ACCT Ch 3

What is the basic accounting equation?

Assets = Liabilities + Common stock + Revenue - Expenses - Dividends.

What is the normal balance for liability accounts?

Liability accounts normally show credit balances.

What is a chart of accounts?

List of account names.

What are the procedures for preparing a trial balance?

List the account titles and their balances Total the debit column and the total credit column Verify the equality of the two colums

What is a trial balance? How are accounts listed in a trial balance?

Lists accounts and balances at a given time. In the order they appear in the ledger.

What does a trial balance prove?

Mathematical equality of debits and credits.

limitations of trial balance

Missing entries not shown Double-entries still balance Offsetting errors

normal balance for dividends

debit

3 steps of recording process

- Analyze each transaction and its effec on the accounts - Enter the trasnaction info in the journal - Transfer the journal info to the ledger accounts

What information does a complete journal entry have?

- Date of transaction, - accounts and amounts to debit/credit - brief explanation of the transaction.

What is a credit balance?

A credit balance occurs when the credit amount exceeds the debits.

What is a debit balance?

A debit balance occurs when the total of the debit amount exceeds the credits.

What is a trial balance?

A list of accounts and their balances at a given time, typically prepared at the end of an accounting period.

What is a chart of accounts?

A list of all the accounts that make up a company's ledger in one place.

What is a ledger?

A record of all company accounts and their balances.

What are the three parts of an account?

A title, a left or debit side, and a right or credit side.

What is the benefit of cloud-based storage in accounting?

Allows access from different locations

When should an expense be recorded?

An expense should be recorded when it has an effect on the accounting equation.

What is an account?

An individual accounting record of increases and decreases in a specific asset, liability, stockholders' equity, revenue or expense item we capitalize name when referring to specific account

What is the order of the accounting cycle?

Analyze business transactions, journalize, post, trial balance, adjusting entries, adjusted trial balance, financial statements, closing entries, post-closing trial balance

What is the first step in the recording process?

Analyze each transaction in terms of its effect on the accounts.

What is the normal balance for asset accounts?

Asset accounts normally show debit balances.

What is the order of presentation in a trial balance?

Assets, Liabilities, Stockholders' equity, Revenues, Expenses.

What do debits increase?

Assets, expenses, and dividends.

What does the accounting equation always need to do?

Balance

What is the dual effect of each transaction on the accounting equation?

Balancing effect, can be on the same side.

Give examples of accounting transactions.

Buying a sewing machine, selling a jacket, launching a marketing campaign.

What is the normal balance for revenue?

Credit.

What is crediting?

Crediting is making an entry on the right side of an account.

How is cash investment in the business recorded?

Cash is debited and common stock is credited.

What is an accounting information system?

Collects and processes transaction data, communicates financial information the size of company, type of trasnactions shape this

How is stockholders' equity calculated?

Common stock + retained earnings.

What are the Dr./Cr. procedures for stockholders' equity?

Common stock is increased by credits and decreased by debits.

What is a general ledger?

Contains all asset, liability, equity, revenue, and expense accounts.

What is the normal balance for revenue accounts?

Credit balance.

What is the normal balance for equity?

Credit.

What does a complete entry consist of?

Date, accounts, amounts, and explanation.

What is the normal balance for expense accounts?

Debit balance.

What is the normal balance for expense?

Debit.

What is debiting?

Debiting is the act of entering an amount on the left side of an account.

What is the general rule for debits and credits in relation to assets and liabilities?

Debits increase assets and decrease liabilities, while credits decrease assets and increase liabilities.

The journal makes 3 significant contributions to the recording process

Discolses in one place the complete effect of a transaction It provides a chronological record of transactions It hleps to prevent or locate errors bc the debit and credit amts for each entry can be readily compared

What is the impact of dividends on stockholders' equity?

Dividends reduce stockholders' claims on retained earnings and are recorded with debits.

What are the limitations of a trial balance?

Doesn't prove all transactions recorded or ledger correctness. An error isn't eithical or unethical An irregularity: intentional misstatemnt: is unethical

trial balance good bc:

Easy check Uncover erros Quickly prepare finance statements

What are accounting transactions?

Economic events requiring recording in financial statements Ex: hiring new employee vs buying a computer, only the computer part would be recorded for acct, bc it affects assets, liabilites...

What are accounting transactions?

Economic events that change assets, liabilities, or stockholders' equity.

What does EDP stand for?

Electronic data processing systems

When is a trial balance prepared?

End of an accounting period.

What are the steps involved in posting?

Enter debit amounts with dates to the proper general ledger account, enter credit amounts with dates to the proper general ledger account.

What is journalizing?

Entering transaction data in the journal.

What can a trial balance uncover?

Errors in journalizing and posting.

What is a source document?

Evidence of the transaction, such as a sales slip, check, or bill.

How do expenses affect stockholders' equity?

Expenses decrease stockholders' equity.

What is the effect of expenses on stockholders' equity?

Expenses decrease stockholders' equity.

What is the purpose of transaction analysis?

Identify account type and determine debit or credit.

How is retained earnings affected?

Increases when the company recognizes revenue, decreases when the company incurs expenses or pays dividends

What is considered an unethical irregularity in a trial balance?

Intentional misstatement.

Are dividends considered an expense?

No, dividends are a reduction of stockholders' equity but not an expense.

What is the purpose of a trial balance?

Preparation of financial statements.

What is transaction analysis?

Process of identifying the specific effects of economic events on the accounting equation

What does the ledger provide?

Provides the balance in each of the accounts, and keeps track of change in these balances Various types but every company has a general ledger

What is accrual-based accounting?

Recognizing revenue as services are performed.

How is retained earnings affected?

Retained earnings are increased by credits and decreased by debits.

Where does revenue increase in the balance sheet?

Retained earnings under stockholder equity

What do credits increase?

Stockholders' equity, liabilities, and revenues.

What are the two main benefits of T-accounts?

The T-account form helps in determining the totals of each side of the account as well as the account abalance (balance is determined by netting the two sides (subtracting one amt form the other))

What is the normal balance?

The side of a t-account where the balance is typically found.

What is the double-entry system?

The double-entry system records the two-sided effect of each transaction in appropriate accounts.

What is a general journal?

The most basic form of a journal.

What is posting?

The process of accumulating journal entry amounts in the general ledger.

What happens to dividends, revenues, and expenses at the end of the period?

They are transferred to retained earnings, affecting stockholders' equity.

What is the rule for total debits and total credits?

They must be equal.

What is the purpose of a journal?

To disclose the complete effect of a transaction (debits and credits) in one place, provide a chronological record of transactions, and help prevent or locate errors.

What is the purpose of a journal?

To disclose the complete effect of a transaction.

What is a general ledger used for?

To keep track of changes in asset, liability, stockholder's equity, revenue, and expense accounts.

What is the purpose of the journal?

To record transactions in chronological order before transferring them to the accounts.

What is the role of the ledger?

To transfer journal information to the appropriate accounts.

What is the purpose of transferring journal entries to the ledger?

To update the account balances.

What is the purpose of a trial balance?

To verify the equality of the two columns.

When does common stock increase?

When new shares are issued for cash.

When is revenue recorded?

When the company has performed the work, even if cash has been received (until then it is in unearned rev)

How is common stock affected?

When the company issues new shares of stock in exchange for cash

Do debits always equal credits?

Yes, debits must equal credits.

What is posting?

the procedure of transferring journal entry amts to ledger accounts This phase of recording process accumulates the effects of journalized transactions in the individual accounts

What is the ledger?

the record of all accounts mainited by a company and their amounts