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1 ACCOUNTING STEP BY STEP THE LANGUAGE OF DEBIT AND CREDIT Dr. R.G.A. Boland FCA, CPA, DBA BRIEF LECTURES TO REINFORCE THE KEY PROGRAM LEARNING ACTIVITY - LEARNING BY DOING!

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1ACCOUNTING STEP BY STEPTHE LANGUAGE OF DEBIT AND CREDITDr. R.G.A. Boland FCA, CPA, DBABRIEF LECTURES TO REINFORCE THE KEY PROGRAM LEARNING ACTIVITY- LEARNING BY DOING!


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2 CHAPTER I - INTRODUCTION TO BOOKKEEPING In 2006 all the hard work of bookkeeping is now done by computer. But ... We must understand the language of "debit and credit", so that we can use the computer data to produce RELIABLE accounting reports in accordance with IAS (International Accounting Standards).


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3 No matter what the form of the record, the basic rule of bookkeeping remains the same: the concept of debit and credit.The five key steps are ...


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Book-keeping and Accounting The process of book-keeping and accounting may be summarized into the following five steps: A. BOOK-KEEPING 4A. BOOKKEEPING: I. Translate transactions into debits and credits in a journal. 2. Post the debits and credits to ledger accounts.3. Balance the ledger accounts to summarize the net effect of the entries.4. Extract a trial balance to check the arithmetical accuracy of the postings.


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5 B. ACCOUNTING5. From the trial balance prepare the accounting reports, balance sheet and income statement (profit and loss account) with IAS!


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Accounting Language Accounting has been called the language of business. Like any language, it can never express our thoughts with absolute precision and clarity. 6Our task of learning this language is complicated by the fact that many of the words used in accounting mean almost, but not quite, the same as they mean in every-day life. We must learn to think of words in their accounting rather than their popular meaning. In this program, we have used a standard set of English and American accounting terms, although certain other terms are also of accounting terms reinforces your basic grasp of the language.


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7 Accounting PeriodThe basis of all profit is the period (accounting period) during which the profit is realized. Thus $10 a week is not the same as $10 for a whole year. Again, the financial position of a business must relate to a particular date. Thus the picture at January 1st may not be the same as the picture at June 3oth. Therefore, the accounting period and the date, is vital information which affect the significance of the accounting reports.


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8 Accounting PeriodA glossary of common bookkeeping words is provided at the end of the program.The following list indicates some of the major differences between English and American terminology:


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9 Accounting PeriodEnglish Term American TermDebtors Accounts receivable Creditors Accounts payable Stock of goods InventoryShare capital Capital stockProfit IncomeAccumulated profits Retained earnings Profit and loss account Income statement


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Debit & Credit Accounting Period 10 Some textbooks teach the application of debit and credit as:(a) Credit the giver(b) Debit the receiver


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11 However this has certain logical limitations. So, in this program we use a different approach. We first define:(a) Debit, as the left-hand side(b) Credit, as the right-hand side(c) Basic debits as, assets, costs and expenses(d) Basic credits, as liabilities, owners' equity and sales This facilitates very rapid assimilation of the bookkeeping technique, while the computer does all the hard work!


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12 this has certain logical limitations. So, in this program we use a different approach. CHAP TER II - ACCOUNTING REPORTSSET I - INCOME STATEMENT (PROFIT AND LOSS ACCOUNT)SUMMARYThe income statement (profit and loss account) of a business relates to a specific accounting period. It matches sales against cost of ales and expenses, to compute a figure of profit for the accounting period.Profit realized is NOT the same as cash received.Cash is more important than profit!


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13 this has certain logical limitations. So, in this program we use a different approach. Sales, less cost of sales and less expenses, equals profit.Sales equals cost of sales, plus expenses, plus profit.


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14 this has certain logical limitations. So, in this program we use a different approach. IMPORTANT NOTEIn the front of each set is a summary (as above) of technical terms and ideas to be learned from the set. Read it quickly.If you already understand all of the summary do not complete the set, pass on to the next one.If you do not completely understand every technical term and idea in the summary, do the whole set. Do not attempt to do only parts of a particular set.


