Chapter 2: Analyzing and Recording Transactions (Quick Check)

What determines the number and types of accounts a company uses?

A company's size and diversity affect the number of accounts in its accounting system. The types of accounts depend on information the company needs to both effectively operate and report its activities in financial statements.

Explain what a compound journal entry is.

A compound journal entry affects three or more accounts.

Describe the link between the income statement and the statement of retained earnings.

An income statement reports a company's revenues and expenses along with the resulting net income or loss. A statement of retained earnings reports changes in retained earnings, including that from net income or loss. Both statements report transactions occurring over a period of time.

Define and describe assets, liabilities, and equity.

Assets are the resources a business owns or controls that carry expected future benefits. Liabilities are the obligations of a business, representing the claims of others against the assets of a business. Equity reflects the owner's claims on the assets of the business after deducting liabilities.

Where are dollar signs typically entered in financial statements?

At a minimum, dollar signs are placed beside the first and last numbers in a column. It is also common to place dollar signs beside any amount that appears after a ruled line to indicate that an addition or subtraction has occurred.

An owner invests $15,000 cash along with equipment having a market value of $23,000 in a company in exchange for common stock. Prepare the necessary journal entry.

Cash 15,000 Equipment 23,000 Common Stock 38,000 Investment by owner of cash and equipment

What types of transactions increase equity? What types decrease equity?

Equity is increased by revenues and by owner investments. Equity is decreased by expenses and dividends.

Does debit always mean increase and credit always mean decrease?

No. Debit and credit both can mean increase or decrease. The particular meaning in a circumstance depends on the type of account. For example, a debit increases the balance of asset, dividends, and expense accounts, but it decreases the balance of liability, common stock, and revenue accounts.

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

Posting reference numbers are entered in the journal when posting to the ledger as a cross-reference that allows the recordkeeper or auditor to trace debits and credits from one record to another.

Define and describe revenues and expenses

Revenues are inflows of assets in exchange for products or services provided to customers as part of the main operations of a business. Expenses are outflows or the using up of assets that result from providing products or services to customers.

Identify examples of accounting source documents. (7)

Sales tickets, checks, purchase orders, charges to customers, bills from suppliers, employer records, bank statements.

Explain he importance of source documents.

Source documents serve many purposes, including record keeping, and internal controls. Source documents, especially if obtained from outside the organization provide objective and reliable evidence about transactions and their amounts.

If a $4,000 debit to Equipment in a journal entry is incorrectly posted to the ledger as a $4,000 credit, and the ledger account has a resulting debit balance of $20,000, what is the effect of this error on the Trial Balance column totals?

The Equipment account balance is incorrectly reported at $20,000—it should be $28,000. The effect of this error understates the trial balance's Debit column total by $8,000. This results in an $8,000 difference between the column totals.

For each transaction, double-entry accounting requires which of the following? (a) Debits to asset accounts must create credits to liability or equity accounts, (b) a debit to a liability account must create a credit to an asset account, or (c) total debits must equal total credits.

The answer is (c).

Explain the link between the balance sheet and the statement of retained earnings.

The balance sheet describes a company's financial position (assets, liabilities, and equity) at a point in time. The retained earnings amount in the balance sheet is obtained from the statement of retained earnings.

Why are accounting systems called double-entry?

The name double-entry is used because all transactions affect at least two accounts. There must be at least one debit in one account and at least one credit in another account.

Identify each of the following as either an asset, liability, or equity: (a) prepaid rent (b) unearned fees (c) building (d)wages payable (e) office supplies

a. assets b. liabilities c. assets d. liabilities e. assets

Describe a chart of accounts.

A chart of accounts is a list of all of a company's accounts and their identification numbers

What is an account? What is a ledger?

An account is a record in an accounting system that records and stores the increases and decreases in a specific asset. liability, equity, revenue, or expense. The ledger is a collection of all the accounts of a company.