Chapter 2 (Wygt)

Question 1

What is an account?

Answer 1

> An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item.

Question 2

In its simplest form, an account has three parts - what are they?

Answer 2

1) the title of the account,
2) a left or debit side, and
3) a right or credit side.

Question 3

What do the terms debit and credit refer to?

Answer 3

> The term debit means left. The term credit means right.

> Debit and credit are simply directional signals that describe where entries are made in the accounts.

> Entering an amount on the left side of an account is called debiting the account; entering an amount on the right side is called crediting the account.

Question 4

What do debits and credits do?

Answer 4

> We use debits and credits repeatedly in the recording process to describe where entries are made in accounts

Question 5

What happens when debits and credits are compared? When does a debit balance occur and when does a credit balance occur?

Answer 5

> When the totals of the two sides are compared, an account will have a debit balance if the total of the debit amounts exceeds the credits.

> On the other hand, an account will have a credit balance if the credit amounts are more than the debits.

Question 6

In the tabular summaries, what are positive and negative transactions?

Answer 6

> In the tabular summary, every positive item is a receipt of cash. Every negative item is a payment of cash.

Question 7

What does a debit refer to? (increase?)

Answer 7

> It is very important to understand that debit does not mean increase; nor does it mean decrease. Sometimes we use a debit to increase an account and sometimes we use a debit to decrease an account.

Question 8

What does a credit mean?

Answer 8

> Credits are the same—sometimes a credit is used to increase an account and sometimes a credit is used to decrease an account.

Question 9

What is a normal balance?

Answer 9

> All accounts have a normal balance, which is the side that increases the account balance.

Question 10

What side of the transaction do assets fall on? (What is the normal balance of assets?)

Answer 10

> Because assets are on the left or debit side of the accounting equation, the normal balance of an asset is on the left or debit side of the account.

> Logically, then, increases to asset accounts need to be entered on the left or debit side and decreases in assets must be entered on the right or credit side.

• (left or right side of the asset category)

Question 11

What side of the transaction do liabilities fall on? (What is the normal balance of liabilities?)

Answer 11

> Similarly, because liabilities are on the right or credit side of the accounting equation, the normal balance of a liability is on the right or credit side of the account.

> This means increases to liability accounts are entered on the right or credit side, and decreases to liability accounts are entered on the left or debit side.

Question 12

What are the effects that debits and credits have on assets and liabilities?

Answer 12

DEBITS:
- increase assets
- decrease liabilities

CREDITS:
- decrease assets
- increase liabilities

> To summarize, because assets are on the left side of the accounting equation and this is the opposite of liabilities, increases and decreases in assets are recorded opposite from increases and decreases in liabilities.

Question 13

What are normal balances (in general)

Answer 13

> The normal balance is the side where increases in the account are recorded.

Question 14

What is the normal balance for assets and liabilities?

Answer 14

> debit for increase (assets)
credits for increase (liabilities)

Question 15

How does knowing the balance in an account help you find errors?

Answer 15

> a credit balance in an asset account such as Land or a debit balance in a liability account such as Wages Payable probably means there was a recording error.

> Occasionally, an abnormal balance may be correct. The Cash account, for example, will have a credit balance when a company has overdrawn its bank balance.

Question 16

What are the rules for owner’s equity?

Answer 16

> As liabilities and owner’s equity are on the same side of the accounting equation, the rules of debit and credit are the same for these two types of accounts. Credits increase owner’s equity and debits decrease owner’s equity.

Question 17

What is the normal balance of the Owner’s Capital account?

Answer 17

> a credit balance. (credit for increase)

> Therefore, investments by owners are credited to the Owner’s Capital account and this increases owner’s equity.

Question 18

What are the debit and credit effects—Owner’s Capital?

Answer 18

DECREASE:
- decrease owner’s capital

CREDITS:
- increase owner’s capital

Question 19

What are owner withdrawals recorded as?

Answer 19

> Withdrawals are recorded as debits because withdrawals decrease owner’s equity. (debit for increase)

> Withdrawals could be debited directly to Owner’s Capital.

