Question

Identify 2-3 of the most important things that you learned in the course. Why do you feel these will be important to your career?

Example: Account Classification, Adjusting Entries, Merchandising Co. entries, Bank Reconciliation, and Depreciation.

Answer 1

The most important things that I learned in this course are;

• Account Classification;
• Adjusting Entries;
• Bank Reconciliation; and
• Depreciation.

As a professional accountant or chartered accountant, he/she should have an indebt knowledge in acoounting, taxation and auditing. So while auditing each and every entity, as an chartered accountant he/she has to go through every transactions and fianally financial statements; then express an opininon that whether the same has been prepared as per applicabe financial reporting framework, whether financial statement reflects true and fair view and financila statements are free from material misstatement due to fraud or error.

So, inorder to examining aforementioned he/she should have thorough knowlwdge in basic aspects of accounting ie, classification of accounts, adjustment entries, bank reconciliation statement and finally depreciation.

Classification of accounts:

Importance of Classification

Classification is the process of identifying accounting transactions and assigning those transactions to an appropriately-numbered account. A company’s classification system is recorded on what is known as a chart of accounts. Certain financial information must be reported by law. Classification organizes and facilitates this reporting process. The classification system helps guide bookkeepers as to where various company transactions should go, saving time and improving accuracy in reporting.

Five Basic Classifications

Classification systems and the chart of accounts follow five basic classifications: assets, liabilities, equity, revenue and expenses. Assets, liabilities and equity pertain to a company’s balance sheet, and transactions in these classifications record benefits, obligations and the residual value of the company. Revenue and expense classifications are income-statement accounts and represent the recognition of products or services provided to customers and the value of the assets used up to create these products and services.

Adjusting Entries:

Purpose of Adjusting Entries

The main purpose of adjusting entries is to update the accounts to conform with the accrual concept. At the end of the accounting period, some income and expenses may have not been recorded, taken up or updated; hence, there is a need to update the accounts.

If adjusting entries are not prepared, some income, expense, asset, and liability accounts may not reflect their true values when reported in the financial statements. For this reason, adjusting entries are necessary.

Types of Adjusting Entries:

Generally, there are 4 types of adjusting entries. Adjusting entries are prepared for the following:

Accrued Income – income earned but not yet received

Accrued Expense – expenses incurred but not yet paid

Deferred Income – income received but not yet earned

Prepaid Expense – expenses paid but not yet incurred

Also, adjusting entries are made for:

Depreciation

Doubtful Accounts or Bad Debts, and other allowances.

Bank Reconciliation:

A bank reconciliation is used to compare your records to those of your bank, to see if there are any differences between these two sets of records for your cash transactions. The ending balance of your version of the cash records is known as the book balance, while the bank's version is called the bank balance. It is extremely common for there to be differences between the two balances, which you should track down and adjust in your own records. If you were to ignore these differences, there would eventually be substantial variances between the amount of cash that you think you have and the amount the bank says you actually have in an account. The result could be an overdrawn bank account, bounced checks, and overdraft fees. In some cases, the bank may even elect to shut down your bank account.

It is also useful to complete a bank reconciliation to see if any customer checks have bounced, or if any checks you issued were altered or even stolen and cashed without your knowledge. Thus, fraud detection is a key reason for completing a bank reconciliation. When there is an ongoing search for fraudulent transactions, it may be necessary to reconcile a bank account on a daily basis, in order to obtain early warning of a problem.

When it comes time for the annual audit, the auditors will always examine the company's ending bank reconciliation as part of their testing procedures, so this is yet another reason to complete a reconciliation.

Depreciation:

  

Depreciation is the systematic allocation of the depreciable amount of an asset over useful life.

The purpose of depreciation is to match the cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset. Since it is hard to see a direct link to revenues, the asset's cost is usually allocated to (assigned to, spread over) the years in which the asset is used. Depreciation systematically allocates or moves the asset's cost from the balance sheet to expense on the income statement over the asset's useful life. In other words, depreciation is an allocation process in order to achieve the matching principle; it is not a technique for determining the fair market value of the asset.

The accounting entry for depreciation is a debit to Depreciation Expense and a credit to Accumulated Depreciation (a contra-asset account that is reported in the same section of the balance sheet as the asset that is being depreciated).

Purpose of providing depreciation

• To keep intact the capital invested in fixed assets.
• To ascertain true cost of production
• To determine profit or loss for the year
• To present true and fair value of entity’s assets in the balance sheet.