Accounting Chapter 2
using the account process, when we want to RECORD, we: 1. analyze the transaction using the _________ _________ 2. ____________ the transaction 3. post _______ entries to the __________ ledger
1. analyze the transaction using the accounting equation 2. journalize the transaction 3. post journal entries to the general ledger
Match steps in the accounting cycle to their definitions. 1. Analyze 2. Record 3. Adjust 4. Report 5. Close a) prepare financial statements b) analyze transactions from source documents c)journalize closing entries and prepare post-closing trial balance d. Journalize adjusting entries and prepare adjusted trial balance e. Journalize transactions and prepare unadjusted trial balance
1. analyze, analyze transactions from source documents 2. record, journalize transactions and prepare unadjusted trial balance 3. adjust, journalize adjusting entries and prepare adjusted trial balance 4. report, prepare financial statements 5. close, journalize closing entries and prepare post-closing trial balance
On December 31, the Milers Company had $800,000 in total assets and owed $300,000 to creditors. If the corporation's common stock amounted to $250,000, what amount of retained earnings should appear on the company's December 31 balance sheet?
250,000
to increase an expense
Debit
on december 18th, webwork performed $4,740 worth of services for which it received $1000 cash with the remaining $3,740 to be paid in the future. Debit both __________ and ______, credit _______.
Debit cash and accounts receivable, credit all of the $4,740 in revenue.
On December 20th, Webwork paid its employee $1620 cash for her first two weeks of employment. Debit _______, credit _______.
Debit wage expense, credit cash
Would a company record a transaction in its general ledger when an order is placed for the purchase of a machine that will be paid for at the time of its delivery in three months? Explain your answer.
No. this transaction has no impact on any of the basic accounting equation components. thus, no entry would be recorded until the asset was received or paid in cash
The retained earnings on a balance sheet are $80,000. Without seeing the rest of the balance sheet, can you conclude that stockholders should be able to receive a dividend in the amount of $80,000 cash from the business? Justify your answer.
No. without knowing how much cash is on hand, it is impossible to determine whether a dividend of $80,000 can be paid by the company
What is a T-account and how is it used?
a T-account is a general ledger account that has the shape of a T. T-accounts are used to accumulate debit and credit entries to any of a company's various accounts.
common stock increases when
a company issues shares of stock
A journal entry that contains more than just two accounts is called: a. A posted journal entry b. An adjusting journal entry c. An erroneous journal entry d. A compound journal entry
a compound journal entry
Which of the following is true? a. A debit will increase a liability account b. A credit will increase an asset account c. A credit will increase a revenue account d. A debit will decrease an expense account
a credit will increase a revenue account
Describe the nature and purpose of a general journal. a general journal is a book of original entry that may be used for the ________ recording of any type of business transaction. it contains space for __________ and for accounts to be debited or credited, columns for the amounts of debit and credits, and a ______________ ____________ column for the accounts that are posted.
a general journal is a book of original entry that may be used for the initial recording of any type of business transaction. it contains space for dates and for accounts to be debited or credited, columns for the amounts of debit and credits, and a posting reference column for the accounts that are posted.
Describe a compound journal entry.
a journal entry containing more than one debit entry or more than one credit entry.
Posting refers to the process of transferring information from: a. A journal to the general ledger accounts b. General ledger accounts to a journal c. Source documents to a journal d. A journal to source documents
a journal to the general ledger accounts
What is a chart of accounts?
a list of accounts to which revenue and expenses are posted and show up on the general ledger
A trial balance is
a listing of all accounts from the general ledger with their respective debit or credit balance
Explain how it is possible for a trial balance to be in balance but still be in error.
a trial balance may be in balance but still be in error because of recording errors in the ledger account. for example, a cash sale in the amount of $1,000 may have incorrectly entered in the ledger as an increase of $100 in cash and sales. the trial balance would still balance because the entered debit and credit were the same amount.
while the general journal organizes transactions in chronological order, the general ledger organizes transactions by
account
What information is recorded in an account?
