SmartBook Ch 2

The sum of accounts with balances must equal the sum of the accounts with balances.

- debit - credit

True or false: An external transaction is a transaction the firm conducts with a separate economic entity.

True

True or false: A trial balance is used for internal purpose to check that debits equal credits.

True Reason: A trial balance is used internally to help prepare financial statements. It lists all accounts of the company and checks to determine if debits equals credits.

True or false: After posting all journal entries to accounts. the sum of accounts with debit balances should equal the sum of accounts with credit balances.

True Reason: If debits are not equal to credits, the assets will not be equal to liabilities plus stockholders' equity and the balance sheet will not balance.

Turkey Corp. provides services to customers on account for $3,000. Recording this transaction will include a

credit to revenues Reason: "on account" means that cash has not been received

Lassiter Industries purchased equipment for $140,000. Lassiter expects to use the equipment over the next 10 years. Recording this transaction would include a

debit to equipment $140,000

A chronological record of all economic events affecting a firm are recorded in a(n)

journal

A transaction is initially recorded in the journal, and then subsequently posted to the general

ledger

A list of all accounts and their balances at a particular date showing that debits equal credits is referred to as a(n)

tria balance

Which of the following accounts would normally have a debit balance on the trial balance?

- Accounts receivable - Dividends - Equipment - Utility Expense - Supplies - Cash

Pearl Corporation pays employee salaries of $5,000 for the current period. Recording this transaction will include which of the following? (Select all that apply.)

- Credit cash - Debit salary expense

Pluto Inc. borrows $3,000 from Second National Bank by signing a promissory note. Recording this transaction will include which of the following?

- Debit cash - Credit note payable

Fuller Company provides services to customers for $25,000 cash. Which of the following is used to record this transaction?

- Debit cash - Credit service revenue.

Farmer, Inc. purchases a tractor for $80,000 cash. Recording this transaction will require which of the following?

- Debit equipment - Credit cash

Which of the following accounts would normally have a credit balance on the trial balance?

- Deferred revenue - Retained earnings - Notes payable - Common stock

The purpose of a trial balance is to

- assist in preparing adjusting entries - ensure debits equals credits Reason: A trial balance will not detect errors in the accounts; it merely determines that debits equal credits.

Roslin Corp. provides services to customers on account for $5,000. Recording this transaction will include a

- debit to accounts receivable - credit to revenues

Match the type of the accounting system with the method for posting journal entries.

Computerized system - journal entries are instantly posted to the general ledger. Manual system- journal entries are posted periodically to the general ledger

National Company provides services to customers on account for $20,000. Which of the following journal entries is used to record this transaction?

Debit accounts receivable; credit service revenue

On August 2, Garner Company provides services to a long-time customer for $50,000. Payment for this service is due on September 1. Which of the following journal entries is made to record this transaction on August 2?

Debit accounts receivable; credit service revenue

Carnival Company issues common stock to investors for $50,000. Which of the following is used to record this transaction?

Debit cash; credit common stock

True or false: A balance sheet is a list of all accounts and their balances showing that debits equals credits.

False

Inwood Corporation receives $36,000 in advance from customers for services to be performed over the next three years. Which of the following is used to record this transaction?

Debit cash; credit deferred revenue

Oasis Company provides services to customers for $10,000 cash. Which of the following is used to record this transaction?

Debit cash; credit service revenue

Porter Company pays for three years of rent in advance. Which of the following is used to record this transaction?

Debit prepaid rent; credit cash

Resnick purchases supplies on account. Which of the following is used to record this transaction?

Debit supplies; credit accounts payable

Torrence purchases supplies for cash. Which of the following is used to record this transaction?

Debit supplies; credit cash

Alvord Company pays employees $10,000 for work performed in the current period. Which of the following is used to record this transaction?

Debit to salary expense

True or false: The two functions of financial accounting are to measure business activities and prepare tax returns.

False

True or false: A ledger provides a chronological record of all transactions affecting the firm.

False Reason: A journal provides a chronological record of the transactions of a firm.

When services are provided on account, what is the effect on stockholders' equity?

Increase

The accounting equation is: Assets = Liabilities +

Stockholders' Equity

If debits do not equal credits on a trial balance, a possible error could be

a debit was posted to the credit column for a journal entry

When cash is received in advance for services to be performed at a later date, an asset is increased and

a liability is increased

A T-account has space at the top for the account title and two sides for recording ______ and ______ to the account.

debits; credits

Beloit Company receives $40,000 from customers for services to be performed in the following year. Recording this transaction will include a credit to

deferred revenue

A trial balance may not be free of errors because the trial balance

only determines that debits equals credits

Pilot Company pays for two years of rent in advance. Recording this transaction would include a debit to

prepaid rent

A transaction will always affect at least Blank______ accounts.

two

When should revenue be recorded?

when services are performed

Clem Corporation issues 1,000 shares of common stock for $25,000. Clem purchased equipment for $10,000 by borrowing from the bank. Clem's total assets are

$35,000 Reason: Cash $25,000 + Equipment $10,000 = $35,000 total assets.

