Questions & Answers vol 2

QUESTIONS AND ANSWERS

1- Can ledger make without journal?

Journal is the source of providing information to ledger accounts relating to transaction’s date, nature of account, reference number, applied rubes and amount. The information in journal comes from vouchers which make base to source documents.

Ledger is the bunch of accounts requires prescribed information which may be supplied by journals or from the source documents to which journal make base for recording. Then we are in right to say that ledger can be made from source documents but the importance of maintaining journals is in its own place. The diary for cash or bank will have to maintain necessarily if ledger is made without journals or cash book.

In small business where some transactions occurred in a month, it can be applied but where transactions’ volume is huge, the practice of maintaining journals must be adopted.

The good way is to walk step by step.

<THE SYSTEM OF ACCOUNTING < VOLIUM II< SYED AQEEL RAZA<[email protected]>

2- What is the difference between cash book and journals?

Cash book is a form of journal mostly used to control receipts and payments of cash. It works as a ledger of cash and bank which balance at the end is shown in balance sheet. The cash book deals with only transactions occurred in cash or by bank and for small transactions, petty cash book is maintained.

When general journal is the form of mixtures of all transactions cash, credit, adjustments, discounts and goods returns and some special journals like cash receipt journal, cash payment journal, sales journal, sales return and allowances journal and purchase journal, purchases return and allowance journals support to general journal.

The cash book is the best replacement of cash receipt and cash payment journals.


3- Does petty cash book link to cash book, explain?

Petty cash book is the part of cash book, it maintains to record small transactions such as conveyance, cartage, entertainment, postage, small repairs, etc.

Petty cash fund is issued by cash book debiting petty cash funds account. The petty cash fund decrease cash from cash book and increase cash in petty cash book. Petty cash expenses are paid through petty cash voucher and recorded into petty cash book in specific column and many other accounts which have no column is written in other account.

Having been paid expenses, the total of each account is journalized into ledge as petty cash expenses; head wise debt and petty cash fund credit. The ledger balance becomes equal to petty cash book balance and for the same way the fund issued and spends.

In other words, we can say the petty cash book is the sub book of cash book.


4- What do you mean by journals and journalizing?

Journal is a book or diary columnar designed to make easy record keeping but journalizing is the method of recording transaction in general journal or in specified journals but where cash book is used instead of journals, journal entry affects general ledger or to its subsidiary ledger accounts.

In business, sale or purchase on credit; the payment of which made later; is journalized by journal voucher which effect debtor or creditor accounts.

All adjustments such as sales discount, purchase discount, sale return, purchase return, transfer of amount from an account to another account and so on in accounts are made through journalizing.

Journalizing mostly affects general ledger consists on permanent accounts and sometimes affects temporary accounts for adjustment purposes.

Because of journalizing, we find the actual balance of debit and credit fluctuating immediately from the process of journalizing facilities one to pay or receive the amount payable or receivable.

Journalizing is mostly used for correction the amount of an account or transfers the balance from an account to another account freely.


5- Explain the function of ledger?

The bunch of accounts is called ledger, its main function is to provide end result of amount as to balance in debit or in credit. If balance in general ledger which consists on assets, liabilities and owner’s equity, as asset is debit means to have or to receive, liabilities is debit means to pay the amount to whom the debit taken and owner’s equity is credit means to have the amount of investment. The balances in temporary accounts; expense and revenue; are ended on calculation of profit and loss which is transferred to general ledger account.

The main function of maintaining ledger is to provide end balance of all accounts to next stage as to trial balance.


6- What do you mean by purchase merchandise; assets or expense?

All purchases unsold for doing business are assets for example a trader purchases items for sale and to get profit over it and a manufacturer purchases different materials to make goods of his business. All goods sold help to recover the amount of purchases as well as profit over it. Therefore, the purchases which were assets unsold when sold changed the name as sale.

Because of the reason in question, the purchase of merchandise is treated as expense to make gross profit or loss and the unsold merchandise will be the part of permanent account as current asset.

All purchase returns and purchase discounts which are contra assets but reduce purchases in income summary are temporary accounts may belong to expense and revenue ledger.


7- Subsidiary ledger and the benefit of making it, explain?

Subsidiary ledger is a sub book of general ledger mostly makes for account receivable and account payable having various parities or clients to whom the goods sold and purchase are made on credit.

