Chapter 3

Question 1

Accounting information system

Answer 1

The system of collecting and processing transaction data and communicating financial information to decision-makers

Question 2

Accounting transactions

Answer 2

Events that require recording in the financial statements because they affect assets, liabilities, or stockholders’ equity.
The accounting equation is used to determine if an accounting transaction has occurred.

Question 3

Accounts receivable

Answer 3

the right to receive payment at a later date. Revenue is recorded when services are performed. When companies perform services for which they are paid at a later date, they record the revenue to the services performed in the accounts receivable. When the company actually collects, the amount in accounts receivable is transferred to cash account.

Question 4

Revenue

Answer 4

Revenue increases stockholders’ equity

Question 5

Expense

Answer 5

Expense decreases stockholders’ equity.

Question 6

Prepaid expenses or Prepayments

Answer 6

An asset account which records payments of expenses that will benefit more than one accounting period. e.g. prepaid insurance

Question 7

Accounts Payable

Answer 7

A Liability account that represents a debt obligation which must be paid at a later date.

Question 8

Unearned Service Revenue

Answer 8

A liability account: the company has received prepayment from the customer for which the company has a liability for the work due.

Question 9

Notes payable

Answer 9

Liability: note issued in exchange for cash

Question 10

Dividend

Answer 10

Dividends are a reduction of stockholders’ equity but not an expense.
Dividends are not included in the calculation of net income. Instead, a dividend is a distribution of the company’s assets to its stockholders.

Question 11

Salaries or Wages

Answer 11

Expense: reduces stockholders’ equity

Question 12

Account

Answer 12

an individual accounting record of increases and decreases in a specific asset, liability, stockholders’ equity, revenue, or expense item. e.g. Accounts Receivable

Question 13

T-account

Answer 13

an account consists of three parts: (1) the title of the

account, (2) a left or debit side, and (3) a right or credit side in the form of a T.

Question 14

Debit (Db) & Credit (Cr)

Answer 14

Debit is the left side of an account. They do not mean increase or decrease, as is commonly thought. They are used to describe where entries are made in accounts. The act of entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account.

In asset and expense accounts, debits increase the balance and credits decrease the balance. In liability, equity and income accounts, credits increase the balance and debits decrease the balance.

Question 15

Double-entry system

Answer 15

A system that records the two-sided effect of each transaction in appropriate accounts.

Question 16

Normal balance

Answer 16

Whether the account has a debit balance (left side of the accounting equation) or a credit balance (right side of the accounting equation) in a normal, profitable company.

Question 17

Balance

Answer 17

The difference between the total debits and total credits in a single account is the account’s balance. If debits exceed credits, the account has a debit balance; if credits exceed debits, the account has a credit balance.

Question 18

(General) Journal

Answer 18

An accounting record in which transactions are initially recorded in chronological order

A journal (a) discloses in one place the complete effect of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared.

Question 19

Journalizing

Answer 19

The procedure of entering transaction data in the journal

Question 20

Ledger

Answer 20

The entire group of accounts maintained
by a company is referred to collectively as a ledger. The
ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.

Question 21

General Ledger

Answer 21

a ledger that contains all accounts maintained by a company: all asset, liability, stockholders’ equity, revenue, and expense accounts.

Question 22

Chart of accounts

Answer 22

A list of a company’s accounts. The number and type of accounts used differ for each company, depending on
the size, complexity, and type of business. For example, the number of accounts depends on the amount of detail desired by management. The management
of one company may want one single account for all types of utility expense. Another may keep separate expense accounts for each type of utility expenditure, such as gas, electricity, and water.

Question 23

Posting

Answer 23

The procedure of transferring journal entry amounts to the ledger accounts

Question 24

Trial balance

Answer 24

A list of accounts and their balances at a given time.

1) A trial balance shows the sum of the debit account balances equals the sum of the credit account balances.
2) A trial balance may also uncover errors in journalizing and posting.
3) a trial balance is useful in the preparation of financial statements.

Note that the order of presentation in the trial balance is:
Assets
Liabilities
Stockholders’ equity
Revenues
Expenses

Question 25

Limitations of a trial balance

Answer 25

For example, the trial balance may balance even when any of the following occurs:
(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, (5) offsetting errors are made in recording the
amount of a transaction.
In other words, 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.