Concept explainers
Accounting Cycle:
Accounting cycle refers to the process of recording a business transaction in the books of accounts. This cycle begins with analysing, and recording the transactions in the journal, and concludes with the preparation of the financial statements.
To Explain: The difference between external events, and internal events.
Explanation of Solution
- External events are the events which involves an exchange transaction between the two parties, which is between a company, and another entity. Whereas, internal events are the events which does not involve any exchange transaction but such events affect the financial position of the company.
- Examples of external events are as follows:
-
- a) Borrowing of cash from bank
- b) Purchase of inventory
- c) Sale to a customer
- Examples of internal events are as follows:
-
- a) Accrual of salary expense
- b)
Depreciation expense - c) Expiry of prepaid rent
External events:
External events are the events which involves an exchange transaction between the two parties, which is between a company, and another entity. Examples of external transactions include borrowing of cash from bank, purchase of inventory, and sale to a customer.
To Identify: Whether the supplies purchased by a company from a local vendor would be classified as an external or internal transaction.
Answer to Problem 1RQ
The supplies purchased by a company from a local vendor would be classified as an external transaction.
Explanation of Solution
When the supplies are purchased by a company from a local vendor, it means that a transaction is being taken place between the two parties, which is between a company, and a local vendor.
Hence, the supplies purchased by a company from a local vendor would be classified as an external transaction.
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Chapter 2 Solutions
Financial Accounting
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