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15 this has certain logical limitations. So, in this program we use a different approach. CHAPTER II SET 2 - BALANCE SHEET SUMMARYThe balance sheet presents a financial picture of a business and lists the assets, liabilities and owner's equity of the business at a specific date. It is not the same as an income statement.Valuable things owned by a business such as cash, debtors, inventory (stock), prepaid expenses and car are assets. Creditors are liabilities.


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16 this has certain logical limitations. So, in this program we use a different approach. The owner's equity is the original investment of the owners (share capital) in the business plus the profits earned and left to accumulate in the business.


17 assets are generally recorded at cost or lower and not at higher resale prices very conservative l.jpg
17 this has certain logical limitations. So, in this program we use a different approach. Assets are generally recorded at cost or lower and NOT at higher resaleprices - very conservative!.


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18 this has certain logical limitations. So, in this program we use a different approach. Assets less liabilities equals owner's equity or net worth.Assets equals liabilities plus owner's equity.


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19 this has certain logical limitations. So, in this program we use a different approach. Note.(a) In our balance sheets we shall (for bookkeeping) always record assets on he left side, and liabilities and owner's equity on the right side.Note: In some countries they may present the balance sheet in many different ways ... but in bookkeeping ... debit (left) and credit (right) are always the same... hooray!


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20 this has certain logical limitations. So, in this program we use a different approach. (b) Remember: Debtors are receivables Creditors are payables Stock is inventoryAccumulated profit is retained earnings Profit is income


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21 this has certain logical limitations. So, in this program we use a different approach. CHAPTER II - SET 3 - BUSINESS TRANSACTIONSTransactions may be for cash or for credit. In a credit transaction liability is incurred but cash is transferred later as a separate transaction.All transactions have a "dual aspect" (debit & credit) and thereby affect two items on the balance sheet.


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22 this has certain logical limitations. So, in this program we use a different approach. Accounting conventions recognize transactions at particular times. For example:Sales transactions are generally recognized when the goods leave the seller's premises, whereas Purchase transactions arc normally recognized when the goods are received by the buyer.


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1. An instantaneous financial picture of a business as of a particular date is a. income statementb. statement of accumulated profitc. balance sheetd. profit and loss account

C


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2. An accounting report of the flows of sales, costs, expenses and net profit over an accounting period is called a: a. sales reportb. balance sheetc. income statementd. owner's equity

C


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3. In a balance sheet the assets are exactly equal to the: expenses and net profit over an accounting period is called a:a. liability to creditorsb. owner's equityc. current assetsd. claims against the assets

D


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4. Owner's claims against the assets of a business are called: a. liabilities b. capital stock c. owner's equity d. income

C


5 valuable things owned by a business are called a capital b assets c fixed assets d liabilities l.jpg
5. Valuable things owned by a business are called: called:a. capitalb. assetsc. fixed assetsd. liabilities

B


6 assets less liabilities equals a share capital b accumulated profits c owner s equity d sales l.jpg
6. Assets less liabilities equals: called:a. share capitalb. accumulated profitsc. owner's equityd. sales

C


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7. People who owe debts to a business are listed on a balance sheet of that business as:a. trade creditorsb. incomec. claims against the assetsd. debtors

D


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8. Land, building, etc., owned by a manufacturing business is a:a. current assetb. "other" assetc. fixed assetd. capital

C


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9. Stock is a: is a:a. fixed assetb. part of owner's equityc. assetd. claim which the business agrees to pay

C


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10. The owner's equity of a limited company consists of: is a:a. share capital and accumulated profitsb. share capitalc. assetsd. dividends

A


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11 is a:. Assets less owner's equity equals:a. claims of the shareholdersb. current liabilitiesc. capitald. liabilities

A


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. is a:12. If a business has cash of £2,000, trade creditors of £100, a mortgage payable of £5,000 and land of 10,000 the owner's equity is:a. impossible to computeb. £10,000c. £5,100d. £6,900

D


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13. A balance sheet is prepared for a business entity. For a limited company this entity is:a. the company and its managementb. the company and its shareholdersc. the shareholders aloned. the company alone

B


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22. Which of the following are limited company this entity is:basic debits?a. liabilitiesb. fixed assetsc. owner's equityd. share capital

B


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23 limited company this entity is:CHAPTER III - BOOK-KEEPING TECHNIQUESET 4 - DEBIT AND CREDIT SUMMARYDebit means "left-hand side". Credit means "right-hand side". In bookkeeping debit and credit have NO significance as being "good" or "bad" as is implied by the popular use of the same words.


