Quiz 3: Analyzing Business Transactions Using T Accounts

Business

Indicate whether accounts have debit balance or credit balance: • An account is a statement of income and expenditure that relates to a specific period of time. • These are the financial records that an organization keeps in order to ascertain the profit as well as the losses that it has incurred during a year. • Revenue accounts, expense accounts are some of the examples of accounts. • By classification, accounts are recognized. img

Explain about setting up T accounts: • Double entry system is the system that means that the effect of every transaction would be such that there would be a debit and a corresponding credit. • In modern times, an organization uses the double entry book keeping system and therefore, the accounting system is usually called the double entry book keeping system. • In this system, there are rules of accounting, the debit credit rules. • Every transaction has a debit and a corresponding credit effect to it. • The debit increases an asset, expenses and the losses, whereas the credit increases the liabilities, revenue and the gains. • The opening balance of an asset is always on the debit whereas the opening side of a liability is always on the credit side. Indicate whether accounts have debit balance or credit balance: img The following are the T accounts: img img img img

Financial statements: Income statement reports the financial performance of a business for a specified period. It reports all revenues and expenses incurred for that specific period. Net income is the excess of revenues over expenses. The following is the formula for calculating net income: img Revenue is defined as the amount that an organization actually receives over a period of time in exchange of transactions or rendering its services or by selling goods. For example, when a professional firm renders its services of advising to its clients, the clients gives the firm fees which accounts as revenue for the firm. Expenses are defined as the amount that the organization spends over a period of time. For example, the expenses of a professional firm would be salaries, stationery etc. When one looks at the income statement, he can ascertain the income or loss that the entity has incurred during the period under consideration. When one does that, he can know the reasons for the results. And work and plan accordingly. A balance sheet reports the financial position of the business on a specific date. It is the result of the transactions that have been entered into during the prior period. By comparing the balance sheets at two different periods of time, one can ascertain the financial position of the entity and plan and work accordingly. It is to be noted that income statement is for a specified period and balance sheet is for a specified date. By knowing the financial performance and position only, management can take any decisions regarding the business. Management should first of all know the fields in which the organizations is doing well and in which still improvement is needed. By analyzing the financial statements only the position and performance of a business can be known.

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