account title, the account number, dates, descriptive notations, amounts reflecting increases or decreases, and cross references to other accounting records
Which of the following accounts has a normal debit balance? a. Accounts Payable b. Notes Payable c. Common Stock d. Advertising Expense
advertising expense
11. The general ledger includes accounts for all but which of the following? a. Assets b. Expenses c. Dividends d. All of the above are in the general ledger
all of the above are in the ledger
What is an account?
an individual record of increases and decreases in specific assets, liabilities, and stockholder's equity
List the five major steps in the accounting cycle in their proper order.
analyze, record, adjust, report, close
the 5 major steps in the accounting cycle are
analyze, record, adjust, report, close
PREPAID rent is considered an
asset
assets ________ with debit entries and ________ with credit entries
assets increase with debit entries and decrease with credit entries
assets increase with _______ entries and decrease with ________ entries.
assets increase with debit entries and decrease with credit entries
In applying the rules of debits and credits, which of the following statements is correct? a. The word debit means to increase and the word credit means to decrease b. Asset, expense, and common stock accounts are debited for increases c. Liability, revenue, and common stock accounts are debited for increases d. Asset, expense, and dividends are debited for increases
assets, expense, and dividends are debited for increases
Which of these accounts has a normal debit balance? a. Assets, expenses, dividends b. Assets, revenues, common stock c. Liabilities, revenues, common stock d. Assets, liabilities, dividends
assets, expenses, dividends
Webwork received a prepayment from a customer for services to be completed over the next couple months. Due to the revenue recognition principal, this transaction will affect what two categories?
cash and unearned revenue
some activities may represent a business activity (such as ordering supplies, bidding on a contract) but an accounting transaction does not take place until such activities result in
change in an asset, liability, or stockholders' equity account
the accounting equation provides a
convenient way to analyze and summarize a company's financial transactions and data
Does the following account have a normal debit or credit balance? Professional Fees Earned
credit
Does the following account have a normal debit or credit balance? accounts payable
credit
Does the following account have a normal debit or credit balance? common stock
credit
common stock has a normal _______ balance
credit
liabilities have a normal ______ balance
credit
liability and stockholders' equity accounts normally have _____ balances
credit
retained earnings has a normal _______ balance
credit
revenue has a normal _______ balance
credit
stockholders' equity has a normal ________ balance
credit
to decrease an asset
credit
to decrease an expense
credit
to decrease dividends
credit
to increase a liability
credit
to increase revenue
credit
to increase service revenue
credit
Some accounting students believe that debits are good and credits are bad. Explain why this is not an accurate way to think about debits and credits.
credits can be good because they can represent an increase of SHE when a sales transaction occurs. debit simply refers to the left side of an account and credit refers to the right side
Does the following account have a normal debit or credit balance? Accounts Receivable
debit
Does the following account have a normal debit or credit balance? advertising expense
debit
Does the following account have a normal debit or credit balance? cash
debit
Does the following account have a normal debit or credit balance? dividends
debit
Does the following account have a normal debit or credit balance? supplies
debit
asset accounts normally have ________ balances
debit
assets have a normal ______ balance
debit
dividends have a normal _______ balance.
debit
expenses have a normal _________ balance
debit
to decrease a liability
debit
to decrease revenue
debit
to decrease service revenue
debit
to increase an asset
debit
to increase dividends
debit
the company paid $500 to suppliers on account. Debit __________, credit ____________.
debit accounts payable, credit cash
the company billed clients $900 for services rendered, which were unpaid. Debit ___________, Credit __________
debit accounts receivable, credit service revenue
Webwork received payment on account from a customer. this will debit _______ and credit _______.
debit cash, credit accounts payable
On December 27, WebWork received $2,400 cash from a customer for services previously performed on account. Debit __________, Credit __________
debit cash, credit accounts receivable
On dec 27th, webwork received $2400 cash from a customer for services previously performed on account. Debit _______, credit _______.
