Accounting Ch 3

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 the mathematical equality of debits and credits after all journalized transactions have been posted. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements.

Why is an account referred to as a T-account?

An account consists of three parts: (a) the title, (b) the left or debit side, and (c) the right or credit side. Because the alignment of these parts resembles the letter T, it is referred to as a T account.

Are debit balances favorable and credit balances unfavorable?

No. A debit balance only means that debit amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable or unfavorable.

Why is a chart of accounts important?

The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and identify their location in the ledger.

What is a ledger?

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.Theledger provides the balance in each of theaccounts as well as keeps track of changes in these balances.

Describe the accounting information system.

The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system.

When entering a transaction in the journal, should the debt(s) or credit(s) be written first?

Usually the debit(s) are entered first.

Can a business enter into a transaction that affects only the left side of the accounting equation?

Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset. An increase in the equipment account which is offset by a decrease in the cash account is a specific example.

For each account listed here, indicate whether it generally will have debit entries only, credit entries only, or both debit and credit entries. (a)Cash (b)Accounts Receivable (c)Dividends (d)Accounts Payable (e)Salaries and Wages Expense (f)Service Revenue

a. both debit and credit entries b. both debit and credit entries c. debit entries only d. both debit and credit entries e. debit entries only f. credit entries only

What are the normal balances for the following accounts of Apple? a. Accounts Receivable b. Accounts Payable c. Sales d. Selling, General, and Administrative Expenses

a. debit b. credit c. credit d. debit

What is the proper sequence of how accounting information flows through the accounting system?

(1)Accounting transaction occurs. (2)Information is entered in the journal. (3)Debits and credits are posted to the ledger. (4)Trial balance is prepared. (5)Financial statements are prepared.

What are the basic steps in the recording process?

(1)Analyze each transaction in terms of 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.

The terms debit and credit mean "increase"and "decrease"respectively. Do you agree? Explain.

Disagree. The terms debit and credit are synonymous with left and right, respectively

Does the double entry system mean that each transaction must be recorded twice?

No. The double-entry system merely records the dual (two-sided) effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once and must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, debits must equal credits.

State the rules of debit and credit as applied to: (a)Asset accounts (b)Liability accounts (c)The Common Stock Account

a. Asset accounts are increased by debits and decreased by credits. b. Liability accounts are decreased by debits and increased by credits. c. The common stock account is decreased by debits and increased by credits.

For each of the following transactions, indicate the account debited and the account credited. (a)Supplies are purchased on account (b)Cash is received on signing a note payable (c)Employees are paid salaries in cash

a. Debit Supplies and credit Accounts Payable. b. Debit Cash and credit Notes Payable. c. Debit Salaries and Wages Expense and credit Cash.

Indicate how each business transaction affects the basic accounting equation a. Paid cash for janitorial supplies. b.Purchased equipment for cash. c. Issued common stock to investors in exchange for cash. d. Paid an account payable in full.

a. Decrease assets and decrease stockholders' equity. b. Increase assets and decrease assets. c. Increase assets and increase stockholders' equity. d. Decrease assets and decrease liabilities.

(a)Should accounting 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, 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 effect 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 readily compared.

Are the following events recorded in the accounting records? Explain your answer in each case. Accounting transactions are the economic events of the company recorded by accountants because they affect the basic accounting equation. a. A major stockholder of the company dies. b. Supplies are purchased on account. c. An employee is fired. d. The company pays a cash dividend to its stockholders

a. The death of a major stockholder of the company is not an accounting transaction as it does not affect the basic accounting equation. b. Supplies purchased on account is an accounting transaction because it affects the basic accounting equation. c. An employee being fired is not an accounting transaction as it does not affect the basic accounting equation. d. Paying a cash dividend to stockholders is an accounting transaction as it does affect the basic accounting equation.

Would the following errors, each considered separately, prevent the trial balance from balancing? (a)The bookkeeper debited Cash for $600 and credited Salaries and Wages Expense for $600 for payment of wages. (b)Cash collected on account was debited to Cash for $800, and Service Revenue was credited for $80.

a. The trial balance would balance. b. The trial balance would not balance since the debits would be $720 higher than the credits.

Indicate whether each account below is an asset, a liability, or a stockholders'equity account, and whether it would have a normal debit or credit balance. (a)Accounts Receivable (b)Accounts Payable (c)Equipment (d)Dividends (e)Supplies

a. asset—debit balance. b. liability—credit balance. c. asset—debit balance. d. stockholders' equity—debit balance. e. 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. debit balance b. debit balance c. debit balance d.credit balance e. credit balance f. debit balance g. credit balance