> best to use a seperate drawings account

Question 20

What balances do the owners drawings have?

Answer 20

> Because withdrawals decrease equity, the drawings account has a normal debit balance.

> Owner’s Drawings is increased by debits and decreased by credits.

> Credits to an owner’s drawings account are unusual, but might be used, for example, to correct a withdrawal recorded in error.

Question 21

Note that increases and decreases to the Owner’s Drawings account are recorded opposite to increases and decreases in Owner’s Capital - why is this?

Answer 21

> That is because investments, which increase owner’s equity, are recorded in Owner’s Capital, and withdrawals, which decrease owner’s equity, are recorded in Drawings.

Question 22

What should be noted about revenue accounts and their credits?

Answer 22

> revenue accounts are increased by credits and decreased by debits.

> Credits to revenue accounts should exceed the debits.

> Credits to revenue accounts should exceed the debits.

Question 23

What should be noted about expenses and their increases?

Answer 23

> Expenses normally have a debit balance; therefore, increases to expenses are debits.

> This is because, as expenses are incurred, owner’s equity decreases.

> Therefore, like the Owner’s Drawings account, expense accounts are increased by debits and decreased by credits.

> Debits to expense accounts should exceed the credits.

Question 24

Debit and credit effects—revenues and expenses

Answer 24

DEBITS
- decrease revenues
- increase expenses

CREDITS:
- increase revenues
- decrease expenses.

Question 25

What kind of effects occur from revenues and expenses?

Answer 25

> Because revenues increase owner’s equity, a revenue account has the same debit/credit rules as the Owner’s Capital account. Expenses have the opposite effect.

Question 26

What is the normal balance for revenues and expenses?

Answer 26

> Revenues: credit for increase (normal balance) > Expenses: debit for increase (normal balance)

Question 27

No matter what the transaction, total debits must equal what?

Answer 27

> total debits must equal total credits in order to keep the accounting equation in balance.

Question 28

In summary, what is the normal balance of each account?

Answer 28

> is on its increase side.

Question 29

Assets, drawings, and expense accounts have what kind of balance?

Answer 29

> Assets, drawings, and expense accounts have a normal debit balance,

Question 30

What kind of balance do liabilities, owners capital, and revenues have?

Answer 30

> Assets, drawings, and expense accounts have a normal debit balance, while liabilities, owner’s capital, and revenue accounts have a normal credit balance.

Question 31

when we record transactions, debits must do what? What is this also known as?

Answer 31

> when we record transactions, debits must equal credits > when we record transactions, debits must equal credits

Question 32

What is the accounting cycle? (what are the nine steps)

Answer 32

1) Analyze business transactions 2) Journalize the transactions 3) Post to ledger accounts 4) prepare a trial balance 5) journalize and post adjusting entries 6) prepare an adjusted trial balance 7) prepare financial statements 8) Journalize and post closing entries 9) prepare a post-closing trial balance

Question 33

What are the first three steps in the accounting cycle also known as:

Answer 33

> the recording process

Question 34

What does evidence from a transaction come from?

Answer 34

> Evidence of a transaction comes from a source document, such as a sales slip, cheque, bill, cash register tape, or bank statement.

Question 35

What is the basic analysis of a transaction?

Answer 35

> identify the accounts that were changed, whether each account increased or decreased, and if so, by how much. This analysis is often referred to as the basic analysis of the transaction.

Question 36

What are the debit/credit analysis of the transaction?

Answer 36

> the debit and credit procedures are applied to determine which account or accounts should be debited and which account or accounts should be credited.

Question 37

What is the most difficult part of the accounting cycle?

Answer 37

> Analyzing transactions is the most difficult part of the accounting cycle because there are so many different types of transactions.

Question 38

What is the journal?

Answer 38

> In a computerized system, journals are kept as files, and accounts are recorded in electronic databases. > economic events are recorded in chronological order.

Question 39

Companies can use various kinds of journals, but every company has what?

Answer 39

> Companies can use various kinds of journals, but every company has a general journal.

