered, and on the right.

The titles of the credit accounts will be indented below the debit accounts.

You will have at least one debit (possibly more).

You will always have at least one credit (possibly more).

The value of the debits must equal the value of the credits or else the equation will go out of balance.

You will write a short description after each journal entry.

Skip a space after the description before starting the next journal entry.

Example journal entry format is as follows.

Note that this example has only one debit account and one credit account

Date	Account	Debit	Credit
01/01/2020	Cash	1,500
	Stock		1,500
	Being Cash received against the sale of Business stock

A compound entry is when there is more than one account listed under the debit and/or credit column of a journal entry

Below are the example

Date	Account	Debit	Credit
01/01/2020	Cash	1,500
	Debtor	1,000
	Stock		2,500
	Being Cash 1,500/- received against the sale of Business stock and balance on credit

Recall that the general ledger is a record of each account and its balance. Reviewing journal entries individually can be tedious and time consuming. The general ledger is helpful in that a company can easily extract account and balance information. Here is a small section of a general ledger.

Bank Account
Date	Description	Reference	Debit	Credit	Balance

You can see at the top is the name of the account “Bank,”

Remember, all asset accounts will start with the number 1. The date of each transaction related to this account is included, a possible description of the transaction, and a reference number if available. There are debit and credit columns, storing the financial figures for each transaction, and a balance column that keeps a running total of the balance in the account after every transaction.

Let’s look at one of the journal entries and corresponding ledgers.

Date	Account	Debit	Credit
01/01/2020	Cash	1,500
	Stock		1,500
	Being Cash received against the sale of Business stock

Cash
Date	Description	Reference	Debit	Credit	Balance
01/01/2020	Cash Received against stock sale		1,500		1,500

Stock
Date	Description	Reference	Debit	Credit	Balance
01/01/2020	Cash Received against stock sale			1,500	1,500

As you can see, Cash had a debit of 1,500 in the journal entry, so 1,500 is transferred to the general ledger in the debit column. The balance in this account is currently 1,500, because no other transactions have affected this account yet.

                       Journal Entries (how to prepare and post)

Accountants use special forms called journals to keep track of their business transactions. A journal is the first place information is entered into the accounting system.

A journal is similar to a diary for a business

Date	Account	Debit	Credit

You can see that a journal has columns labeled debit and credit. The debit is on the left side, and the credit is on the right. Let’s look at how we use a journal.

There are some rules you need to follow

Include a date of when the transaction occurred.

The debit account title(s) always come first and on the left.

The credit account title(s) always come after all debit titles are entered, and on the right.

The titles of the credit accounts will be indented below the debit accounts.

You will have at least one debit (possibly more).

You will always have at least one credit (possibly more).

The value of the debits must equal the value of the credits or else the equation will go out of balance.

You will write a short description after each journal entry.

Skip a space after the description before starting the next journal entry.

Example journal entry format is as follows.

Note that this example has only one debit account and one credit account

Date	Account	Debit	Credit
01/01/2020	Cash	1,500
	Stock		1,500
	Being Cash received against the sale of Business stock

A compound entry is when there is more than one account listed under the debit and/or credit column of a journal entry

Below are the example

Date	Account	Debit	Credit
01/01/2020	Cash	1,500
	Debtor	1,000
	Stock		2,500
	Being Cash 1,500/- received against the sale of Business stock and balance on credit

Recall that the general ledger is a record of each account and its balance. Reviewing journal entries individually can be tedious and time consuming. The general ledger is helpful in that a company can easily extract account and balance information. Here is a small section of a general ledger.

Bank Account
Date	Description	Reference	Debit	Credit	Balance

You can see at the top is the name of the account “Bank,”

Remember, all asset accounts will start with the number 1. The date of each transaction related to this account is included, a possible description of the transaction, and a reference number if available. There are debit and credit columns, storing the financial figures for each transaction, and a balance column that keeps a running total of the balance in the account after every transaction.

Let’s look at one of the journal entries and corresponding ledgers.

Date	Account	Debit	Credit
01/01/2020	Cash	1,500
	Stock		1,500
	Being Cash received against the sale of Business stock

Cash
Date	Description	Reference	Debit	Credit	Balance
01/01/2020	Cash Received against stock sale		1,500		1,500

Stock
Date	Description	Reference	Debit	Credit	Balance
01/01/2020	Cash Received against stock sale			1,500	1,500

As you can see, Cash had a debit of 1,500 in the journal entry, so 1,500 is transferred to the general ledger in the debit column. The balance in this account is currently 1,500, because no other transactions have affected this account yet.

