Chapter 3 Analyzing business Transactions Using T Accounts
Your friend has prepared financial statements for her business. She has asked you to review the statement for accurcy. The trial balance debt coum totals $91,000 and the credit column totals $104,000. What steps would you take to fina the error?
1. Check the math by adding the column again. 2. Determine whether the account balances are in the correct columns. 3. Check the accounts to see whether the balances in the accounts were computed correctly. 4. Check the accuracy of transactions recorded during the period.
Chart of accounts
A list of the accounts used by a business to record its financial transactions
What is a chart of accounts?
A list of the numbers and names of a business. It provides a system by which the accounts of the business can be easily identified and located.
Classifications
A means of identidying each account as an asset, liability, or owners, equity.
Footing
A small pencil figure written at the base of an amount column showing the sum of the entries in the column.
Drawing account
A special type of owner's equity account set up to record the owner's withdrawal of cash from the business.
Trial balance
A statement to test the accuracy of total devits and credits after transaction have been recorded.
T account
A type of account, resembling a T, used to analyze the effects of a bussines transaction.
How is the balance of an account determined?
Adding the figures on both sides of the account and subtracting the smaller total from the larger total
When a chart of accounts is created, number gaps are left within groups of accounts. Why are these number gaps necessary?
Additional accounts can be added when needed.
Permanent account
An account that is kept open from one accounting period to the next
Temporary account
An account whose balance is transferred to another account at the end of an accounting period.
Slide
An accounting error involving a mispaced decimal point
Transposition
An accounting error involving misplaced digits in a number.
Double entry system
An accounting system that involves recording the effects of eacch transaction as debts ans crdits.
Debit
An entry on the left side of an account.
Credit
An entry on the right side of an account
What are withdrawals and how are they recorded?
Cash taken from the business by the owner to obtain funds for personal living expenses.
The term debit and credit are often used in describing the effects of transactions on different accounts. What do these terms mean?
Debit: entry on the left side of an account. Credit: entry on the right side of an account
On which side of asset, liability, and owner's equity accounts are decreases recorded?
Decreases in asset accounts are recorded on the credit side. Decreases in liability and owner's equity accounts are recorded on the debit side
Why is the modern system of accounting usually called the double entry system?
Each transaction produces at least two effects with at least one debit and one credit.
In what order do accounts appear in the chart of accounts?
Order in which they appear on financial statements. Balance sheet accounts listed first, followed by income statement accounts.
Why is prepaid rent considered an asset account?
Payment of rent in advance affords the right to occupy the facility for the number of months covered by the payment.
Accounts are classified as permanant or temporary aaccounts. What do these classifications mean?
Permanent account balances are carried forward to start a new accounting period. Temporary account balances are transferred to a summary account at the end of the period and are zero at the start of a new accounting period.
Account Balance
The Difference between the amounts recorded on the two sides of an account.
What type of accounts are found on the balance sheet?
The assets, liabilities, and owner's equity accounts
Normal balance
The increase side of an account.
What is the purpose of a chart of accounts?
To provide a classified list of the names and numbers of a firm's accounts
What are accounts?
Written records for all assets, liabilities, and owner's equity of a business.
Accounts
Written records of the assrts, liabilities, and owners equity of a business.
Indicate whether each of the following types of accounts would normally have a debit balance or a credit balance.. a. An asset account b. A liability account c. The owner's capital account d. A revenue account e. An expense account
a. debit b. credit c. credit d. credit e. debit