The subsidiary ledger helps for receiving the amount balance in party’s account as well as giving discounts on sale or purchases which sometime seller or purchaser issues on early payment. The party’s account in subsidiary ledger is increased or decreased in balance by discounts

The subsidiary ledger helps in doing returns of sale or purchase to any party due to defect in goods or any reason and is affected by increase or decrease in balance.

All accounts which have windows or various accounts relating to specific account may be opened by subsidiary ledger account.

The main benefit of subsidiary accounts is to make separate account of any specific account having multiple parties or clients.


8- What do you understand by accounts receivable and accounts payable and its schedule?

The list of debtors or creditors consists on parties name, amount etc. is the schedule of accounts receivable or account payable scratched from subsidiary ledger; sub ledger of general ledger; especially made for parties.

Creditors are those from whom we purchase merchandise on credit by crediting their accounts as account payable and debtors are the parties to whom we sell merchandise on account by debiting their accounts as account receivable. For example, we purchase merchandise goods worth Rs.10, 000/= from A.I. Traders on credit, we shall open A.I. Traders Account (A/c payable) and on paying some amount or Rs.5000/= from his account shall debit his account as A.I. Traders (A/c Payable), the balance will remain in credit Rs.5000/= indicate us to pay later.

The schedule of debtors and creditors may indicate the position of parties altogether or individually for management purposes that requires with a payment or receiving point of view and for linking with general ledger control account.


9- Is purchase asset or an expense?

All purchases which have no concern with the goods applied in sale are expenses and the goods sold which consumed in sale will also be an expense but the goods unsold is current asset.

Hence, purchase for doing business is a temporary asset or may be considered expense but relates to the ledger of expense and revenue or income statement accounts.

Further, Purchase for doing business is a temporary account relates to inventory and inventory is asset until in hand but may be considered as expense because of its relation to income and the balance remains unsold will be permanent account as asset which is transferable to the next accounting cycle.


10- Is purchase return asset or an expense?

The purchase returns and allowances have relation to purchase merchandise which reduce purchases is not expense directly but may be contra expense.

11- Is purchase discount asset or an expense?

Purchase discount offered by supplier to purchaser on payment in time is not an expense directly but relates to goods purchased for business and does contra to the value of goods purchased. It is reduced by purchases in income statement may be contra expense account.

12- Describe the net and gross method of purchase discount.

Purchase discount is given by the supplier to the purchaser on payment in time and may be recorded under gross method and net method of accounting.

In gross method, the total cost of purchase is credited to accounts payable and discount at the time of payment if realized will be recorded as accounts payable debit; the total amount of payable against invoice; discount credit;

the amount of discount; cash credit; the payment after deducting discount and payment after discount period; accounts payable debit and cash credit.

In net method of accounting, the total net cost of purchase (gross value less discount) is debited and account payable credited and on payment account payable is debited and purchase discount credited.

If the payment is not made in time, an anti-revenue account named purchase discount lost is debited to record the loss as accounts payable debit, purchase discount loss debit and cash credit.

13- How to close an opening and closing inventory account?

An opening inventory is the balance of closing inventory at the start of accounting cycle transferred by expense & revenue summary to general ledger account as opening inventory debit and income summary credit.

In order to make income statement, the opening inventory is transferred to expense summary under

journal entry as income summary debit and inventory opening credit.

The inventory unsold is transferred to general ledger account under journal entry as inventory ending debit and income summary credit.

The inventory ending is a current asset shown in balance sheet.

14- Is the cost of goods sold an expense?

The cost of goods sold is obtained by cost of goods sold statement under formula cost of goods sold = merchandise inventory opening + net purchases – merchandise inventory closing. On selling, the cost of goods sold is converted into cash and cash is asset, the sale above than cost of goods will definitely be profit and profit is the part of capital but the consumption process of cost of goods is considered as an expense.


15. Discuss briefly on asset, liabilities, equities, revenue and expenses.

The discussion on assets, liabilities, proprietorship, revenue and expense is like to draw water from sea and to count stars from sky because of their involvements in every places entire subject but in shortly we can describe them;

- Assets represent to resources or things having economical value equal to liabilities plus proprietorship under different classifications.

- Liabilities are the claims of suppliers and borrowers in short term and long term.

- Equities are the sources of providing funds to business by internal or external ways.

- Expenses help to generate profit.

The result is concluded that assets are resources obtained by sources or equities which can have liabilities from internal or external but revenues and expenses are applied in the process of income.