Question 40

The journal makes some important contributions to the recording process: name three:

Answer 40

> It discloses the complete effect of a transaction in one place. > It provides a chronological record of transactions. > It helps to prevent and locate errors, because the debit and credit amounts for each entry can be easily compared.

Question 41

Entering transaction data in the journal is known as what?

Answer 41

> journalizing.

Question 42

What are separate journal entries and complete journal enteries: (What components does complete journal entries have?)

Answer 42

> A separate journal entry is made for each transaction. > A complete entry consists of the following: - the date of the transaction, the accounts and amounts to be debited and credited, and - a brief explanation of the transaction.

Question 43

What are notable features of a journal entry?

Answer 43

1) The date of the transaction is entered in the Date column. 2) The debit account title (that is, the account to be debited) is entered first at the extreme left margin of the column headed “Account Titles and Explanation,” and the amount of the debit is recorded in the Debit column. 3) The credit account title (that is, the account to be credited) is indented and entered on the next line in the column headed “Account Titles and Explanation,” and the amount of the credit is recorded in the Credit column. 4) A brief explanation of the transaction appears on the line below the credit account title. A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read. 5) The column titled Ref (which stands for Reference) is left blank when the journal entry is made. This column is used later when the journal entries are transferred to the ledger accounts.

Question 44

What is an extra step that can be considered in step 1 of the recording step?

Answer 44

> In the margins next to journal entries are equation analyses that show the effect of the transaction on the accounting equation (A = L + OE) and on cash flows. You should think of these as part of Step 1 of the accounting cycle.

Question 45

What is required for an account title? What are they required to not contain?

Answer 45

> It is important to use correct and specific account titles in journal entries. While there is some flexibility in creating account titles, each title has to accurately describe the account’s content. > Account titles used in journalizing should not contain explanations (such as Cash Paid or Cash Received).

Question 46

What is considered a simple journal entry?

Answer 46

> If an entry affects only two accounts, it will have one debit and one credit. This is considered a simple journal entry.

Question 47

What is a compound journal entry?

Answer 47

> Some transactions, however, involve more than two accounts. When three or more accounts are required in one journal entry, the entry is called a compound entry.

Question 48

What is the standard format for a compound entry?

Answer 48

> In a compound entry, the standard format requires that all debits be listed before the credits.

Question 49

What is a ledger?

Answer 49

> The entire group of accounts maintained by a company is called the ledger.

Question 50

What kind of ledgers are used?

Answer 50

> The ledger provides the balance in each of the accounts and keeps track of changes in these balances. > Companies can use different kinds of ledgers, but every company has a general ledger.

Question 51

What is a general ledeger?

Answer 51

> A general ledger contains accounts for all the asset, liability, equity, revenue, and expense accounts

Question 52

What is the order of a ledger?

Answer 52

> Companies arrange the ledger in the sequence in which they present the accounts, beginning with the balance sheet accounts. > First in order are the asset accounts, followed by liability accounts, owner’s capital, drawings, revenues, and expenses. Each account is numbered for easier identification.

Question 53

What does the ledger provide?

Answer 53

> The ledger provides the balance in each of the accounts.

Question 54

What is the most common form used in the accounting cycle?

Answer 54

> This form is often called the three-column form of account because it has three money columns: debit, credit, and balance.

Question 55

What is posting?

Answer 55

> Transferring journal entries to the ledger accounts is called posting. It is the third step in the accounting cycle. > This phase of the recording process accumulates the effects of journalized transactions into the individual accounts.

Question 56

What are the four steps of posting?

Answer 56

> In the general ledger, to post to the debit account, enter the date, the journal page number, and the amount. > In the journal, enter the debit account number in the journal reference column. > In the general ledger, to post to the credit account, enter the date, the journal page number, and the amount. > In the journal, enter the credit account number in the journal reference column.

Question 57

What does the reference column do?

Answer 57

> The reference column in the journal shows the entries that have been posted. > The references also show the account numbers to which the amounts have been posted. > The reference column of a ledger account indicates the journal page where the transaction was posted from.

Question 58

In what order should posting be done?

