ACCT 201- Chapter 2

Posting reference (PR) Column

A column in journals in which individual ledger account numbers are entered when entries are posted to those ledger accounts.

Compute the debt ratio and describe its use in analyzing financial condition.

A company's debt ratio is computed as total liabilities divided by total assets. It's reveals how much of the assets are financed by creditor (no owner) financing. The higher this ratio, the more risk a company faces because liabilities must be repaid at specific dates.

Prepare and explain the use of a trial balance.

A trial balance is a list of accounts from the ledger showing their debit or credit balance in separate columns. The trial balance is a summary of the ledger's contents and is useful in preparing financial statements and in revealing recordkeeping errors.

Balance Column Account

Account with debit and credit columns for recording entries and another column for showing the balance of the account after each entry.

Double-Entry Accounting

Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit.

General Journal

All-purpose journal for recording the debits and credits of transactions and events.

Describe an account and its use in recording transactions.

An account is a detailed record of increases and decreases in a specific asset, liability, equity, revenue, or expense. Information from accounts is analyzed, summarized, and presented in reports and financial statements.

Define debits and credits and explain double-entry accounting.

Debit refers to left, and CREDIT refers to right. Debits increase assets, expenses, and dividends while credits decrease them. Credit increase liabilities, common stock, and revenues; debits decrease them. Double-entry accounting means each transaction affects at least two accounts and has at least one debit and one credit. The system for recording debits and credits follows from the accounting equation. The left side of an account is the normal balance for assets, dividends, and expenses, and the right side is the normal balance for liabilities, common stock, and revenues.

Account Balance

Difference between total debits and total credits (including the beginning balance) for an account.

Creditors

Individuals or organizations entitled to receive payments.

Debtors

Individuals or organizations that owe money.

Compound Journal Entry

Journal entry that affects at least three accounts.

Unread Revenue

Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

Chart of Accounts

List of accounts used by a company; includes an identification number for each account.

Trial Balance

List of ledger accounts and their balances (either debit or credit) at a point in time; total debit balances equal total credit balances.

Journalizing

Process of recording transactions in a journal.

Posting

Process of transferring journal entry information to the ledger; computerized systems automate this process.

Debit Ratio

Ratio of total liabilities to total assets; used to reflect risk associated with a company's debts.

General Ledger/Ledger

Record containing all accounts (with amounts) for a business; also called general ledger.

Journal

Record in which transactions are entered before they are posted to ledger accounts; also called book of original entry.

Account

Record within an accounting system in which increases and decreases are entered and stored in a specific asset, liability, equity, revenue, or expense.

Debit

Recorded on the left side; an entry that increases an asset or expense account, or decreases a liability, revenue, or equity account; abbreviated Dr.

Credit

Recorded on the right side; an entry that decreases an asset or expense account, or increases a liability, revenue, or equity account; abbreviated Cr.

Source Documents

Source of information for accounting entries that can be in either paper or electronic form; also called business papers.

Prepare financial statements from business transactions.

The balance sheet, the statement of retained earnings, the income statement, and the statement of cash flows use data from the trial balance (and other financial statements) for their preparation.

Describe a ledger and a chart of accounts.

The ledger (or general ledger) is a record containing all accounts used by a company and their balances. It is referred to as the BOOKS. The chart of accounts is a list of all accounts and usually includes an identification number assigned to each account.

T-Account

Tool used to show the effects of transactions and events on individual accounts.

Explain the steps in processing transactions and the role of source documents.

Transactions and events are the starting points in the accounting process. Source documents identify and describe transactions and events and provide objective and reliable evidence. The effects of transactions and events are recorded in journals. Posting along with a trial balance helps summarize and classify these effects.

Record transactions in a journal and post entries to a ledger.

Transactions are recorded in a journal. Each entry in a journal is posted to the accounts in the ledger. This provides information that is used to produce financial statements. Balance column accounts are widely used and include columns for debits, credits, and the account balance.

Analyze the impact of transactions on accounts and financial statements.

We analyze transactions using concepts of double-entry accounting. This analysis is performed by determining a transaction's effects on accounts.

On May 1, Mattingly Lawn Service collected $2,500 cash from a customer in advance of five months of lawn service. Mattingly's journal entry to record this transaction includes a a. Credit to Unearned Lawn Service Frees for $2,500. b. Debit to Lawn Services Fees Earned for $2,500. c. Credit to Cash for $2,500. d. Debit to Unearned Lawn Service Fees for $2,500. e. Credit to Common Stock for $2,500.

a. Credit to Unearned Lawn Service Fees for $2,500. ebit cash for $2,500, and credit Unearned Lawn Service Fees for $2,500.

Amalia Company received its utility bill for the current period of $700 and immediately paid it. It's journal entry to record this transaction includes a a. Credit to Utility Expense for $700. b. Debit to Utility Expense for $700. c. Debit to Accounts Payable for $700. d. Debit to Cash for $700. e. Credit to Common Stock for $700.

b. Debit to Utility Expense for $700. debit Utility Expense for $700, and credit Cash for $700

Laing Shue contributed $250,000 cash and land worth $500,000 to open his new business, She Consulting Corp. Which of the following journal entries does Shue Consulting Make to Record this transaction? a. Cash Assets 750,000 Common Stock 750,000 b. Common Stock 250,000 Assets 750,000 c. Cash 250,000 Land 500,000 Common Stock 750,000 d. Common Stock 750,000 Cash 250,000 Land 500,000

c. Cash 250,000 Land 500,000 Common Stock 750,000 debit Cash for $250,000, debit Land for $500,000, and credit Common Stock for $750,000

A trial balance prepared at year-end shows total credits exceed total debits by $765. This discrepancy could have been caused by a. An error in the general journal where a $765 increase in Accounts Payable was recorded as a $765 decrease in Accounts Payable. b. The ledger balance for Accounts Payable of $7,650 being entered in the trial balance as $765. c. A general journal error where a $765 increase in Accounts Receivable was recorded as a $765 increase in Cash. d. The ledger balance of $850 in Accounts Receivable was entered in the trial balance as $85. e. An error in recording a $765 increase in Cash as a credit.

d. The ledger balance of $850 in Accounts Receivable was entered in the trial balance as $85.

Bonaventure Company has total assets of $1,000,000, liabilities of $400,000, and equity of $600,000. What is its debt ratio (rounded to a whole percent)? a. 250% b. 167% c. 67% d. 150% e. 40%

e. 40% Debit ratio = $400,000 / $1,000,000 = 40%