Acct 351 Chapter 03

Question 1

account

Answer 1

An individual accounting record of increases and decreases in a specific asset, liability, or shareholders’ equity item.

Question 2

accounting cycle

Answer 2

A series of steps followed by accountants in recording transactions and preparing financial statements

Question 3

accounting information system

Answer 3

The system of collecting and processing transaction data and communicating financial information to interested parties

Question 4

accrued expenses

Answer 4

Expenses incurred, but not yet paid or recorded at the statement date.

Question 5

accrued revenues

Answer 5

Revenues earned, but not yet received in cash or recorded at the statement date

Question 6

adjusted trial balance

Answer 6

A list of all open accounts in the ledger and their balances taken immediately after all adjustments have been posted

Question 7

adjusting entries

Answer 7

Journal entries made at the end of the accounting period to ensure that the revenue recognition and matching principles are followed

Question 8

balance sheet

Answer 8

A financial statement, otherwise known as the statement of financial position, that shows an enterprise’s financial condition at the end of a period

Question 9

book value

Answer 9

The difference between the cost of any depreciable asset and its related accumulated amortization.

Question 10

closing entries

Answer 10

The journal entries that close the temporary accounts in order to start a new financial reporting period. These amounts are posted to retained earnings.

Question 11

closing process

Answer 11

The procedure generally followed to reduce the balance of temporary accounts to zero in order to prepare the accounts for the next period’s transactions

Question 12

contra asset account

Answer 12

An account that is offset against an asset account on the balance sheet

Question 13

credit

Answer 13

The right side of a general ledger account.

Question 14

debit

Answer 14

The left side of a general ledger account.

Question 15

depreciation/amortization

Answer 15

The process of allocating the cost of tangible capital assets to the accounting periods benefiting their use. (Synonym: amortization)

Question 16

double-entry accounting system

Answer 16

The equality of debits and credits when recording transactions, which proves the accuracy of the recorded amounts

Question 17

event

Answer 17

A happening of consequence, which is generally the source of changes in asset, liability, and equity balances. An event may be internal or external.

Question 18

financial statements

Answer 18

The principal means through which financial information is communicated to those outside an enterprise. They provide a firm’s history, quantified in money terms.

Question 19

general journal

Answer 19

A chronological listing of transactions and other events expressed in terms of debits and credits to particular accounts

Question 20

general ledger

Answer 20

A collection of all assets, liability, shareholders’ equity, revenue, and expense accounts and their respective balances

Question 21

income statement

Answer 21

A method to account for contributions of assets that requires the amount received to be deferred and recognized over the period that the related assets are employed.

Question 22

journal

Answer 22

The book of original entry where transactions and selected other events are initially recorded.

Question 23

periodic inventory system

Answer 23

The inventory recording system where a Purchases account is used and the Inventory account is unchanged during the period. At the end of the accounting period, the Inventory account must be adjusted by closing out the beginning inventory amount and recording the ending inventory amount. Cost of goods sold is, therefore, determined by adding the beginning inventory to the net purchases and deducting ending inventory

Question 24

permanent accounts

Answer 24

All of the asset, liability and equity accounts that appear on the balance sheet. (Synonym: real accounts)

Question 25

perpetual inventory system

Answer 25

The inventory recording system where purchases and sales are recorded in the Inventory account as they occur

Question 26

post-closing trial balance

Answer 26

A trial balance taken immediately after closing entries have been posted

Question 27

posting

Answer 27

The process whereby items entered in a general journal must be transferred to the general ledger.

Question 28

prepaid expenses

Answer 28

Expenses paid in cash and recorded as assets before they are used or consumed

Question 29

reversing entries

Answer 29

A journal entry made at the beginning of the next accounting period that is the exact opposite of the related adjusting journal entry made in the previous period

Question 30

special journals

Answer 30

Journals that summarize transactions possessing a similar characteristic

Question 31

statement of cash flows

Answer 31

A financial statement that provides information about an entity’s cash receipts and cash payments during a period

Question 32

statement of comprehensive income

Answer 32

Reconciles net income to comprehensive income; reconciling items include unrealized gains and losses on certain financial instruments, and debits/credits from related party or other transactions not recognized in net income

Question 33

statement of retained earnings

Answer 33

The financial statement that reconciles the balance of the retained earnings account from the beginning to the end of the period.