debit cash, credit accounts receivable
Steve Gates invested $30,000 cash in exchange for all of the company's common stock. How will this transaction effect the accounting equation?
debit cash, credit common stock
Steve Gates invested 30,000 in exchange for common stock. we will debit __________ and credit _______.
debit cash, credit common stock
On December 10, WebWork performed services for several customers and was paid $13,510 cash. debit __________, credit __________
debit cash, credit fee revenue
On December 2, WebWork obtained a two-year bank loan for $36,000, signing a note payable. Annual interest of 10 percent is due each November 30. Debit __________, Credit ___________
debit cash, credit notes payable
Webworked signed a note in exchange for cash. Debit _______, credit _______.
debit cash, credit notes payable
On december 10th, Webwork performed services for several customers and was paid cash. Debit _______, credit _______.
debit cash, credit revenue
On December 5, WebWork received $3,000 cash for services to be performed in the future. Debit ____________, Credit ____________
debit cash, credit unearned revenue
On december 5th, webwork received a customer payment in cash for services to be performed at a later time. Debit _______, credit _______.
debit cash, credit unearned revenue
On December 18, WebWork performed $4,740 of services for which it received $1,000 cash with the remaining $3,740 to be paid in the future. Debit __________________, debit _________________, Credit ______________
debit cash, debit accounts receivable, credit fee revenue
On December 30, WebWork paid a $500 cash dividend. Debit ________________, Credit ____________
debit dividends, credit cash
On dec 30th, webwork paid a $500 cash dividend. Debit _______, credit _______.
debit dividends, credit cash
the company paid a $400 dividend Debit ____________, Credit ___________
debit dividends, credit cash
webworked purchased office equipment using cash. Debit _______, credit _______.
debit equipment, credit cash
On December 3, WebWork used cash to purchase $32,400 of office equipment. Debit _____________, Credit ____________
debit office equipment, credit cash
Webwork prepaid rent in advance covering the next 6 months. we debit ___________ and credit __________. (HINT: prepaid rent is considered an asset)
debit prepaid rent, credit cash
On December 2, WebWork purchased $2,850 of office supplies on account. Debit _____________, Credit __________
debit supplies, credit accounts payable
Webwork purchased supplies on account. we debit _________ and credit _________.
debit supplies, credit accounts payable
On December 20, WebWork paid its employee $1,620 cash upon completion of her first two weeks on the job. Debit ____________, Credit ____________
debit wage expense, credit cash
regardless of what amount is recorded in an account, an entry made on the left side is a _________ and an entry made on the right side is a _______ to the account.
debit, credit
provide an example of a transaction that would: b. Decrease an asset account and a liability account
debit: accounts payable, credit: cash
provide an example of a transaction that would: c. Decrease an asset account and increase an expense account
debit: advertising expense, credit: cash
Provide an example of a transaction that would: a. Increase one asset account but not change the amount of total assets
debit: cash, credit: accounts receivable
provide an example of a transaction that would: d. Increase an asset account and a liability account
debit: cash, credit: bank loan
a firm using a calendar year basis ends on
december 31
Pay January rent of 3600 in cash. How does this effect the accounting equation?
decrease cash by 3600, decrease retained earnings by 3600
Paid $20 in cash to the bank as January interest on an outstanding loan payable. How does this effect the accounting equation?
decrease cash, decrease retained earnings
Paid employee wages of $2,400 cash. How does this effect the accounting equation?
decrease cash, decrease retained earnings
Paid $4000 in cash on Jan 31 to purchase a sound system to replace the rented sound system. How does this effect the accounting equation?
decrease cash, increase equipment
Webwork prepaid its office rent for the next six months, paying a total of $10,800. How will this transaction effect the accounting equation?
decrease cash, increase prepaid rent
Paid $900 in cash in dividends to stockholders. How does this effect the accounting equation?
