Analysis of Accounting Principles and Financial Reporting

This document provides a comprehensive solution to a fundamental accounting assignment. It covers the essential steps in recording and posting business transactions, including journal entries and ledger postings, with a focus on the use of source documents like invoices and bills. The solution explains the debit and credit rules for different types of accounts, such as assets, liabilities, equity, revenue, and expenses. The accounting cycle is explained in detail, from identifying transactions to preparing financial statements. Additionally, the document discusses the rationale behind distinct expense and revenue accounts and their impact on the income statement. It also explores the normal balance of accounts and how debits and credits are applied in the balance sheet and income statement. The solution incorporates references to academic sources, offering a well-rounded understanding of accounting principles.

Fundamentals of Accounting

Answer 1: The following steps are used in recording and posting the effects of a business
transaction:
 Recording the transactions in Journal: This step involves identifying the type of each
account and determining whether it is being debited or credited. This is followed by
recording its entry in the journal.
 This step involves posting the journal entries into ledger in the specific debit and credit
columns
The source document used in these steps is invoice, bills, credit memo and deposit slip.
The debit is an accounting entry that record increase in an asset whereas credit increases a
liability (Porter and Norton, 2016). The type of accounts that are:
 Increased by debit: Accounts receivable, inventory and expense account.
 Decreased by debit: Notes payable, retained earnings and common stock
 Increased by credit: Stockholders equity, liabilities and income account
 Decreased by credit: Asset, expense and profits
Answer 2: The steps that are performed throughout the accounting cycle are identifying the
transaction, developing the source document of the transaction, analyzing and recording the
transaction and at last posting it in the ledger accounts. The steps that are performed at last
includes developing the trial balance, adjusting entries, financial statements, posting closing
entries in ledger and preparing reverse journal entries.
The most common type of accounting software packages that are used are freshbooks,
Xero and QuickBooks online. I would adopt the use freshbooks in starting a small business as it
has high scalability (Wevgandt, 2007).
Answer 3: The main reason for developing distinct accounts for expense and revenue is due to
large number of entries related to these accounts during the overall accounting cycle. For
example, the payment received for services that is to be provided would be included under
unearned income while the payments for services that are delivered would be recorded in the
earned income as revenue.
The revenue account will positively impact the new income with the realization of cash
while expenses would have negative effect due to expenditure incurred for carrying out its
different activities while retained income will also increase the income account as it is a financial
gain.
The dividend account is prepared for depicting the profit available for the shareholders
and the owners. The account would be increased if there is increase in the profitability position
of a company and decrease with the reduction in net income for an accounting period (Porter and
Norton, 2016).

Answer 4:
1. The increase in liability is credit while increase in expense is debit and it is conceivable
2. Increase in asset and decrease in liability is debit and this is not conceivable
3. The increase in revenue and decrease in expense is credit and is not conceivable
4. The decrease in asset is credit and increase in another asset is debit and is conceivable
5. Decrease in asset is credit while increase in liability is credit and is not conceivable
6. Decrease in revenue is debit while that in an asset is credit and is conceivable
(Narayanaswamy, 2014).
Answer 5: The normal balance is the classification of an account either as credit or debit in the
double-entry accounting system. The rule for recording the debit and credit entry in the balance
sheet is that a debit increases the balance of an account under assets section while credit
increases the balance of liabilities account. The revenue account in the income statement shows
the credit balance while the expense account shows a debit balance (Gaffney, 2017).

References
Gaffney, C. 2017. Rules of Debits & Credits for the Balance Sheet & Income Statement.
[Online]. Available at: https://pocketsense.com/rules-debits-credits-balance-sheet-
income-statement-2171.html [Accessed on: 20 January 2018].
Narayanaswamy, R. 2014. Financial accounting: A Managerial Perspective. PHI Learning Pvt.
Ltd.
Porter, G. and Norton, C. 2016. Using Financial Accounting Information: The Alternative to
Debits and Credits. Cengage Learning.
Wevgandt. 2007. Financial Accounting, 4th Ed. John Wiley & Sons.