Question

 1. Identify the three categories of the accounting equation, and list at least four accounts associated with each category.

 2. What is the purpose of the chart of accounts? Explain the numbering typically associated with the accounts.

 3. What does a ledger show? What's the difference between a ledger and the chart of accounts?

 4. Accounting uses a double-entry system. Explain what this sentence means.

Answer 1

Ans 1) The three categories of accounting equation are assets, liabilities and equity. Below are the accounts which are actually associated with these categories.

Assets: Includes: Accounts receivables, Cash, Bank, Prepaid Exp., Furniture’s

Liabilities: Includes: Accounts Payables, Outstanding Salary, Unearned revenue

Equity: Includes: Common Stock, Dividends, and Revenue & Exp.

Ans 2) The purpose of using chart of accounts (CoA) is actually quite simple, It basically helps the companies to organize their accounts. It helps them in managing their list of accounts in a correct and proper way. In chart of accounts, accounts usually starts with 1 are actually classified as Assets, 2 as Liabilities and 3 as Equity.

Ans 3) Ledger is nothing but detailing of accounts, a ledger actually shows increase and decrease happened in an account over a specific time of period. This detailing is actually the major difference between Chart of accounts and ledger. Otherwise both are similar in a way that both actually provide the list of accounts numbers and names as well.

Ans 4) Double entry system simply means that every transaction has two aspects, debit and credit, every transactions affects at least 2 accounts. One would be debit and other would be credit. Suppose A company takes credit of USD 1000 from A person called Mr B. So here, It will have two aspects, one is Cash, Cash is increasing by $1000 and other is liability, your liability towards Mr B is also increasing by USD 1000. SO this is the double entry system that tells in nutshell, “any business transaction will have at least two legs to walk”.