decrease cash, reduce retained earnings
Explain the financial effect (increase, decrease, or no effect) of each of the following transactions on stock- holders' equity: c. paid salaries
decrease stockholders equity (retained earnings)
liabilities and stockholders' equity __________ with debit entries and ________- with credit entries.
decrease with debit entries and decrease with credit entries
retained earnings __________ when the company pays dividends
decreases
the first step of the accounting cycle, analyze, is meant to
determine what financial information, if any, must be recorded in a company's accounting records
dividends _________ with debit entries and __________ with credit entries
dividends increase with debit entries and decrease with credit entries
dividends __________ with debit entries and _________ with credit entries
dividends increase with debit entries and decrease with credit entries
while it is required a trial balance be equal, this equality DOES/DOES NOT guarantee that the accounting data is error free.
does not
an account is created for
each individual asset, liability, or stockholders' equity item
Which of the following is not one of the five steps in the accounting cycle? a. Analyze b. Adjust c. Eliminate d. Report
eliminate
expense accounts _______ with debit entries and _________ with credit entries
expense accounts increase with debit entries and decrease with credit entries
On the other hand, expenses decrease earnings, thus expense accounts __________ with debit entries and _________ with credit entries
expense accounts increase with debit entries and decrease with credit entries.
expenses _____ with a debit entry and ______ with a credit entry.
expenses increase with a debit entry and decrease with a credit entry
after an accounting transaction is journalized in another journal, the debits and credits in each journal entry are immediately transferred to another component of the accounting system called the ___________ ___________.
general ledger
The chart of accounts is a listing of: a. Customers and suppliers b. Each inventory item c. General ledger account names and numbers d. Shareholders
general ledger account names and numbers
the initial step in the analysis and recording process is to
identify that a business transaction has taken place
Received a $680 invoice for January's utilities. How does this effect the accounting equation?
increase accounts payable, decrease retained earnings
The purchase of $500 of supplies on account will: a. Increase both assets and stockholders' equity by $500 b. Increase assets and decrease liabilities by $500 c. Increase assets and decrease stockholders' equity by $500 d. Increase both assets and liabilities by $500
increase both assets and liabilities by $500
If assets increase by $50 and liabilities decrease by $30, stockholders' equity must: a. Remain unchanged b. Increase by $80 c. Decrease by $70 d. Decrease by $130
increase by $80
On December 18, WebWork performed $4,740 of services and received $1,000 in cash with the remaining $3,740 to be paid to WebWork by customers within 90 days. How will this effect the accounting equation/balance sheet?
increase cash by 1000, increase accounts receivable by 3740
Collected $10,000 cash on accounts from clients for prior classes. How does this effect the accounting equation?
increase cash, decrease accounts receivable
On December 27, WebWork received a payment of $2,400 cash from a customer who had previously received services performed on account.
increase cash, decrease accounts receivable
On December 5, WebWork received a prepayment in the amount of $3,000 for services to be performed over the next few months. How will this effect the accounting equation?
increase cash, increase unearned revenue
Received a $500 invoice from a supplier for T-shirts given free to January's class members as an advertising promotion. How does this effect the accounting equation?
increase in accounts payable, decrease retained earnings
billed clients for January classes in the amount of 11,500. How does this effect the accounting equation?
increase in accounts receivable, increase in retained earnings
Webwork purchased office supplies on account totaling $2,850. How will this transaction effect the accounting equation?
increase supplies, increase accounts payable
Explain the financial effect (increase, decrease, or no effect) of each of the following transactions on stock- holders' equity: e. invested cash in business
increased stockholders equity (common stock)
Explain the financial effect (increase, decrease, or no effect) of each of the following transactions on stock- holders' equity: f. rendered services to customers on account
increased stockholders equity (revenue)
Explain the financial effect (increase, decrease, or no effect) of each of the following transactions on stock- holders' equity: g. rendered services to customers for cash
increased stockholders equity (revenue)
the normal balance of an account is the side on which __________ to the account are normally recorded
increases
the normal balance of an account is the side on which.... this is because increases in an account are usually greater than or equal to ____________ in an _________.