If a transaction decreases cash by $100, the balance sheet will balance if which of the following occurs? (Select all that apply)

- A liability is decreased - Another asset is increased

London Corp. issues 1,000 shares of stock for $20 per share. What is the effect of this transaction on the accounting equation?

- Assets increase - Stockholders' equity increases

Jeremy issues 5,000 shares of common stock for $10 per share. Which of the following accounts are affected? (Select all that apply.)

- Cash - Common stock

Shriver Corp. borrows $25,000 from a bank and signs a two-year promissory note. What accounts will be affected by this transaction and what is the effect?

- Cash increases - Notes payable increases

London Corp. issues 1,000 shares of stock for $20 per share. What are the effects of this transaction?

- Cash is increased. - Common stock is increased

Which of the following accounts normally have a credit balance?

- Common stock - Retained earnings

Geo Corporation issues stock to investors for $100,000. Recording this transaction will include which of the following?

- Debit to cash - Credit common stock

What are the effects of providing services on account to customers?

- Increase assets - Increase retained earnings

Lexington Company borrows $10,000 from a bank by signing a promissory note. What are the effects of this transaction on the accounting equation?

- Increase liabilities - Increase assets

Price Company provides cleaning services to customers for $10,000 cash. What are the effects of this transaction on the accounting equation? (Select all that apply.)

- Increase retained earnings - Increase assets

Which of the following are external transactions?

- Purchasing inventory from suppliers - Paying salaries to employees - Borrowing money from the bank

Which of the following are stockholder equity accounts?

- Retained earnings - Common stock

Indicate which situations would require Zenda Company to record revenue in the current period. (Select all that apply.)

- Zenda performs services for cash. - Zenda performs services on account.

When a company pays salary expense, the effects are to

- decrease stockholders' equity. - decrease assets.

The types of accounts which affect retained earnings are

- expenses - dividends - revenues

The two roles of financial accounting are to:

- measure business activities of the company. - communicate information to external parties for decision making purposes.

The type of information included in an account includes

- the account title - columns for debits and credits

Place the three steps for analyzing the effect of transactions in the correct order.

1. Determine one account in the accounting equation that will increase or decrease 2. Determine a second account in the accounting equation that will increase or decrease 3. Confirm that assets are equal to liabilities plus stockholders' equity

Arrange the steps for measuring transactions in the correct order.

1. Use a source document to identify accounts affected 2. Analyze the impact of the transaction on the accounting equation 3. Assess whether the transaction results in a debit or credit to account balances 4. Record the transaction in a journal 5. Post the transaction to the ledger 6. Prepare a trial balance

Which of the following is used to record the summary of effects on one particular item?

An account

Where is the Deferred Revenue account reported in the financial statements?

As a liability

Analysis of Mueller Company's accounts show that as a result of a single transaction, both cash and notes payable increased by $10,000. Which of the following transactions would have caused this increase?

Borrowing cash and signing a promissory note

Wolfgang Company's assets and stockholders' equity both increased by $50,000 as a result of a single transaction. Which of the following transactions would explain this increase?

Common stock was sold for cash

The last step for analyzing the effect of transactions is:

Confirm that assets are equal to liabilities plus stockholders' equity

Rawlings Corp. borrows $3,000 on a note payable from Third National Bank. Which of the following is used to record this transaction?

Debit cash $3,000; credit note payable $3,000.

What effect will the payment of salaries to employees for the current period have on stockholders' equity?

Decrease

What is the effect of dividends on retained earnings?

Decrease

What is the effect of expenses on retained earnings?

Decrease

What is the effect of expenses on stockholders' equity?

Decrease

On February 1, Domino Corporation ordered inventory. The inventory was received on February 15. Domino paid for the inventory on February 27. On which of the following dates will Domino record a transaction? (Select all that apply)

February 15 and February 27

Which of the following contains a list of transactions affecting each account and the account's balance?

General ledger

LMN Enterprises performs accounting services for a client for $3,000 cash. What is the effect on the accounting equation?

Increase assets and increase retained earnings

Rice borrows $20,000 from the bank. Which of the following is an effect of this transaction?

Increase liabilities

What effect does revenue have on retained earnings?

Increases

What is the effect of net income on retained earnings?

Increases retained earnings

Which of the following represents a common advantage of a computerized accounting system?

Journal entries are instantly posted to the ledger

Which of the following includes the list of transactions affecting each individual account and the account's balance?