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24 limited company this entity is:Each item in the balance sheet and income statement is, by convention, either a basic debit or a basic credit: 1. The items on the left-hand side: assets, costs and expenses are basic debits. 2. The items on the right-hand side: liabilities and owner's equity and sales are basic credits.


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25 limited company this entity is:A basic debit is increased by debits and decreased by credits. Conversely a basic credit is increased by credits and decreased by debits.Each business transaction has a debit aspect and a credit aspect of the same amount. Thus in a set of books the total debits always equal the total credits."Dr" means debit. "Cr" means credit.


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26 limited company this entity is:IMPORTANT NOTEAt this point we must unlearn something about the words debit and credit, which is current in every-day life but does NOT apply to bookkeeping!!Repeat aloud the following sentences:"Credit means right side, It does not mean good or bad.""Debit means left side. It does not mean good or bad."


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28 limited company this entity is:CHAPTER III SET 5 ACCOUNTS AND BALANCESUMMARYFor each basic debit item and each basic credit item in the accounting reports there is an "account" in the books of the business. An account is simply a page in the books. In a series of accounts in the books we analyze and summarize each aspect (Dr and Cr) of a large number of business transactions.


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29 limited company this entity is:The balance brought down summarizes the net amount of the transactions recorded in the account to date. Each account may have a debit or credit balance according to the net total of debit and credit postings.


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30 limited company this entity is:CHAPTER III SET 6 - CASH AND CREDIT SUMMARYIn bookkeeping the word "credit" has two meanings: Credit means NOT for cash Credit means right side of the account, the opposite of debit.


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31 limited company this entity is:Transactions may be either for cash or credit Cash transactions are either cash receipts or cash payments, which increase or decrease the cash balance.Credit transactions increase either receivables or payables, but NOT cash ... until they are paid with a cash transaction!.


32 cash is an asset and therefore a basic debit l.jpg
32 limited company this entity is:Cash is an asset and therefore a basic debit.


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33 limited company this entity is:In terms of debit and credit, cash sales and purchases are recorded thus:Cash receipts: Cash account Dr. Sales account Cr.Cash payments:. Purchases account Dr. Cash account Cr


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34 limited company this entity is:Credit transactions do not affect the balance of cash but they do increase debtors (basic debits) or creditors (basic credits). Remember - debtors - receivables - basic assetCreditors - payables - basic credit


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35 limited company this entity is:Credit transactions for sales and purchases are recorded thus:Credit sales: Debtor (receivable) account Dr. Sales account CrCredit purchases: Purchases account Dr Creditor account Cr.


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36 limited company this entity is:CHAPTER III SET 7 - JOURNALIZING TRANSACTIONS SUMMARYThis is a revision set to give you practice in journalizing transactions by translating them into debits and credits.The journal of a business is the book in which any transaction may be recorded in the following form of entry.


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37 limited company this entity is:FORM OF GENERAL JOURNAL ENTRY:DateAccount name Dr 1000 Account name Cr 1000Plus an explanation of the transaction for future reference.


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22. Which of the following are limited company this entity is:basic debits?a. liabilitiesb. fixed assetsc. owner's equityd. share capital

B


23 which of the following are basic credits a assets b costs c owner s equity d expenses l.jpg
23. Which of the following are limited company this entity is:basic credits?a. assetsb. costsc. owner's equityd. expenses

C


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24. A debit balance is increased by a:a. creditb. debitc. something elsed. both credits and debits

B


25 a basic debit is decreased by a a credit b debit c neither d both debits and credits l.jpg
25 24. A debit balance is increased by a:. A basic debit is decreased by a:a. creditb. debitc. neitherd. both debits and credits

A


26 a basic credit is decreased by a a debit b credit c neither d both debits and credits l.jpg
26. A basic credit is decreased by a: 24. A debit balance is increased by a:a. debitb. creditc. neitherd. both debits and credits