increases to the account are recorded. decreases in an account.
retained earnings ________ with revenues and _______ with expenses
increases, decreases
Provide three examples of source documents that underlie business transactions.
invoices sent to customers, invoices received from suppliers, bank checks, bank deposit slips, cash receipt forms and written contracts
the trial balance IS/IS NOT a financial statement
is not
Is it possible for an accounting transaction to only affect the left side of the accounting equation and still leave the equation in balance? If so, provide an example. An example: the collection of accounts receivable, which increases cash (debits cash) and decreases accounts receivable (credits accounts receivable).
it IS possible for a transaction to only impact the left side of the basic accounting equation.
debit always refers to the ____ side of an account, credit always refers to the _________.
left, right
liabilities and stockholders' equity _______ with credit entries and _____ with debit entries
liabilities and stockholders' equity increase with credit entries and decrease with debit entries
unearned revenue is considered a
liability
the general ledger is a....
list of each account of a company and the amounts making up the account
a chart of accounts is a ...
list of the titles of all accounts in a business's accounting system
only items that can be expressed in __________ terms are recorded in financial statements
monetary
Explain the financial effect (increase, decrease, or no effect) of each of the following transactions on stock- holders' equity: b. paid an account payable
no effect
Explain the financial effect (increase, decrease, or no effect) of each of the following transactions on stock- holders' equity: d. purchased equipment for cash
no effect
Explain the financial effect (increase, decrease, or no effect) of each of the following transactions on stockholders' equity: a. Purchased supplies for cash
no effect
2. Tobias Company purchased inventory on account. This transaction will affect: a. Only the balance sheet b. Only the income statement c. The income statement and the statement of retained earnings d. The income statement, balance sheet, and statement of retained earnings
only the balance sheet
1. Which of the following transactions does not affect the balance sheet totals? a. Purchased $500 supplies on account b. Paid off a $3,000 note payable c. Received $4,000 cash from a bank after signing a note payable d. Ordered a new machine that will be paid for upon its delivery in two months
ordered a new machine that will be paid for upon delivery in 2 months
the process of transferring the debit and credit info from the general journal to the general ledger is called __________.
posting
Which of the following will cause a trial balance to be out of balance? a. Mistakenly debiting an asset account instead of an expense account b. Posting $123 as $213 to both a debit and a credit account c. Posting the same transaction twice by mistake d. Posting only the debit part of a transaction
posting only the debit part of a transaction
it is important to be able to trace each data entry appearing in a general ledger account to the general journal from which it was posted, hence why both the general journal and general ledger have a
posting reference code
What is the justification for the use of posting references? posting references enable an account to trace amounts in the ledger back to the __________ _________ ___________, and permits the accountant to know which entries have been ___________.
posting references enable an account to trace amounts in the ledger back to the original journal entry, and permits the accountant to know which entries have been posted.
source documents
printed forms or computer records that are generated when a firm engages in a business transaction
all accounting transactions are initially recorded in a journal. a journal is a
record in which a business's activities are reflected in terms of debits and credits and recorded in chronological order
an accounting transaction is an economic event that must be
recorded in the company's accounting records
an accounting transaction affects at least two elements of the accounting equation so that the equation always
remains in balance
revenue accounts _________ with credit entries and _______ with debit entries
revenue accounts increase with credit entries and decrease with debit entries
revenues increase earnings and just like retained earnings accounts, revenue accounts ______ with credit entries and ________ with debit entries
revenue accounts increase with credit entries and decrease with debit entries
revenue must be recorded as revenue only when
revenue is earned
a general journal records any type of business transaction in it. the procedure for a general journal is: step 1: indicate the ______, month, and date of the entry. step 2: enter the titles of the __________ ________ in the description column. step 3: enter the dollar amounts in the left and right columns step 4: provide a brief explanation of the transaction below the account titles
step 1: indicate the year, month, and date of the entry. step 2: enter the titles of the accounts effected in the description column. step 3: enter the dollar amounts in the left and right columns step 4: provide a brief explanation of the transaction below the account titles
the posting reference code of the general journal indicates
the account to which the related debit or credit has been posted
Define the term fiscal year.
