ACCTG 211 Midterm Chapter 2 Review

Why are posting references entered in the journal when entries are posted to the ledger accounts?

So we will know that the entry has been posted.

The four steps of the accounting process

Step 1: Identify transactions and source documents Step 2: Analyze transactions using the accounting equation Step 3: Record journal entry Step 4: Post entry to ledger

Journalizing

The process of recording transactions in a journal

debit = left and credit = right

There is no quality of good or bad associated with either term, so do not think that, if an account is debited, it is bad; in fact, it might be a good thing. Debit only means "left." Credit only means "right." Debits and credits are used to record changes (increases or decreases) in the accounts (ledger accounts or T-Accounts) as transactions occur.

Which of the following types of accounts are increased with a credit? a) assets and liabilities b) liabilities and expenses c) revenues and liabilities d) owner's equity and expenses

c) revenues and liabilities

Which of the following accounts is a liability? a) company truck b) prepaid advertising c) common stock d) accounts payable

d) accounts payable Liabilities include accounts payable, income tax payable, salaries payable, and unearned revenue.

The trial balance is completed to ensure that

debits and credits are equal in the General Ledger.

Which of the following statements is the best definition of the Chart of Accounts?

It is a list of all ledger accounts which exist in a business and includes an identification number assigned to each account.

double-entry system

for every transaction, the amounts recorded on the debit side should equal the credit side: debits = credits.

Debt ratio

total liabilities/total assets

Posting

Once the transactions are recorded in the journal, each debit and credit is transferred to the proper ledger account (T-Account) to determine the balance of each account. This process is called posting. Taking each one of the journal transactions involving cash and putting them into your checkbook is analogous to the posting process.

natural balance

Assets, expenses, and losses all have their natural balance on the left side, or debit side. Liabilities, owners' equity, revenue, and gains all have their natural balance on the right side, or credit side.

"period of time" vs "point in time"

Income statement - Period of time Balance sheet - Point in time Statement of Retained Earnings - Period in time Statement of Cash Flows - Period of time

On December 31, the company provides services and receives cash of $5,000. How would you record the transactions in the journal?

Debit Cash for $5,000 Credit Services Revenue for $5,000

On December 31, the company purchases equipment for $10,000 and pays for the purchase in cash. How would you record the transactions in the journal?

Debit Equipment for $10,000 Credit Cash for $10,000

On December 31, the company purchases supplies for $1,000 on credit. How would you record the transactions in the journal?

Debit Supplies for $1,000 Credit Accounts Payable for $1,000

On November 30, the company received an invoice from the electric company for $200. The company will pay the invoice in December. How would you record the transactions in the journal?

Debit Utilities Expense for $200 Credit Accounts Payable for $200

Which of the following statements are true about the chart of accounts? (Multiple select) - Different companies use different charts of accounts based on individual company need. - The chart of accounts contains the balance of all of the accounts in a ledger. - The chart of accounts should be ordered in a logical sequence based on type of account. - The chart of accounts can be ordered in any sequence because they are not formal financial systems.

- Different companies use different charts of accounts based on individual company need. - The chart of accounts should be ordered in a logical sequence based on type of account. - Companies have complete flexibility in how they establish the account titles they use as long as they are sufficient to allow accurate recording of business transactions. - The chart of accounts as well as the general ledger should follow the sequence in the financial statements. This allows a much more efficient means of accessing and reviewing the account information. It is also important to have accounts grouped by type so that financial data can be summarized as appropriate.

Which of the following is false? - Equipment is an asset - Equipment cost is initially recorded as an asset and the cost is allocated over time to expense - Equipment purchases are reported on the balance sheet - Equipment purchases are expensed, in their entirety, in the period in which they occur - Equipment is reported on the left side of the accounting equation

- Equipment purchases are expensed, in their entirety, in the period in which they occur The above statement is false because - Equipment purchases are treated as assets in the year they are purchased and its cost is allocated over time to expense called depreciation. - Equipment cost is initially recorded as an asset and as it is used and gets worn down, the cost is gradually expensed through the Accumulated Depreciation account.