Ledger

The accounting equation is: Assets = Blank______ + Stockholders' Equity.

Liabilities

On May 1, Ace Electronics ordered office equipment. The equipment was delivered to Ace on May 15, and Ace agreed to pay for it by the end of the month. Ace paid for the equipment on May 31. When will Ace make the first entry in its accounting system for this purchase?

May 15

Which of the following is an external transaction?

Purchasing supplies from a vendor

Match the account used for each type of transaction.

Revenue - Services performed for customers for cash or on account Deferred revenue - Cash received from customers for services to be performed in the future

What are the three components of retained earnings?

Revenues, expenses, and dividends

A simplified version that is used informally for analysis instead of drawing a formal general ledger account is referred to as a:

T-account

Claire purchases equipment for $10,000 by paying $3,000 in cash and borrowing $7,000 from the bank. The number of accounts affected by this transaction is

Three Reason Three accounts are affected: equipment, notes payable, and cash.

Rory purchases supplies for cash. Which of the following occurs?

Total assets remain the same

True or false: For each journal entry, debits must be equal to credits.

True Reason: Debits and credits must be equal for each journal entry.

True or false: The accounting equation must always remain in balance.

True Reason: In a double entry system, debits must equal credits, and the balance sheet must always balance.

True or false: Revenue is recorded when services are performed, whereas deferred revenue is recorded when cash is received from customers in advance before services are performed.

True Reason: Revenue is recorded when the services are performed

A company records the effects of transactions for a particular item in a(n)

account

A(n) ______ is maintained for each financial statement item, whereas a(n) ______ contains all of the accounts of the company.

account; general ledger

Accounts receivable are assets which represent

amounts owed by customers Reason: Accounts receivable only represent services or sales on account. Since the company could also have cash sales, accounts receivable do not represent total revenues for the period.

A cost is recognized as _______ if the company expects to derive benefits during future periods.

an asset

The account deferred revenue is used to record

an obligation to perform services in the future.

The cost of equipment that will benefit future periods is typically recorded as a(n)

asset

Marcy receives $10,000 cash in advance from customers for services to be performed in the following year. This transaction would cause

assets to increase and liabilities to increase

Crane purchases equipment by paying cash with the equipment dealer for $10,000. The accounts affected for Crane are

cash and equipment

Slim purchases equipment with cash. The accounts affected are

cash and equipment

A journal provides a

chronological record of all transactions affecting a firm.

The two components of stockholders' equity are

common stock and retained earnings

Stockholders' equity accounts normally have a balance.

credit

In a double-entry accounting system, a(n) represents the left side of the account.

debit

Because dividends reduce retained earnings, a ______ to dividends is essentially a ______ to retained earnings.

debit; debit Reason: dividends are recorded as debits and debits reduce retained earnings

For every journal entry, total must be equal to total credits. (Enter one word per blank)

debits

An general ledger account should have an account title, account number, a place for the date of the transaction, and two columns for

debits and credits

Dividends paid to stockholders will cause retained earnings to

decrease

Expenses will cause retained earnings to

decrease

Dividends ______ retained earnings; therefore, to increase dividends, one would ______ the dividends account.

decrease; debit

Expenses ______ retained earnings; therefore, to increase any expense, one would ______ the expense account.

decrease; debit

When a company receives cash in advance from customers for services to be performed in the future, the transaction affects the _______ account.

deferred revenue

After the accountant analyzes the impact of a transaction on the accounting equation, the next step in the measurement process is to

determine the accounts to debit and credit

Which type of account is increased with a debit?

expense

A(n) ____________ transaction involves an exchange between the company and a separate economic entity. (Enter one word per blank)

external

Revenues cause retained earnings to

increase

Revenues ______ retained earnings; therefore, to increase any revenue, one would ______ the revenue account.

increase; credit

Net income ______ retained earnings.

increases

A debit is on the ______ side of the account

left

How is deferred revenue classified?

liability

Stockholders' equity is increased by revenues because revenues increase

net income

The process of transferring information from a journal entry to the specific accounts affected in the general ledger is referred to as

posting

The process of transferring information from the journal to the ledger is referred to as

posting

Rent paid in advance and classified as an asset is referred to as

prepaid rent

The purpose of a general ledger is to

provide in a single location the list of transactions affecting each account and the account's balance

Ursula Company's bookkeeper records revenue relating to a customer transaction. This indicates that the company

provided goods or services to a customer.

Cray purchases equipment for cash. Total assets will

remain the same

Prepaid rent is

rent paid in advance

An increase in revenues increases net income, which results in an increase to:

retained earnings

Consistent with the __________ recognition principle, companies record revenue at the time goods are provided to customers. (Enter only one word.)

revenue

Which type of account is increased with a credit?

revenue

The purpose of an account is to

summarize all transactions for that item.