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Summative Assessment 1
Summative Assessment 1
Summative Assessment 1
Question 1 – What is the principle of double entry accounting? Provide an example that
would illustrate this principle.
The main body of accounts is the general ledger and it is the main accounting record of a
business using a double entry accounting system. Each account has its own page in the
general ledger. For each account – the increases and decreases are recorded for the
accounting period, usually 1 month.
The aim of a double entry accounting system is to have a balance, up-to-date, properly
posted ledger. A double entry system posts a debit and credit for each transaction (hence
the term double entry) to reflect that we get something and give something up with each
transaction. For example, if the organisation buys a jar of coffee, then it gets a jar of coffee,
but it gives the cost of the coffee to the supplier.
Question 2 – Explain what a general journal is; describe the process of entering a correcting
entry then explain the general principles for reconciling balances outstanding and how
would you enter something from the statement that decreases the bank balance.
A journal is an accounting record where all business transactions are originally entered. A
journal details which transaction occurred and what accounts were affected. Journal entries
are usually recorded in chronological order and using the double entry method of
bookkeeping.
There are several ways organisations record transactions. They include manual systems
(hard copy) and computer based (electronic) systems.
Spreadsheet systems are only suitable for small organisations with few transactions. They
can have complex and useful reporting links. Spreadsheets, like Microsoft Excel, can be used
instead of a manual system. A worksheet replaces each book used in a manual system.
Although they are cheaper than proprietary accounting programs, they rely on someone
who understands both the spreadsheet programs and accounting principles. If the
spreadsheet is not tested properly there could be underlying errors that affect the accuracy
of the accounts.
All transactions must be correctly entered otherwise the calculations or end results of the
application will be incorrect. Transactions are financial events which affect the elements of
the accounting equation. Each transaction must be analysed for its effect on the assets,
liabilities and owner’s equity of the organisation. At least two items will change as a result of
every entered transaction.
Transactions can involve cash (the purchase of stationery where the organisation pays cash)
or credit (account) transactions (where the supplier of the stationery agrees that the
organisation need not pay for the stationery for 30 days after purchase). Cash transactions
consist of either cash coming into the organisation (cash receipt) or cash flowing out of the
organisation (cash payment).
Question 3 – List and explain the key points relating to two (2) types of legislation,
regulations, standards or codes of practice that are required for the preparation of financial
reports.
Privacy Legislation – All customers have a right to privacy. This is a legal right covered by the
privacy legislation. This means keeping customers personal and sensitive information
confidential. This legislation requires financial sector employees to behave in a careful
manner with regards to information.
When collecting personal information, the customer must be told why it is being collected,
how it is recorded, how it will be used, where it will be stored, how they can access it and
who else can access it. All records must be kept safe and protected against unauthorised
access. This information cannot be shared with anyone except the person/s it relates to.
Code of Practice – Industry codes of practice provide documented guidance and advice on
how to achieve predetermined minimum industry standards and legislative compliance.
They are developed in consultation with representatives from industry, workers and
employers, special interest groups and government agencies. While a code of practice is not
law and does not have the same legal enforcement as legislation it should be adhered to
unless there is an alternative course of action that achieves the same or better standards.
Question 4 – Describe how accounting information systems work, including the benefits
systems provide to the business.
Accounting Information Systems involve collecting, storing and processing of financial and
accounting data used by internal users to report information to investors, creditors and tax
authorities. It’s a computer-based method for tracking accounting activity in conjunction
with information technology resources.
Interdepartmental Interfacing which is when the sales department upload the sales budget
to the system, and the inventory management team can conduct inventory counts and
purchase materials. AIS can also share information about a new order so that the
manufacturing, shipping and customer service departments are aware of the sale.
Question 5 – Explain why organisations have policies regarding the use of assets and why do
staff need to be aware of them and other organisational policies, procedures and accounting
standards.
Policies are necessary so that people working in the organisation can have a framework for
actions that helps them perform their jobs in the way that is expected by their employer. It
alleviates the problem of people having to discuss and resolve issues each time a situation
arises. The policy provides the decision-making process and the actions that can be applied
in many cases and as a consequence has efficiency benefits.
There are accounting principles that are general in nature and provide a collection of rules,
procedures and conventions that define accepted accounting practice, and which include
broad guidelines as well as detailed procedures. These are accepted practices that are
accepted as the norm and against which auditors will conduct their examination. The
accounting equation is:
The general ledger is the accounting records of an organisation that contains all of the
financial accounts of a business. The financial accounts categorise and keep track of income
and expenses. It is therefore necessary to have a general ledger that is easy to use and
which has a range of reports covering all the information that is required.
The transactions on the bank statement are in a different order than in the journal. The
bank statement lists the transactions as they occur at the bank. When conducting
reconciliation, it would be noted that the cheque 770981, for $28.95, has not been
presented to the bank.
Reconcile the bank statement by ticking off the entries in the journal and the corresponding
entry in the statement.