Alex invested $30,000 in cash in his business. How will this entry be posted in the ledger accounts?

- The $30,000 will be posted to the debit side of the Cash account. - The $30,000 will be posted to the credit side of the Common Stock account.

Land account and building account are not the same

- The Building account records the costs of purchasing an office, warehouse or store. - The Land account is used to record the costs of land purchased by the business.

Prepaid expenses

- initially an asset - when used up, is an expense are payments of an expense in advance. We are using the accrual basis of accounting and recognize expenses when they are incurred, not necessarily when they are paid. When we prepay expenses, such as rent and insurance, they are initially recorded as assets. When the amount prepaid is used up, we will move the portion used from the asset account into an expense account. The more common prepaid expenses include - prepaid rent and - prepaid insurance Rent and insurance are items that both individuals and businesses normally prepay.

Which of the following are source documents - sales receipt - budget - purchase order - checks - payroll records

- sales receipt - purchase order - checks - payroll records

From the following list, identify those that are likely to serve as source documents. - trial balance - telephone bill - sales receipt - income statement - invoice from the supplier - bank statement

- telephone bill - sales receipt - invoice from the supplier - bank statement

With double-entry accounting, each transaction requires:

- that at least two accounts are affected - that the total debits equal total credits

The general ledger can be used to determine

- which accounts are being used by a company and their balances at any given time. - common and unique accounts used by a business. - increases and decreases in all accounts in a business.

How we record rent

1. The current month's rent is debited to rent expense, regardless of when the rent was paid. 2. If you prepay two or more months' rent in advance, we will debit an asset account (prepaid rent).

ledger account

= T account - is a place where increases or decreases are recorded for a given account. A ledger account is maintained for every account listed in the chart of accounts in order to accumulate the information about the account for a given time period. In its simplest form, the ledger account is divided into two columns. The left column is called debit and the right column is called credit. An amount recorded on the left side of the account is called a debit entry; on the right side, it is called a credit entry. The simplest form of ledger is called the T-Account.

On December 31, the company paid a $200 invoice that they received in November for electricity. How would you record the transactions in the journal?

Debit Accounts Payable for $200 Credit Cash for $200

On December 31, Fantastic Tea receives $3,000 cash from Don Smith, in exchange for common stock. How would you record the transactions in the journal?

Debit Cash for $3,000 Credit Common Stock for $3,000

If a credit balance in Unearned Revenue (a liability account) is incorrectly listed as a credit balance in the Sales Revenue account (a revenue account), is the trial balance still in balance?

Yes Yes, the trial balance still balances. However, when preparing the financial statements liabilities would be understated and revenue would be overstated. Remember, just because debits equal credits does not ensure that account balances are correct!

The general journal cannot be used to determine

a complete record of each transaction in one account. The journal will show both the debited account and the credited account of a business transaction. Each account in the general ledger will show either the debited portion of the transactions or the credited portion.

Which of the following types of accounts are decreased with a credit? a) assets and expenses b) liabilities and expenses c) revenues and assets d) owner's equity and expenses

a) assets and expenses

A trial balance is prepared to: a) summarize the account balances to help prepare financial statements b) prove that there were no errors made in recording transactions into the journal c) prove that no errors were made in posting to the ledger d) prove that each account balance is correct

a) summarize the account balances to help prepare financial statements

Debits and credits

are used to record increases and decreases in account balances.

Prepayment of insurance is debited to an

asset account (prepaid insurance)

Supplies are _____ until they are used. When they are used up, their costs are reported as _____.

assets; expenses

A record of the increases and decreases in a specific account is a(n): a) ledger b) account c) general ledger d) financial statement

b) account An account is a record of the increase and decreases in a specific asset, liability, equity, revenue or expense.

