Chapter 3: Analyzing Business Transactions Using T Accounts, Review

How is the balance of an account determined?

Adding the figures on both sides of the account and subtracting the smaller total from the larger total.

When a chart of accounts is created, number gaps are left within groups of accounts. Why are these number gaps necessary?

Additional accounts can be added when needed.

The terms "debit" and "credit" are often used in describing the effects of transactions on different accounts. What do these terms mean?

Debit: entry on the left side of an account. Credit: entry on the right side of an account

Why is the modern system of accounting usually called the double-entry system?

Each transaction produces at least two effects.

When referring to financial statements, what does the manager mean by saying "it is the results on the bottom line" that really count?

Net income or net loss for the period.

In what order do accounts appear in the chart of accounts?

Order in which they appear on financial statements. Balance sheet accounts listed first, followed by income statement accounts.

Why is "Prepaid Rent" considered an asset account?

Payment of rent in advance affords the right to occupy the facility the number of months covered by the payment.

Accounts are classified as permanent or temporary accounts. What do these classifications mean?

Permanent account balances are carried forward to start a new accounting period. Temporary account balances are transferred to a summary account at the end of the period and are zero at the start of a new accounting period

How do the income statement and the balance sheet help management make sound decisions?

Provide summaries of: a. Income statement - revenues and expenses; b. Balance sheet - assets, liabilities, and owner's equity.

If a firm's expenses equal or exceed its revenue, what actions might management take?

Reduce expenses; increase sales volume or raise sales prices.

How can management find out at any given time, whether or not they can pay its bills as they become due?

Review of financial records containing cash available, amounts due, and dates due.

What is the purpose of a chart of accounts?

To provide a classified list of the names and numbers of a firm's accounts.

What are accounts?

Written records for all assets, liabilities, and owner's equity of a business.

Are the following accounts temporary or permanent? a.fees income, b.John Jones drawing, c.accounts payable, d.accounts receivable, e.John Jones capital, f.prepaid rent, g.cash, h.advertising expense, i.utilities expense, j.equipment, k.salaries expense, L.prepaid insurance:

a, b, h, i, k: temporary accounts: fees income, John Jones drawing, advertising expense, utility expense, salaries expense c,d,e,f,g,j,L: permanent accounts: accounts payable, accounts receivable, John Jones capital, prepaid rent, cash, equipment, prepaid insurance

Indicate whether each of the following types of accounts would normally have a debit balance or a credit balance: a. asset account b. liability account c. owner's equity account d. revenue account e. expense account

a. debit, b. credit, c. credit, d. credit, e. debit

Gains

an increase in wealth or resources

The statement of owner's equity is prepared to

analyze the change in owner's equity during the period.

Revenue accounts increase owner's equity therefore, increases are recorded on the

credit side/right of revenue accounts

Increases in owner's equity are shown on the credit/right side of an account. Decreases appear on the

debit/left side.

Accounts are arranged in a predetermined order and are numbered for

handy reference and quick identification.

A firm's list of accounts is called:

it's chart of accounts

The income statement is prepared to

report the revenue and expenses for the period.

The balance sheet is prepared to

summarize the assets, liabilities, and owner's equity of the business at the end of the period.

The difference between the amounts recorded on the two sides of an account is known as

the balance of the account.

The trial balance is a statement to test the accuracy of the financial records. Total debits should equal

total credits.

When creating a new account in the "chart of accounts", do not open the account

without approval from the controller.

Expenses are recorded on the debit (left) side of the expense accounts because

debits decrease the owner's equity.

The drawing account is used to record the withdrawal of cash from the business by the owner. The drawing account __owner's equity?

decreases.

Each business transaction is analyzed for its effects on the

fundamental accounting equation: Assets= Liabilities + Owner's Equity

Typically, accounts are numbered in the order in which they appear

on the financial statements: balance sheet accounts come first, followed by income statements.

An increase in a liability T account is recorded on the credit/right side. The left/debit side of a liability T account is used for

recording decreases.

Increases in an asset T account appear on the debit/left side because assets are on the left side of the accounting equation. The credit/right side

records decreases.