Answer 58

> Posting should be done in chronological order. That is, all the debits and credits of one journal entry should be posted before going to the next journal entry.

Question 59

What is the first step to creating an accounting system?

Answer 59

> When creating an accounting system, the first step is to develop a framework for the accounting information

Question 60

What is the 'chart of accounts'?

Answer 60

> The chart of accounts is a list of the accounts and account numbers that identify where the accounts are in the ledger.

Question 61

What is the numbering system used in the charts of accounts and how many accounts do businesses typically have?

Answer 61

> The numbering system used to identify the accounts usually starts with the balance sheet accounts and follows with the income statement accounts. > Because each company is different, the types and number of accounts they have vary. > The number of accounts depends on the amount of detail that management requires.

Question 62

What is a trial balance?

Answer 62

> A trial balance is a list of the accounts and their balances at a specific time.

Question 63

What are four notable components to a trial balance?

Answer 63

> Companies usually prepare a trial balance at the end of an accounting period. > They list accounts in the order in which they appear in the ledger. > Debit balances appear in the left column and credit balances in the right column. > The totals of the two columns must be equal.

Question 64

What is the purpose of a trial balance?

Answer 64

> The main purpose of a trial balance is to prove (check) that the debits equal the credits after posting. That is, the sum of the debit account balances must equal the sum of the credit account balances

Question 65

When is a trial balance considered "balanced"

Answer 65

> When the totals of the two columns are equal, the trial balance is considered “balanced.”

Question 66

What is the procedure for preparing a trial balance ?

Answer 66

> List the account titles and their balances in the same order as in the chart of accounts. Debit balances are entered in the debit column and credit balances are entered in the credit column. > Total the debit and credit columns. > Ensure that the totals of the two columns are equal.

Question 67

What are three things that should be noted about a trial balance?

Answer 67

> accounts are listed in the same order as they are in the general ledger? > balance of each account in the general ledger is included in the correct debit or credit column. > total debit accounts equal the credit accounts

Question 68

What are the 5 limitations to a trial balance?

Answer 68

> the trial balance may balance even when: 1. a transaction is not journalized, 2. a correct journal entry is not posted, 3. a journal entry is posted twice, 4. incorrect accounts are used in journalizing or posting, or 5. offsetting errors (errors that hide each other) are made in recording the amount of a transaction. > As long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the total debits will equal the total credits when the trial balance is prepared.

Question 69

Is an error unethical?

Answer 69

> An error is the result of an unintentional mistake; > it is neither ethical nor unethical. > An irregularity is an intentional misstatement, which is viewed as unethical.

Question 70

What normally causes errors?

Answer 70

> Errors generally result from mathematical mistakes, incorrect postings, or simply recopying data incorrectly.

Question 71

What are the four ways to resolving errors with trial balances?

Answer 71

1. If the error is an amount such as $1, $100, or $1,000, re-add the trial balance columns and recalculate the account balances. 2. If the error can be evenly divided by two, scan the trial balance to see if a balance equal to half the error has been entered in the wrong column. 3. If the error can be evenly divided by nine, retrace the account balances on the trial balance to see whether they are incorrectly copied from the ledger. For example, if a balance was $12 but was listed as $21, a $9 error has been made. Reversing the order of numbers is called a transposition error. 4. If the error cannot be evenly divided by two or nine, scan the ledger to see whether an account balance in the amount of the error has been omitted from the trial balance. Scan the journal to see whether a posting in the amount of the error has been omitted.

Question 72

When are cents used in financial statements?

Answer 72

> cents are used in the formal accounting records. > When a transaction is recorded in the journal and then posted to the ledger, cents are always used. > But when the financial statements are prepared, the account balances are normally rounded to the nearest dollar, and in larger companies, they may be rounded to the nearest thousand or even million.

Question 73

When are dollar signs used?

Answer 73

> Both in practice and in accounting textbooks, dollar signs are not used in journals or ledgers. > Dollar signs are used only in the trial balance and the financial statements. Generally, a dollar sign is shown only for the first item in the column, and for the total of that column.