Accounting Fundamentals for Healthcare Management , Chapter 8, Testing your know

Question

Accounting Fundamentals for Healthcare Management , Chapter 8, Testing your knowledge

1. How do the ledger and journal entries interact with one another?

2. Explain how the ledger provides the information needed to prepare the balance sheet.

3. Explain how the ledger provides the information needed to prepare the operating statement.

4. What is the main purpose of the statement of cash flows?

5. What are the three categories used within the statement of cash flows? Why are these categories important for understanding an organization's cash situation?

6. Differentiate between the direct and the indirect methods for preparing and presenting the statement of cash flows.

Explanation / Answer

Under double entry system the business transactions are primarily recorded in journal and thereafter they are posted permanently in classified form under different respective heads according to nature of transactions.

So, it is a proven fact, both journal and ledger play important role in accounting process. Despite so many similarities there are some differences between journal and ledger which are shown below,

2. While preparing balance sheet, we are considering closing balances reflcted on personal and nominal accounts. these balance will show in balancesheet.

3. Balances of real account will transfer to operating statement. operating statement will show the effects of real account.

4. The primary purpose of the statement of cash flows is to provide information about cash receipts, cash payments, and the net change incash resulting from the operating, investing, and financing activities of a company during the period.

5. Cash Flow from Operating Activities

Cash flow from Investment Activities

Cash flow from financing activities

6.The main difference between the direct method and the indirect method involves the cash flows from operating activities, the first section of the statement of cash flows. (There is no difference in the cash flows reported in the investing and financing activities sections.)

Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers. In contrast, the indirect method will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities.

The direct method must also provide a reconciliation of net income to the cash provided by operating activities. (This is done automatically under the indirect method.)

Nearly all corporations prepare the statement of cash flows using the indirect method.

No Journal Ledger 1. Journal is a subsidiary book of account. It is the store house of recording transactions. Ledger is the permanent and final book of accounts. It is termed as the means of classified transactions. 2. Transactions are recorded in journal in chronological order of dates just after their occurrences. Transactions are posted in ledger in classified form from journal. 3. Transactions are recorded in journal without considering their nature of classification. Transactions are recorded in ledger in classified form under respective heads of accounts. 4. In journal explanation of entries of transaction are shown. In ledger explanations of entries of transactions are not needed. 5. The format of journal contains five columns. Generally the ledger account of ‘T’ form contains eight columns - four in left and four in right. But in statement format of ledger account contains six columns. 6. Journal helps in preparing ledger accounts correctly. The object of ledger is to know income and expenditures of different heads. 7. Transactions are recorded in journal in chronological order of dates. Ledger is prepared according to nature of accounts. 8. The total results of transactions cannot be known from journal. Results of particular head of accounts can be known from ledger. 9. In journal ledger folio (L.F.) is written. In ledger journal folio (J.F.) is written. 10. Preparation of trial balance is not possible from journal. Trial balance is prepared from ledger. 11. It is not possible to prepare income statement at the end of a period from journal to know profit or loss. Income statement is prepared with the ledger balances at the end of a period to know the net profit, or loss. 12. Balance sheet cannot be prepared directly from journal. Balance sheet is prepared with the help of ledger balances. 13. Transactions are recorded in journal in the light of voucher. Journal is the source of preparation of ledger. 14. There is no debit side or credit side in money columns in it for writing debit. Each account in ledger has two sides.
The left side is called debit and the right side is called credit under "T" format.
But in statement form there are three money columns for writing debit and credit amount and also for balance. 15. Recording of transaction in journal is called journalizing. Recording of transactions in ledger is called posting. 16. There is no scope of balancing in Journal. Balances are drawn in ledger accounts. 17. Journals are generally classified into eight groups according to practice. Ledgers are generally classified into two groups. 18. Journal does not start with opening balance. It is prepared from current transactions occurred. Some ledger accounts start with opening balance which is the closing balance of previous year.

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