A


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27. Debtors are decreased by:a. debitsb. creditsc. something elsed. both debits and credits

B


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28. Expenses are increased by:a. debitsb. creditsc. something elsed. both debits and credits

A


29 sales are increased by a debits b credits c something else d both debits and credits l.jpg
29. Sales are increased by: 28. Expenses are increased by:a. debitsb. creditsc. something elsed. both debits and credits

B


37 creditors normally have a balance a debit b credit c something else d debit or credit l.jpg
37. Creditors normally have a balance: 28. Expenses are increased by:a. debitb. creditc. something elsed. debit or credit

B


38 debtors normally have a balance a debit b credit c something else d both debit and credit l.jpg
38. Debtors normally have a balance: 28. Expenses are increased by:a. debitb. creditc. something elsed. both debit and credit

A


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39. Owner's equity and profits normally have a balance: 28. Expenses are increased by:a. debitb. creditc. something elsed. both debit and credit

B


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40. Expenses and sales normally have balance which are: 28. Expenses are increased by: a. the same-debit b. the same-credit c. credit and debit respectively d. debit and credit respectively

D


41 assets normally have a balance a debit b credit c something else d both debit and credit l.jpg
41. Assets normally have a balance: 28. Expenses are increased by: a. debit b. credit c. something else d. both debit and credit

A


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42. Posting in book-keeping means: 28. Expenses are increased by:a. writing in the journalb. journalizingc. writing in the ledger accountsd. preparing a trial balance

C


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38 CHAPTER IV - SPECIAL TRANSACTIONSSET 8 ACCRUALS SUMMARYAccruals are credit transactions. They record a liability not yet paid for. The liability may be for the purchase of a fixed asset, or a cost or an expense incurred. Thus the books and the accounting reports must show the full liabilities of a business. Settlement of the accrual in cash, is a subsequent cash transaction.


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39 IV - SPECIAL TRANSACTIONSTo record an accrual we journalize: Asset (basic debit Dr. Creditor (basic credit) Cr. OR Cost (basic debit) Dr. Creditor (basic credit) Cr. OR Expense (basic debit) Dr. Creditor (basic credit) Cr.


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40 IV - SPECIAL TRANSACTIONSTo record the cash settlement of the accrual we journalize: Creditor (basic credit) - decreased Dr. Cash (basic debit) - decreased Cr.


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41 IV - SPECIAL TRANSACTIONSCHAPTER IV SET 9 - FIXED ASSETS AND DEPRECIATION SUMMARYFixed assets, such as land, buildings, machinery, plant, furniture, trucks, cars, etc., are normally purchased for use in the business, and not for resale.The process of "depreciation" allocates the cost of each fixed asset to "depreciation expense" proportionally over its working life. It is a process of allocation not valuation of the fixed asset, Depreciation expense" (basic debit) is shown in the income statement.


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42 IV - SPECIAL TRANSACTIONSFixed assets (basic debits) are shown in the balance sheet at cost, less accumulated depreciation (basic credit). Exception: Land is not depreciated - shown at cost until revalued.


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43 IV - SPECIAL TRANSACTIONSThe amount charged to depreciation expense for the accounting period may be journalized in one of two ways:I.Directly against the cost of the fixed asset: Depreciation expense (basic debit) Dr Fixed asset (basic debit) Cr OR


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44 2.Through an intermediate account deducted from the cost of the fixed asset in the balance sheet:Depreciation expense (basic debit) Dr Accumulated depreciation (basic credit) Cr.Note: Accumulated depreciation is deducted from the total of fixed assets (basic debits) on the left side of the balance sheet. It is therefore a basic credit (not basic debit).