The assets, liabilities and equities are the member of accounting cycle but revenues and expenses are expired on income and loss sate.

16- What do you mean by working capital?

Money invested in business is recognized by capital which enables business to buy assets and pay for obligations.

Working capital is a measure to weigh the financial health of an entity by increasing or decreasing in assets and liabilities under formula working capital = current assets – current liabilities. The increase in current assets means the efficiency in business and decrease in current assets defines deficiency.

The working capital ratio can be calculated by dividing all current assets with all current liabilities indicating increase and decrease in assets comparatively as;

Year 1 Year 2 Year 3Current Assets 400,000 600,000 800,000

Current Liabilities 200,000 300,000 500,000

Working capital ratio 2:1 2:1 1.6:1

17- What do you mean by other assets, sundry creditors and sundry debtors?

Other assets, sundry creditors and sundry debtors represent to different types of assets, creditors and debtors require classification separately in lieu of opening the different accounts of irregular assets, creditors and debtors.

The benefit of them is to save the time of searching, to see in a list and they work like control account of miscellaneous accounts relating to like these.


18- Described about cash base accounting, accrual base accounting and cash base and accrual base mix accounting.

CASH BASE ACCOUNTING

In cash base accounting system, transactions are recognized on receipt and payment of cash. It is usually applied or followed by individual or small business concerns. Revenues and are report in income statement when the cash is received and expenses occurred.

ACCRUAL BASE ACCOUNTING

In accrual base accounting, transactions are recorded in ledger under journalizing and as when they transact and reported in income statement when they earned or occurred of the period that closes accounting. Now, the cash received or paid will have no concern with revenues and expenses but payment and receipt.

As far as usually expenses are concerned, the accrual of them daily is not in practice. Now, this question can be arisen that will the profit cover the transaction of the date? The answer will be no, then the accrual base accounting need to accrue all transactions on accrual

basis if we require profit and loss and balance sheet on daily basis.

CASH AND ACCRUAL BASE MIX ACCOUNTING

In cash base accounting cash is received or paid against transactions as and when they occurred and in accrual base accounting, the journal entry of the transactions is recorded as and when it occurred before cash receipt and payment.

In cash and accrual mix base accounting, usually cash is received or paid against transactions but the transactions relate to receivable or payable are journalized and remaining transactions of the date of accounting period are recorded at the time of closing accounts.

It is up to entity’s requirement that it adopts the system among cash, accrual and mix accounting system.


19 - What is suspense account?

A suspense account in debit or credit is an account which is opened in general ledger temporarily to record doubtful transactions requires proper account undefined. On meeting the proper account, the amount recorded in suspense account is transferred to its proper account from suspense account.

Suppose that on reconciliation of bank statement, an amount of Rs.50000/= is found in credit in bank statement may be sent by someone or party. It needs to store in account temporarily to imbalance cash book till the party is ascertained, it will kept in suspense account like; bank debit and suspense account credit and like this way an amount is found in payment by bank statement, will be in suspense account debit and bank credit.

Further, a suspense account is used to record the difference in amount of an account like;

- Machinery repaired at Rs. 900/= has been debited to Machinery repair account Rs. 800/=.

The difference in account has been noted Rs.100/= because machinery was repaired Rs.900/= and the original entry will be machinery repair debited by Rs.900/= and cash credited by Rs.900/= but difference in positing in machinery repair account is recorded Rs.800/= instead of Rs.900/= then the difference will go in machinery repair account in debit Rs.100/= and suspense account in credit Rs.100/=.

20- Discuss about the need of internal audit.

Everything which has weight if let it idle will cause faulting, this is the fact that everyone has no way to deny. Just like this, accounts to which we say are the characters of accounting need to have checking and finding mistakes at an early stage will save the difficulty of presenting true accounting.

Hence, accounts are needed to check daily and to do it an auditor is required internally who sees every transaction with bird’s eye view and finds mistakes in source documents and in recording. I think he will be responsible for;

- Checking indents/purchase orders/inventory/consumables- Checking invoices/bills/cash memos compare to purchase

order/requests- Checking and calculation of invoice/bills/cash memo in

compassion to rate- Getting awareness with rates according to market.- Raising questions about rates and purchases above than

purchase order.- Verified payment instrument that has been audited.- Finding mistakes in wrong postings and make them

corrected.- Keep an eye on receiving and payments


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Questions & Answers vol 2