Question1 a) State the Accounting Equation and show how each of the following tr

Question

Question1 a) State the Accounting Equation and show how each of the following transactions undertaken by DE Ltd in December 2008 can affect the Equation: i. Dec.1, 2008 Purchased goods for resale on credit GHe150,000 ii.Dec.3, 2008 Paid Rent Expense for the month of November 2008 with cheque GHg250 iii. Dec. 6, 2008 Bought Ofice Furniture with cheque GH¢2,500 iv. Dec. 15, 2008 Sold goods costing GHf50,000 on credit GH¢72,500 v, Dec. 20, 2008 Sold goods costing GH¢25,000 for cash GH¢37,000 vi. Dec. 20, 2008 Mr. Alimo, the sole shareholder of the Company introduced additional capital of GH¢75,000 by deptsiting a cheque in the Company's bank account for 1,000,000 ordinary shares marks b) State and describe what happens at cach stage of the Accounting c) What is a Transaction? d) Give two (2) examples each of Internal and external trahsactions. Cycle. 3 marks 2 marks 2 marks e) Identily the two main causes that will lead to a discrepahcy between the bank statemert balance and the cashbook balance. Give three examplet each of the two causes. 4 marks 0 List five reasons foi which a bank wili disnonour a cheque 2 marks

Explanation / Answer

(a)

(i) Both assets and liability side will increase and no effect on others.

(ii) Asset and stockholders' equity will decrease and expense will increase because an expense has been incurred.

(iii) No effect on anything. Only exchange of assets is being. One form of asset is being used to create other asset.

(iv) Assets will increase by $22,500 and so as the stockholders' equity and revenue.

(v) Assets will increase by $12,000 and so as the stockholders' equity and revenue.

(vi) Company's assets and stockhlders' equity will increase due to increase in amount invested by shareholders.

(b) First Stage: Transaction Journalizing: Here the accounting events and transactions are identified and journalized to keep track record of each and every financial event.

Second Stage: Account Posting: After journalizing, all the transactions being posted to their relevant accounts like asset, liabilities, revenue, expense, etc. to summarize the whole business events.

Third Stage: Trial Balancing: Transactions recorded and posted are then entered into trial balance to detect and rectify any error committed while 1st or 2nd stage because all debits must be equal to all credits. any difference there reflects errors.

Fourth Stage: Statement Preparing: After trial balancing each accounts balance transferred to its respective statement i.e. Income statement or Balance Sheet to summarize the whole data and view the final results of all the financial transactions ocurred during the year.

(c) Transaction means any agreement between two parties, it can either be business related or not. For instance paying house rent to landlord is a non business transaction. and selling goods to debtors is a business transaction. Also transaction can be internal or external.

(d) Two examples of external transaction:

.....(i) Selling goods to customers

......(ii) Paying rent expense

Two examples of internal transaction:

......(i) Charging Depreciation to fixed asset

......(ii) Adjusting Prepaid insurance

(e) Two main causes that will lead to a discrepency between bank balance and cashbook balance are:

(i) Amounts deposited or deducted in bank not recorded in cashbook for instance money directly deposited by customer, bank charges deducted by bank, bills paid by bank on standing instructions

(ii) Amount deposited or deducted in cashbook not recorded in bank for instance cheques issued but not cleared, cheques deposited with bank but not cleared, amount deposited in bank and entry in bank is pending.

(f) Five reasons for which bank will dishonour cheque are :

(i) Insufficient Balance

(ii) Signature mismatch

(iii) If date is not mentioned

(iv) Overwritten cheque

(v) Name of payee is not clear or missing

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