Question

Q1- Provide an example of each title here and then record the journal entries. Following the first given answer.

1-Providing consulting services receiving cash. Given answer: Aziz company provides consulting service and receives 1,000 cash. Cash. 1,000 Consulting Revenue. 1,000

2-Investment by an owner.

3-Purchasing equipment for cash.

4-Purchasing supplies on credit.

5-Borrowing money from a bank.

6-Paying investors their shares of dividends.

Q2- Pick two principles or assumptions of accounting and briefly explain it with an example.

Q3- On your own words, explain the purpose and the importance of the following statements:

1- Income Statement

2- balance sheet

Answer 1

Q2 - There are many principle of accounding of which two are as follows -

1. The Revenue Principle

This principle defines a point in time when bookkeepers may record a transaction as revenue on the books. The revenue principle states that revenue for the business is earned and recorded at the point of sale. This means that revenue occurs at the time at which the buyer takes legal possession of the item sold or the service is performed, not at the moment at which cash for the transaction is accepted by the seller. This concept is sometimes called the “revenue recognition principle.”

2. The Expense Principle

This principle defines a point in time at which the bookkeeper may log a transaction as an expense in the books. The expense principle, or expense recognition principle, states that an expense occurs at the time at which the business accepts goods or services from another entity. Essentially, it means that expenses occur when the goods are received or the service is performed, regardless of when the business is billed or pays for the transaction.

Q3 - Income statement: It is also known as profit and loss statement. Now that you have machine, you can produce, lets say, a product A. After selling product you will get revenues. However, you will need raw material and labour. You will have to pay interest on debt. Moreover, part of machine is also used to produce a product. So, you will have to depreciate it. Thus, you will deduct cost of raw material, labour cost, interest on debt, depreciation, etc. from revenues and you get Net Profit. There are many more heads of expenditure.

The Balance Sheet

A balance sheet lays out the ending balances in a company's asset, liability, and equity accounts as of the date stated on the report. The most common use of the balance sheet is as the basis for ratio analysis, to determine the liquidity of a business. Liquidity is essentially the ability to pay one's debts in a timely manner. The information listed on the report must match the following formula:

Total assets = Total liabilities + Equity

The balance sheet is one of the key elements in the financial statements, of which the other documents are the income statement and the statement of cash flows. A statement of retained earnings may sometimes be attached.