Question 34

subsidiary ledger

Answer 34

Contains the details related to a given general ledger account

Question 35

T account

Answer 35

A convenient method of illustrating the effect of transactions on particular asset, liability, equity, revenue, and expense items

Question 36

temporary accounts

Answer 36

Revenue, expense, and dividend accounts, which, except for dividends, appear on the income statement. They are all periodically closed. (Synonym: nominal accounts)

Question 37

transaction

Answer 37

An external event involving a transfer or exchange between two or more entities or parties.

Question 38

trial balance

Answer 38

A list of all open accounts in the ledger and their balances

Question 39

unearned revenues

Answer 39

When a company receives consideration before the goods are delivered or the services are rendered

Question 40

useful life

Answer 40

The term of service that an asset is expected to provide

Question 41

work sheet

Answer 41

A columnar sheet of paper (or computer spreadsheet) used to adjust the account balance and prepare the financial statements

Question 42

Understand basic accounting terminology

Answer 42

It is important to understand the following terms: (1) event, (2) transaction, (3) account, (4) permanent and temporary accounts, (5) ledger, (6) journal, (7) posting, (8) trial balance, (9) adjusting entries, (10) financial statements, (11) closing entries

Question 43

Explain double-entry rules

Answer 43

The left side of any account is the debit side; the right side is the credit side. All asset and expense accounts are increased on the left or debit side and decreased on the right or credit side. Conversely, all liability and revenue accounts are increased on the right or credit side and decreased on the left or debit side. Shareholders’ equity accounts, Common Shares, and Retained Earnings are increased on the credit side, whereas Dividends is increased on the debit side.

Question 44

Identify the steps in the accounting cycle.

Answer 44

The basic steps in the accounting cycle are (1) identification and measurement of transactions and other events, (2) journalizing, (3) posting, (4) the unadjusted trial balance, (5) adjustments, (6) the adjusted trial balance, (7) statement preparation, and (8) closing

Question 45

Record transactions in journals, post journal entries to ledger accounts, and prepare a trial balance

Answer 45

The simplest journal form is a chronological listing of transactions and events that are expressed as debits and credits to particular accounts. The items entered in a general journal must be transferred (posted) to the general ledger. An unadjusted trial balance should be prepared at the end of a specific period after the entries have been recorded in the journal and posted to the ledger.

Question 46

Explain the reasons for preparing adjusting entries

Answer 46

Adjustments achieve a proper matching of revenues and expenses, which is necessary in order to determine the correct net income for the current period and to achieve an accurate statement of the end-of-the-period balances in assets, liabilities, and owners’ equity accounts.

Question 47

Prepare closing entries

Answer 47

In the closing process, all of the revenue and expense account balances (income statement items) are transferred to a clearing account called Income Summary, which is used only at the end of the fiscal year. Revenues and expenses are matched in the Income Summary account. The net result of this matching, which represents the net income or net loss for the period, is then transferred to a shareholders’ equity account (retained earnings for a corporation and capital accounts for proprietorships and partnerships).

Question 48

Explain how inventory accounts are adjusted at year end

Answer 48

Under a perpetual inventory system, the balance in the Inventory account should represent the ending inventory amount. When the inventory records are maintained in a periodic inventory system, a Purchases account is used; the Inventory account is unchanged during the period. The Inventory account balance represents the beginning inventory amount throughout the period. At the end of the accounting period, the inventory account must be adjusted by closing out the beginning inventory amount and recording the ending inventory amount

Question 49

Prepare a 10-column work sheet and financial statements

Answer 49

The 10-column work sheet provides columns for the first trial balance, adjustments, adjusted trial balance, income statement, and balance sheet. The work sheet does not replace the financial statements. Instead, it is the accountant’s informal device for accumulating and sorting the information that is needed for the financial statements

Question 50

Identify adjusting entries that may be reversed

Answer 50

Reversing entries are usually used for reversing two types of adjusting entries: accrued revenues and accrued expenses. Prepayments may also be reversed if the initial entry to record the transaction is made to an expense or revenue account.