The Accounting Process
They provide evidence that a transaction occurred and are the basis for entering information into the accounting system (e.g., receipts, invoices, bank statements).
What are source documents?
(1) Debit entries first, (2) Indent credit entries, (3) Include a narration (short description).
What are the three major rules when preparing a general journal entry?
To check the arithmetic accuracy of the general ledger and ensure debits = credits.
What is the purpose of a trial balance?
An entry made at the end of an accounting period to ensure revenues and expenses are recorded in the correct period.
What is a Balance Day Adjustment?
(Net Profit ÷ Total Revenue) × 100
What is the formula for the Net Profit Ratio?
Every transaction affects at least two accounts; one is debited and one is credited, ensuring the accounting equation stays balanced.
What is meant by the “two-fold nature” of a business transaction?
or
What is Double entry bookkeeping?
Because the particulars column must cross-reference the other account in the entry, not itself, so the double entry can be traced.
Why must you never write the name of the account in its own ledger account?
Errors like omitted transactions, double entries, wrong accounts used, or compensating errors can still result in equal totals
Why can a trial balance “balance” and still be wrong?
When purchased, supplies are an asset. When consumed, the used portion becomes an expense (Supplies Expense).
When are supplies considered an asset and when are they an expense?
(Net Profit ÷ Average Owner’s Equity) × 100
What is the formula for Return on Equity?
Transactions (source documents) → General Journal → General Ledger → Trial Balance → Financial Reports → Analysis & Evaluation.
What is the correct order of the accounting process?
Debit: Cash at Bank $10,000
Credit: Capital $10,000
(Owner’s contribution)
Provide the journal entry for: Owner contributes $10,000 cash to start a business.
“As at” a particular date (e.g., as at 30 June 2025).
On which date format is a trial balance or Statement Financial Position prepared?
Debit: Supplies Expense $200
Credit: Supplies $200
(Supplies consumed in June)
What is the BDA for $200 supplies used during June?
Ratios are only meaningful when compared to benchmarks (industry averages, past performance, or alternative investments).
Why do you compare ratios to benchmarks?
To summarise business performance and financial position, and provide information for decision-making and accountability.
What is the purpose of preparing financial reports?
The process of transferring journal entries to the individual accounts in the general ledger.
What is “posting” to the general ledger?
You take the $1,000 credit away of the $9,000 debit in the Cash at Bank account
How do you calculate the balance of the Cash at Bank account?
They match expenses with revenues earned in the same period, ensuring accurate profit measurement.
Why are BDAs essential for reporting profit?
It costs the business 72 cents in expenses to create $1 in revenue.
or
The business creates 28c in NP from every dollar of revenue.
How do you describe a 28% NPR?
Because every debit has a matching credit, providing checks and balances that help ensure accuracy in recording transactions
Why is double entry accounting described as a “beautiful system”?
An entry involving more than two accounts. Example: Purchase a $33,000 vehicle on credit with $4,000 cash deposit → Debit Motor Vehicles $33,000; Credit Cash $4,000; Credit Other Payables $29,000.
What is a compound journal entry?
It’s a checking tool; it verifies ledger accuracy before preparing financial statements.
Why is the Trial Balance important to a business?
The BDA for $800 supplies used during June.
Debit: Supplies Expense $800
Credit: Supplies $800
(Supplies used in June)
The business returns 18c for every dollar invested by the owner into the business.
How do you explain a Return on Equity of 18%?