Question

(Objectives of this case study) To understand the application of accounting principles in recording of financial transactions To analyze the treatment of adjustment entries in the preparation of final accounts Case 1. The image given below shows one of the basic principles of accounting. Identify the concept related and answer the following questions in your own words. Debit Credit Answer the following Questions (I mark each) a. Identify the accounting concept represented by this image b. How would you define this accounting principle in your own words? c. Discuss any three examples where this accounting concept can be applied d. How this concept of accounting related to assets, liabilities and equity? e. Write the alternative name of this accounting principles?

Answer 1

a. The accounting concept is double entry book-keeping where debits need to be equal to credits

b. Every business transaction that can be measured in monetary terms finds a place in the accounting transactions of a firm. In order to record these monetary transactions, a system of debit and credit has been devised, which records such events through different accounts. The net effect of these accounting entries will remain same in terms of quantity. However, by debiting and crediting two different accounts, the correct and accurate accounting treatment is presented.

c. Example 1- If you pay down your Accounts Payable account which is a liability with $10,000 in cash (an asset), you'll need to adjust both accounts. In that case, you'll credit Cash for $10,000 which will reduce cash amount by $10,000.

Example 2- In case you bring capital to the business by contributing $1000 cash, Assets will be increased by 1000 and capital (equity) will increase by 1000. Hence balancing the equation.

Example 3- If you perform services on credit, revenue will increase and accounts receivable will increase by the same amount.

d. Equity is calculated after subtracting all assets, and liability is how much is owed to other parties. Debits will increase asset or expense accounts and decrease liability or equity. Credits on the other hand decrease assets and expenses and increase liability and equity. The basic accounting equation is Assets = Equity + Liabilities.

e. Double entry is the alternative name of this principle