AE 111 Financial Accounting & Reporting

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Questions and Answers

What is the primary purpose of preparing a trial balance?

To calculate the net income for a business

To report the income and expenses of a period

To ensure total debits equal total credits (correct)

To summarize the financial position of a business

Which of the following account types would typically have a credit balance?

Liabilities (correct)

Expenses

Drawings

Assets

In which scenario would an accounting error not affect the trial balance?

A transaction is recorded twice

An incorrect account is debited

A transaction is completely omitted

An amount is recorded incorrectly in both debit and credit (correct)

Which of the following statements best describes the debit and credit concepts?

Debits decrease liability accounts (C) Signup and view all the answers

What is the first financial statement usually prepared after the trial balance?

Income Statement (A) Signup and view all the answers

What does a trial balance verify at the end of an accounting period?

The equality of debits and credits (A) Signup and view all the answers

Which of the following accounts would typically appear in the credit column of the trial balance?

Accounts Payable (A) Signup and view all the answers

What does it indicate if the trial balance columns are equal?

The totals of debit and credit are equal. (D) Signup and view all the answers

Which of the following is NOT a step in the preparation of a trial balance?

Compare the account balances with external statements (C) Signup and view all the answers

What potential mistake can still cause errors even if the trial balance is balanced?

An expense was omitted from the records. (B) Signup and view all the answers

Which account type does 'Prepaid Rent' fall under in a trial balance?

Asset (A) Signup and view all the answers

What does a discrepancy in the total amounts of debits and credits indicate?

A potential accounting error exists. (B) Signup and view all the answers

Which of the following is an example of an asset in the given trial balance?

Accounts Receivable (D) Signup and view all the answers

What is the primary purpose of a chart of accounts?

To provide a systematic order for accounts used in financial reporting (A) Signup and view all the answers

Which of the following accounts would be classified as an asset?

Cash (B) Signup and view all the answers

When preparing a trial balance, which of the following statements is true?

Total debits must equal total credits. (B) Signup and view all the answers

Which of the following best describes the function of the journal in accounting?

To record business transactions systematically (C) Signup and view all the answers

What account type does 'Unearned Revenues' fall under?

Liability (B) Signup and view all the answers

In which section of the chart of accounts would 'Salaries Expense' be recorded?

Expenses (A) Signup and view all the answers

What is the impact of an accounting error where a revenue account is understated?

Owner's equity will be understated (C) Signup and view all the answers

Which of the following is a key component of financial statements?

Income Statement (A) Signup and view all the answers

How are assets and liabilities ranked in the chart of accounts?

Assets followed by liabilities and then owner's equity (A) Signup and view all the answers

Which account is considered a liability in the chart of accounts?

Notes Payable (D) Signup and view all the answers

Study Notes

Chart of Accounts

The chart of accounts is a comprehensive listing of all accounts and their corresponding numbers within the ledger, organized for financial statement presentation.
Account categories are structured in a specific order: assets, liabilities, owner's equity, income, and expenses.
Account numbers should be flexible for effective indexing and cross-referencing.
Accountants use the chart to identify relevant accounts for transaction analysis; new accounts can be added if necessary.

Del Mundo Landscape Specialist Chart of Accounts

Balance Sheet Accounts
- Assets include Cash, Accounts Receivable, Supplies, Prepaid Rent, Prepaid Insurance, Vehicles, Equipment.
- Liabilities consist of Notes Payable, Accounts Payable, Salaries Payable, Interest Payable, Unearned Revenues.
- Owner's Equity includes Capital, Withdrawals, and Income Summary.
Income Statement Accounts
- Income accounts feature Landscaping Revenues and Lawn Cutting Revenues.
- Expense accounts comprise Salaries Expense, Supplies Expense, Rent Expense, Insurance Expense, Gas Expense, Advertising Expense, and Depreciation Expenses.

Journalizing Transactions

Journals are special forms used by accountants to systematically document business transactions.
Proper journal entries are essential for maintaining accurate accounting records.

Trial Balance

A trial balance is prepared to verify the equality of debits and credits in the ledger at the end of an accounting period or after posting updates.
It acts as a control mechanism to reduce accounting errors.
Significantly, an equal trial balance does not guarantee error-free accounts—specific errors may still exist, such as unrecorded expenses.

Preparation of Trial Balance

Steps to prepare a trial balance:
- List account titles in numerical order.
- Obtain balances from the ledger, entering debit balances in the debit column and credit balances in the credit column.
- Sum both columns and compare the totals.

Example Trial Balance

The example shows Del Mundo Landscape Specialist's trial balance from November 30, 2019, with total debits and credits both equal at ₱ 602,000.

Locating Errors

Discrepancies between the totals of debits and credits indicate an error in the accounting records that requires investigation.

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Description

This quiz covers steps 5 to 10 from the modules in AE 111 Financial Accounting & Reporting. Students will review critical concepts necessary for understanding the financial accounting process. Prepare to assess your knowledge as you delve into these essential topics.