1. Debits and Credits- When studying debits and credits, I often hear people say that it seems backwards and then cite their bank statement that shows deposits as a credit and withdrawals as a debit.
At first blush, it does seem backwards, but it is really does make sense since the bank statement is from the bank’s perspective. For the bank, your checking (or savings) account is a liability – any money you deposit is something they owe to you. So when you make a deposit, the bank debits their cash account and credits your checking account. Conversely, when you make a withdrawal, the bank would credit their cash account and debit your checking account.
The use of debits and credits are important to the double-entry accounting system used in modern accounting.
Explain debits and credits and the concept of the double-entry accounting system and
complete this chart as a ‘cheat sheet’ of sorts, indicating ‘increase’ or ‘decrease’ to show how each account is effected by a debit or credit.
2. Chart of Accounts- Accounts are the basic tool used in accounting to organize, classify and report financial information.
What is an account and what are the five basic account classifications? What is the purpose of a chart of accounts? In what order do accounts appear in the chart of accounts?
Why are these number gaps necessary?
3. Respond to the following:
As the bookkeeper of a new start-up company, you are responsible for keeping the chart of accounts up to date. At the end of each year, you analyze the accounts to verify that each account should be active for accumulation of costs, revenues, and expenses.
In July, the accounts payable (A/P) clerk asked you to open an account named New Expenses. You know that an account name should be specific and well defined, and you’re afraid the A/P clerk might charge some expenses to the account that are inappropriate.
Why do you think the A/P clerk needs the New Expenses account? Who needs to know this information, and what action should you consider?
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