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Accounting Fundamentals in Society
WEEK 3: Hoggett et al (2018) chapter 3: DQ 3.1, 3.3,3.5, 3.6;
EX 3.1, 3.2, 3.4 & 3.5.
DISCUSSION QUESTIONS
3.1 Indicate whether each of the following events is an internal transaction, an external
transaction, or a non-transaction event. Explain your answer in each case:
(a) Receipt of money from a customer in payment of services to be provided early in the
next accounting period.
(b) Equipment is used to provide a service for a customer
(c) The human resources department provided services to the customer service department.
(d) A building owned by the business increased in value
(e) Received payment from a customer on account for services
provided in the previous accounting period.
(f) A prospective employee is interviewed and hired for a job
(g) Stationery supplies are used by an employee.
(a) External, because an event has happened between the entity and an outside party. Even
though no service has yet been provided the receipt of money means that the entity now has a
liability to either provide the service in the future or return the money. This needs to be
recorded immediately.
(b) External and Internal. Even though the equipment has been used in the performance of a
service to an outside party (external), the usage and wearing out of the equipment is usually
recorded as an internal adjustment by way of depreciation on the equipment.
(c) Internal, as there needs to be a record kept within the entity of the provision of services
between departments so that the cost of running each department may be accurately
determined.
(d) Non-transaction event. However, if it is the practice of an entity to revalue such assets to show
the higher value of the building, it would be recorded as an internal transaction, as there is no
outside party involved.
(e) External, as there is an external party directly involved. Even though the provision of services
would have been recorded in the previous period along with accounts receivable, the receipt
of cash affects the cash at bank and reduces accounts receivable in the current period.
(f) Non-transaction event, which is not recorded until an employee has begun work and
has provided services to the entity
(g) Internal, as there is merely an adjustment inside the entity to reflect a change in value due
to supplies being used. No external party is involved.
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, 3.3 One often hears the statement: ‘Debits are bad and credits are good for the business.’ Do
you agree? Why or why not?
This statement is meaningless. The debits and credits are merely double-entry rules for recording
transactions and events. Even though expenses may be ‘debit’, so too are assets. ‘Debit’ implies
neither good or bad. Likewise for credits, which can be revenues or liabilities or equity.
3.5 Why are journals required as part of the recording process? Would not a set of
ledger accounts be sufficient?
Journals provide a chronological record of transactions and events affecting an entity. The general
ledger does not, but classifies like transactions similarly. Hence, the purposes of the journal and
ledger are different, but complement each other.
3.6 Give an example of a transaction that results in:
a) An increase in one asset and an increase in equity
b) An increase in one asset and an increase in a liability
c) A decrease in one asset and a decrease in a liability
d) A decrease in one asset but no change in the total assets
e) A decrease in one asset and a decrease in equity
f) A decrease in equity and an increase in a liability.
g) One asset increasing, one asset decreasing and one liability increasing
(a) The owner contributing an asset to the business such as cash or equipment or land or buildings.
Earning income would increase either cash at bank or accounts receivable and also increase
income, which by definition is an increase in equity.
(b) Purchase of stationery on credit from a supplier which would increase Stationery Supplies
Inventory and increase Accounts Payable.
(c) Paying a supplier for goods or services purchased on credit would reduce cash at bank as well as
the accounts payable.
(d) Examples are purchase of supplies for cash and the collection of money from a customer who
was part of accounts receivable.
(e) If the owner took cash from the business bank account this would reduce cash at bank and
equity by increasing drawings. Paying cash for an expense incurred by the business would
reduce the asset cash at bank and reduce equity by increasing expenses which are defined as
decreases in equity.
(f) The incurrence of an expense on credit or which is not yet paid for e.g. wages expense and
wages payable.
(g) Purchase of an asset (such as equipment or a building) in which a part payment is made and the
balance of the purchase price is borrowed from a bank or finance company
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