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44. A cash payment is journalized: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. debit cash, credit some other accountb. debit some other account, credit debtorsc. debit cash, credit creditorsd. credit cash, debit some other account

D


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45. Cash receipts are always journalized as debit to: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. debtorsb. creditorsc. owner's equityd. something else

D


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46. Credit sales are journalized: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. credit debtors, debit salesb. debit cash, credit salesc. debit creditors, credit salesd. debit debtors, credit sales

D


47 a cash purchase is always recorded as a credit to a creditors b assets c cash d purchases l.jpg
47. A cash purchase is always recorded as a credit to: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. creditorsb. assetsc. cashd. purchases

C


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49. Receipt from a debtor is journalized as: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. debit sales, credit cashb. debit debtors, credit cashc. debit debtors, credit salesd. debit cash, credit debtors

D


50 a credit transaction is normally followed by a cash transaction a true b false c neither d both l.jpg
50 intermediate account deducted from the cost of the fixed asset in the balance sheet:. A credit transaction is normally followed by a cash transaction: a. true b. false c. neither d. both

A


51 cash is a basic a debit b credit c neither d debit or credit l.jpg
51. Cash is a basic: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. debitb. creditc. neitherd. debit or credit

A


52 in the cash account cash receipts are a debits b credits c neither d both debits and credits l.jpg
52. In the cash account cash receipts are: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. debitsb. creditsc. neitherd. both debits and credits

A


53 in the cash account cash payments are a debits b credits c neither d both debits and credits l.jpg
53. In the cash account cash payments are: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. debitsb. creditsc. neitherd. both debits and credits

B


54 debtors are a debits b credits c neither d both debits and credits l.jpg
54. Debtors are: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. debitsb. creditsc. neitherd. both debits and credits

A


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55. A debit balance on a creditors' account probably means: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. we owe him moneyb. he owes us moneyc. something elsed. there is an error or a return to supplier.

B/D


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5 intermediate account deducted from the cost of the fixed asset in the balance sheet:6. Purchase of land on credit is recorded:a. debit purchases, credit cashb. debit cash, credit landc. debit land, credit creditorsd. something else

C


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57. Purchase of machinery for cash is recorded: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. debit cash, credit machineryb. debit debtors, credit machineryc. credit cash, debit machineryd. something else

C


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58. Payment of rent in cash is recorded: intermediate account deducted from the cost of the fixed asset in the balance sheet:a. debit rent, credit creditorsb. credit rent, debit cashc. debit rent, credit debtorsd. something else

D


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45 intermediate account deducted from the cost of the fixed asset in the balance sheet:CHAPTER V RECORDSSET 10 - JOURNALS AND LEDGERS SUMMARYBooks of account may be divided into books of. Prime entry (journals) Second entry (ledgers)


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46 intermediate account deducted from the cost of the fixed asset in the balance sheet:In the journal each transaction is translated into debits and credits, Only one journal is essential but in practice we have separate journals for each main source of transactions.


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47 The cash book (journal) records cash receipts and payments. The sales journal records credit sales. The purchases journal records credit purchases. The general journal records all types of transactions


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48 cash book (journal) records cash receipts and payments. The sales journal and the purchases journal summarize one side of transactions so that the debit to purchases and the credit to sales may be made in total figures, instead of in detail for each transaction.


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49 cash book (journal) records cash receipts and payments. Posting to the ledger accounts is made from the journals. Each ledger includes a series of accounts to record the debit and credit aspects of the transactions.


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50 cash book (journal) records cash receipts and payments. Three separate ledgers are usually kept. The sales ledger contains an account for each debtor. The purchases ledger contains an account for each creditor, In the general (private) ledger are all the other accounts for assets, liabilities, owner's equity, sales, costs and expenses


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51 CHAPTER V - SET 11 - TRIAL BALANCESUMMARYBookkeeping is the process of keeping books of account. The bookkeeping records analyze, classify and summarize transactions to provide the basic data for accounting reports.In the books the total debit postings equals the total credits.The arithmetical accuracy of the books is verified by making a "trial" or test by listing the balances of the accounts in the form of a trial balance, to check that total debits and credits agree.