Reconciling accounts

Bank accounts for businesses can involve thousands of transactions per month. Due to the number of ongoing transactions, an organization’s book balance for its checking account rarely is the same as the balance that the bank records reflect for the entity at any given point. These timing differences are typically caused by the fact that there will be some transactions that the organization is aware of before the bank, or transactions the bank is aware of before the company.

For example, if a company writes a check that has not cleared yet, the company would be aware of the transaction before the bank is. Similarly, the bank might have received funds on the company’s behalf and recorded them in the bank’s records for the company before the organization is aware of the deposit.

                                                                          Fixed Assets

A fixed asset is a long-term part of a property that a company possesses and utilises in the generation of its revenue and is not anticipated that would be devoured or consumed into cash in coming next one year. A typical case of fixed asset is a producer’s plant resources, for example, its structures and hardware. The word “fix” indicates that these assets won’t be sold in the current bookkeeping year.

Detailed documentation of an organisation’s capital adds to the understanding of the financial wellbeing and estimation of that business. Data including fixed assets and depreciation is additionally utilised by potential financial specialists when they are thinking about whether an organisation is a profitable or non-profitable firm. While deciding the estimation of a fixed asset, the strategy for depreciation must be considered.

                                                               Accrual Accounting

In financial accounting or accrual accounting, accruals refer to the recording of revenues that a company has earned but has yet to receive payment for, and the expenses that have been incurred but that the company has yet to pay. In simple terms, it is the accounting adjustment of accumulated debits and credits. Such accounting practices, therefore, have a general impact on the handling of the income statement and the balance sheet. The affected accounts include accounts payable, liabilities and non-cash-based assets, goodwill, future tax liabilities, and future interest expenses, among others.

                                                                  Depreciation

Since the value of the assets depreciates as it is utilized, as it ages, or as latest models are presented, it is critical for a firm to enlist and track depreciation from the time of procurement. Fixed assets are incorporated into the asset report at their initial expense, and after that depreciation all through their life until they are sold, supplanted on the accounting report at their residual esteem.

Bad debt and how to apply it (indirect and direct method)

Bad debts are accounts receivable that a company does not expect to collect and has written off to income statement as an expense. Bad debts are also called irrecoverable debts.

Bad debts are recognized as expense because they are not expected to generate any economic benefits in future. Recognition of bad debt expense also results in a corresponding decrease in the accounts receivable balance on balance sheet because bad debts are no longer an asset.

Under the direct method, a bad debt is charged to expense as soon as it is apparent that an invoice will not be paid.

Under the Indirect method, an estimate of the future amount of bad debt is charged to a reserve account as soon as a sale is made. This results in the following differences between the two methods:

• Timing. Bad debt expense recognition is delayed under the direct write-off method, while the recognition is immediate under the allowance method. This results in higher initial profits under the direct write-off method.
• Accuracy. The exact amount of the bad debt expense is known under the direct write-off method since a specific invoice is being written off, while only an estimate is being charged off under the allowance method.
• Receivable line item. The receivable line item in the balance sheet tends to be lower under the allowance method, since a reserve is being netted against the receivable amount.

T-Charts and knowing which accounts to use – Natural Balance of Accounts

The left side of the Account is always the debit side and the right side is always the credit side, no matter what the account is.

For different accounts, debits and credits can mean either an increase or a decrease, but in a T Account, the debit is always on the left side and credit on the right side, by convention.

Some Example is:

Assets increased is debit

Assets decrease in credit

Liability increase in credit

Liability decrease is debit

Equity increase in credit

Equity decrease is debit

                                                                            Trial Balance

When constructing a trial balance, we must consider a few formatting rules as bellow.

Trail Balance should be the debit and credit balances of all the ledgers

The header must contain the name of the company, the label of a Trial Balance and the date.

Accounts are listed in the accounting equation order with assets listed first followed by liabilities and finally equity.

When amounts are added, the final figure in each column should be totaled .

And debit and credit side should be equal.

Advantage of Trial Balances.

To check the debits equal the credits

To find the uncover errors in journalizing

To find the uncover errors in posting

To locate the errors in ledger accounts

To make financial statements

To list the accounts at a single place

To know the ending balance of each account at a glance

To make the adjustments for unrecorded transactions

To find the missing amount of an account in the special case

To test the mathematical accuracy of recording process

In short, the trial balance is an essential tool to verify the accuracy of the recording process.