Question

What is a chart of accounts?

What is a T account? What are the normal balances for the accounts?

What is the time period assumption, Revenue recognition principle, matching principle?(pg 151)

What is the difference between Accrual and Cash basis accounting? (pg 153).

Answer 1

1. Chart of Accounts:

A chart of accounts provides a complete set of listing of each account or general ledger in an accounting system. An account is a unique record for each type of asset, liability, equity, revenue and expense.
It represents the names of the ledger accounts that the organisation has identified and made available for proper recording of transactions in its general ledger. A Chart of Accounts establishes the level of detail track in a record-keeping system. Chart of Accounts contains the name of accounts, their brief descriptions and identification codes assigned to them.
The Chart of Accounts serves as the foundation for a company’s financial record keeping system. It provides a logical structure which facilitates the addition of new accounts and deletion of old accounts in an accounting system & book keeping.

2. T Account:

A T account is a graphic representation of a general ledger account in an accounting system in which the name of the account is placed above the "T". Debit entries are entered to the left of the "T" and credits are depicted to the right. The grand total balance for each account appears at the bottom of the account. All the T accounts are grouped together to show the accounts affected by an accounting transaction in the organisation. It is a fundamental tool in double entry system of accounting, showing one side of an accounting transaction is reflected in another account. This approach is not used in single entry accounting, since only single account is affected by each transaction.
T account normally has debit & credit balances of general ledger, where revenue revenue & gains are usually credited & expenses & losses are debited.

3. Time Period Assumptions:

The time periods are known as accounting periods for which organisation prepares their financial statements which is to be used by various users of financial information either internal or external.
The length of accounting period usually depends on the nature and requirement of each business as well as according to the needs of users of financial statements. An accounting period generally consists of a quarter, six months or a year.

Revenue Recognition Principle:

According to Revenue Recognition Principle, revenues are recognized as & when they are realized or become realizable, and are earned, no matter whether cash is received or not.

Matching Principle:

The matching principle states that the company should report an expense on its income statement in the same period as the related revenues are recorded.

4. Difference between Cash & Accrual Basis:

1. Under Cash basis of Accounting revenues are reported on the income statement in the period in which the cash is received from customers whereas under accrual basis of accounting incomes are reported on the income statement as & when they are earned
2. Under Cash Basis of accounting expenses are reported on the income statement when the cash is paid out whereas in accrual basis of accounting expenses are reported on the income statement in the time period when they actually occured or when they expires.