66 depreciation expense is a basic credit this statement is a true b false c either d neither l.jpg
66. "Depreciation expense is a basic credit." This statement is:a. trueb. falsec. eitherd. neither

B


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67. Accumulated depreciation is: is:a. an expenseb. a liabilityc. a fixed assetd. deducted from fixed assets

D


68 depreciation is a process of a allocation b valuation of fixed assets c accrual d sales l.jpg
68. Depreciation is a process of: is:a. allocationb. valuation of fixed assetsc. accruald. sales

A


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69. Bad debt expense is recorded: is:a. debit debtors, credit bad debtsb. debit creditors, credit bad debtsc. debit bad debt expense, credit debtorsd. something else

C


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70. Debit cash, credit machinery normally records: is:a. purchase of fixed assetb. prepaid expensesc. sale of a debtord. something else

D


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71. Transactions are first translated in debits and credits in the:a. ledgerb. journalc. cash bookd. something else

B/C


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72. The three types of ledgers are normally: in the:a. sales, purchases, assetsb. sales, general, purchasesc. cash book, sales, purchasesd. purchases, sales, expenses

B


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73. The four types of journals are normally: in the:a. cash book, sales, expenses, generalb. sales, cash, purchases, generalc. general ledger, sales and purchasesd. something else

B


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74. The arithmetical accuracy of the book-keeping is verified in the:a. booksb. balance sheetc. trial balanced. journal

C


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75 verified in the:. "An error of the right amount posted to the wrong account is ALWAYS revealed by the trial balance." This is:a. trueb. falsec. neitherd. partly true

B


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76. "An error of the right amount posted to the wrong account is SOMETIMES revealed by the trial balance." This is:a. trueb. falsec. neitherd. partly true

A


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77. The original entry of a transaction to charge depreciation would be recorded first in the:a. Sales ledgerb. Sales journalc. General journald. Private ledger

C


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78. The process of book-keeping depreciation would be recorded first in the:alone involves:a. journalizing, postingb. journalizing, posting, balancingc. journalizing, posting, balancing, trial balanced. journalizing, posting, balancing, trial balance, balance sheet, income statement

C


79 we prepare accounting reports normally from a a ledger b balance sheet c journal d trial balance l.jpg
79. We prepare accounting reports normally from a: depreciation would be recorded first in the:a. ledgerb. balance sheetc. journald. trial balance

D


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52 depreciation would be recorded first in the:CHAPTER VI - SET 12 SUMMARYThis is a revision set on the whole process of BOOKKEEPING and accounting which involves: Journalizing transactions into debits and credits Posting to accounts in the ledger Balancing ledger accounts Extracting a trial balanceand .. the ACCOUNTING work of preparing an income statement and a balance sheet with IAS!.


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53 depreciation would be recorded first in the:The set includes the routine for recording the following types of transactions:Starting a business with cashPurchases for cash and creditPurchase and depreciation of fixed assetsSales for cash and creditTransfer to cost of sales (cost of goods sold)Accrual and payment of expensesSettlement of debtors and creditors


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73. The four types of journals are normally: depreciation would be recorded first in the:a. cash book, sales, expenses, generalb. sales, cash, purchases, generalc. general ledger, sales and purchasesd. something else

B


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74. The arithmetical accuracy of the book-keeping is verified in the:a. booksb. balance sheetc. trial balanced. journal

C


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75 verified in the:. "An error of the right amount posted to the wrong account is ALWAYS revealed by the trial balance." This is:a. trueb. falsec. neitherd. partly true

B


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76. "An error of the right amount posted to the wrong account is SOMETIMES revealed by the trial balance." This is:a. trueb. falsec. neitherd. partly true

A


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77. The original entry of a transaction to charge depreciation would be recorded first in the:a. Sales ledgerb. Sales journalc. General journald. Private ledger

C


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78. The process of book-keeping alone involves: depreciation would be recorded first in the:a. journalizing, postingb. journalizing, posting) balancingc. journalizing, posting, balancing) trial balanced. journalizing, posting, balancing, trial balance, balance sheet, income statement

C


79 we prepare accounting reports normally from a a ledger b balance sheet c journal d trial balance115 l.jpg
79. We prepare accounting reports normally from a: depreciation would be recorded first in the:a. ledgerb. balance sheetc. journald. trial balance

D


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80. In the U.K. we present a balance sheet with the assets (basic debits) on the right-hand side. Does this affect the book-keeping?a. yesb. noc. maybed. sometimes

B


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54 (basic debits) on the right-hand side. Does this affect the book-keeping?... and so ends ... And begins ... THE LANGUAGE OF DEBIT AND CREDIT ... ... on we go together . with a quiz ...... to give YOU feedback on how well YOU have learned ... bye for now ...


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