On January 15, we paid four month's rent in advance, which equals $2,000. What account would we credit when we journalize this entry? a) rent expense b) cash c) prepaid rent d) account payable

b) cash

On January 25, stockholders invested $100,000 in the business in exchange for common stock. What account would we debit when we journalize this entry? a) common stock b) cash c) retained earnings d )accounts receivable

b) cash

On June 15, we paid $1,000 on account. What account would we credit when we journalize this entry? a) accounts payable b) cash c) accounts receivable d) fees earned

b) cash Paid $1,000 on account means that $1,000 cash was used to pay $1,000 in account payable. There, cash will be credited (as cash has decreased), and accounts payable will be debited (as accounts payable has decreased (normal balance of accounts payable (a liability) is on the credit side.

Which of the following accounts is an asset? a) dividends b) prepaid advertising c) supplies expense d) accounts payable

b) prepaid advertising Assets include cash, accounts receivable, supplies (not supplies expense), prepaid items including prepaid insurance and prepaid advertising, equipment, and land.

Which of the following is an asset account? a) retained earnings b) prepaid rent c) rent expense d) unearned rent

b) prepaid rent

A debit refers to: a) the right side of a T-account b) the left side of a T-account c) increases in a T-account d) decreases in a T-account

b) the left side of a T-account

Which of the following statements are true about the general ledger? a) All companies will use the same general ledger accounts. b) The ledger contains the balance of all of the accounts in a chart of accounts. c) The general ledger contains all of the accounts that a company uses, along with detail of the balances in those accounts. d) The general ledger can be ordered in any sequence because they are not formal financial systems.

c) The general ledger contains all of the accounts that a company uses, along with detail of the balances in those accounts. The general ledger contains all of the accounts, once they have been established in the chart of accounts, and then also the transaction and balance data pertaining to each account.

Unearned revenue is: a) a customer's promise to pay in the future for services or goods sold b) a debt owed for renting a building currently c) a liability created when a business collects cash from customers in advance d) an amount earned from services to customers

c) a liability created when a business collects cash from customers in advance

Which of the following accounts is an equity? a) company truck b) prepaid advertising c) common stock d) accounts payable

c) common stock Equity includes common stock, dividends, revenues and expenses.

Which of the following accounts is increased with a debit? a) retained earnings b) fees earned c) rent expense d) unearned revenue

c) rent expense

chart of accounts

is a list of all the company's accounts along with their account numbers. The chart of accounts is prepared when the business is first organized (prior to recording any transactions in the journal and ledger (T-Accounts)). We can update the chart of accounts as needed. When we record transactions, we use the account names exactly as they appear in our chart of accounts.

trial balance

is a listing of ledger accounts and their balances at the end of an accounting period. We can prepare the trial balance anytime, but they are usually prepared at the end of an accounting period (month, quarter, or year). The debit and credit column balances in a trial balance need to equal each other.

journal (also called a general journal)

is a place where each transaction is recorded in chronological order. The journal entry is the first step in recording transactions (this is also called original entry). The journal shows all the information about a transaction in one place. In the journal, accounts that will be debited are listed first, and then accounts that will be credited are indented adhering to the requirement of debits to the left and credits to the right.

accounting journal

is the historical record of the financial transactions of the company. Most companies record their journal entries using computer accounting software programs, which enable accountants to efficiently record the financial history of the company. Certified accounting software programs maintain the integrity of the original journal and prohibit erasures or deletions, requiring explanations to accompany corrections. Any software program that allows deletion of data is not credible for auditing purposes and may be invalidated if the company's financial records are questioned. The purpose of the journal is to provide a permanent historical record of every financial transaction.

Unearned Revenue

occurs when we receive payments before we complete the service (i.e., earned the revenue). We are using the accrual basis of accounting and recognize revenues when they are earned, not necessarily when the payment is received. When customers prepay revenues, they are initially recorded as liabilities. When the service is provided, the amount prepaid is earned, and we will move the portion earned from the liability account into a revenue account.

Prepaid accounts are also called

prepaid expenses and are considered assets

Another name for a notes receivable is a

promissory note - It is the promise of another entity to pay a specific sum of money on a specified future date. - Notes receivable is classified as an asset.