the annual accounting period adopted by a firm
Which of the following is true? a. The debit is on the right side of an asset account b. The debit is on the left side of an asset account c. The credit is on the left side of a liability account d. The debit is on the right side of an expense account
the debit is on the left side of an asset account
a trial balance is prepared at
the end of an accounting period after all transactions have been recorded
Explain the terms general ledger and trial balance. What are the primary reasons for preparing a trial balance?
the general ledger is the grouping of accounts that is used to prepare a firm's financial statements. the trial balance is a list of the accounts in their general ledger with their respective debit or credit balances. it is prepared at the end of a period to ensure that the sum of debit balances equals the sum of credit balances. this procedure may reveal the the existence of certain errors.
while the general journal organizes transactions in chronological order, the general ledger organizes transactions by
the general ledger organizes transactions by account
an account is an individual record of
the increases and decreases in a specific asset, liability, or stockholders' equity item
How is the normal side of an account determined?
the normal balance of any account is always the side on which increases are recorded
What does the term debit mean? What does the term credit mean?
the term debit refers to the left side of an account. the term credit refers to the right side of an account
the 2 principal reasons for preparing a trial balance are: 1. to serve as a check on whether the ________ balances and the ________ balances are from the general ledger are equal 2. to show all general ledger account balances in one location, which facilitates the preparation of ________ __________.
to serve as a check on whether the sum of the debit balances and the credit balances are from the general ledger are equal; to show all general ledger account balances in one location, which facilitates the preparation of financial statements
while it is required that in a trial balance the debit equal the total of the credit column, this is not a guarantee that the accounting data is error free. true or false?
true. while it is required that in a trial balance the debit equal the total of the credit column, this is not a guarantee that the accounting data is error free.
What type of account—asset, liability, stockholders' equity, dividend, revenue, or expense—is each of the following accounts? Indicate whether a debit entry or a credit entry increases the balance of the account. Dividends Type: Entry to Increase:
type: Dividend, entry to increase: debit
What type of account—asset, liability, stockholders' equity, dividend, revenue, or expense—is each of the following accounts? Indicate whether a debit entry or a credit entry increases the balance of the account. cash type: entry to increase:
type: asset, entry to increase, debit
What type of account—asset, liability, stockholders' equity, dividend, revenue, or expense—is each of the following accounts? Indicate whether a debit entry or a credit entry increases the balance of the account. Accounts receivable type: entry to increase:
type: asset, entry to increase: debit
What type of account—asset, liability, stockholders' equity, dividend, revenue, or expense—is each of the following accounts? Indicate whether a debit entry or a credit entry increases the balance of the account. Supplies Type: Entry to Increase:
type: asset, entry to increase: debit
What type of account—asset, liability, stockholders' equity, dividend, revenue, or expense—is each of the following accounts? Indicate whether a debit entry or a credit entry increases the balance of the account. Advertising Expense Type: Entry to Increase:
type: expense, entry to increase: debit
What type of account—asset, liability, stockholders' equity, dividend, revenue, or expense—is each of the following accounts? Indicate whether a debit entry or a credit entry increases the balance of the account. accounts payable type: entry to increase:
type: liability, entry to increase: credit
What type of account—asset, liability, stockholders' equity, dividend, revenue, or expense—is each of the following accounts? Indicate whether a debit entry or a credit entry increases the balance of the account. Professional Fees Earned Type: Entry to Increase:
type: revenue, entry to increase: credit
What type of account—asset, liability, stockholders' equity, dividend, revenue, or expense—is each of the following accounts? Indicate whether a debit entry or a credit entry increases the balance of the account. Common Stock type: entry to increase:
type: stockholders equity, entry to increase: credit
