Financial Accounting Chpt 2

Describe the parts of a T-account.

A T-account has the following parts: (a) the title, (b) the left or debit side, and (c) the right or credit side.

"The terms debit and credit mean increase and decrease, respectively." Explain why this statement is true or false.

False. The terms debit and credit mean left and right respectively.

Indicate whether each of the following accounts is an asset, a liability, or a stockholders' equity account and whether it has a normal debit or credit balance: (a) Accounts Receivable, (b) Accounts Payable, (c) Equipment, (d) Dividends, and (e) Supplies.

(a) Accounts Receivable—asset—debit balance. (b) Accounts Payable—liability—credit balance (c) Equipment—asset—debit balance. (d) Dividends—stockholders' equity—debit balance. (e) Supplies—asset—debit balance.

What is the normal balance for each of the following accounts? (a) Accounts Receivable. (b) Cash. (c) Dividends. (d) Accounts Payable. (e) Service Revenue. (f) Salaries and Wages Expense. (g) Common Stock.

(a) Accounts Receivable—debit balance. (b) Cash—debit balance. (c) Dividends—debit balance. (d) Accounts Payable—credit balance. (e) Service Revenue—credit balance. (f) Salaries and Wages Expense—debit balance. (g) Common Stock—credit balance.

State the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, and (c) the stockholders' equity accounts (revenue, expenses, dividends, common stock, and retained earnings).

(a) Asset accounts are increased by debits and decreased by credits. (b) Liability accounts are decreased by debits and increased by credits. (c) Revenues, common stock, and retained earnings are increased by credits and decreased by debits. Expenses and dividends are increased by debits and decreased by credits.

(a) Should business transaction debits and credits be recorded directly in the ledger accounts? (b) What are the advantages of first recording transactions in the journal and then posting to the ledger?

(a) No, business transaction debits and credits should not be recorded directly in the ledger. (b) The advantages of using the journal are: 1. It discloses in one place the complete effects of a transaction. 2. It provides a chronological record of all transactions. 3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared.

(a) When entering a transaction in the journal, should the debit or credit be written first? (b) Which should be indented, the debit or credit?

(a) The debit should be entered first. (b) The credit should be indented.

(a) What is a ledger? (b) What is a chart of accounts and why is it important?

(a) The entire group of accounts maintained by a company, including all the asset, liability, and stockholders' equity accounts, is referred to collectively as the ledger. (b) A chart of accounts is a list of accounts and the account numbers that identify their location in the ledger. The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and define the level of detail that a company desires in its accounting system.

What is a trial balance and what are its purposes?

A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements.

The account number is entered as the last step in posting the amounts from the journal to the ledger. What is the advantage of this step?

The advantage of the last step in the posting process is to indicate that the item has been posted.

What are the advantages of using a journal in the recording process?

The advantages of using the journal in the recording process are: (a) It discloses in one place the complete effects of a transaction. (b) It provides a chronological record of all transactions. (c) It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared.

What are the basic steps in the recording process?

The basic steps in the recording process are: 1. Analyze each transaction for its effect on the accounts. 2. Enter the transaction information in a journal. 3. Transfer the journal information to the appropriate accounts in the ledger.