Chapter Three: The Accounting Information System

Question 1

Double-Entry System

Answer 1

Debits and credits equal each other

Question 2

Debits

Answer 2

left-hand side, increase assets and expense accounts (debit balance), decrease liabilities, equity, and revenue

Question 3

Credits

Answer 3

right hand side, increase liabilities, equity, and revenue (credit balance), decrease assets and expenses

Question 4

Types of Accounts

Answer 4

Assets, Liabilities, Stockholder’s/Owner’s Equity, Revenues, and Expenses

Question 5

Accounting equation

Answer 5

Assets = Liabilities + Owner’s Equity

Question 6

Profit Equation

Answer 6

Revenues - Expenses = Net Income

Question 7

Accounting Cycle

Answer 7

Identify events or transactions, Record transaction in journal, Posting, Prepare a Trial Balance, Adjusting Entries (Accruals and Deferrals), Prepare an Adjusted Trial Balance, Prepare the Financial Statements, Closing Process, and Post-Closing Trial Balance

Question 8

What types of transactions are recorded?

Answer 8

internal and external

Question 9

Transaction

Answer 9

event between organization and something outside organization (external)

Question 10

Journal

Answer 10

original book of entry, use general journal

Question 11

Accrued revenue

Answer 11

revenues that have been earned but payment has not been received

Question 12

Accrued expense

Answer 12

expense incurred this period but have not made an expenditure

Question 13

Deferred (unearned) revenue

Answer 13

revenue where payments have been received but earning process is not complete

Question 14

Deferred (prepaid) expenses

Answer 14

made expenditure but not properly matched in this period (still have asset on hand)

Question 15

Balance Sheet

Answer 15

composed of permanent accounts, will reflect company’s financial position and accounting equation (assets = liabilities + owner’s equity)

Question 16

Income Statement

Answer 16

composed of nominal accounts, reflects company’s profitability over time, shows results of profit equation

Question 17

Statement of Cash Flows

Answer 17

reports cash transactions during period, financing, investing, and operating activities

Question 18

Statement of Retained Earnings

Answer 18

not money, retained earnings is owner’s equity account which represents profit which has been left in business by owners

Question 19

Closing Process

Answer 19

results of profit equation added to retained earnings

Question 20

Describe the closing process

Answer 20

1) Introduce new account, Income Summary, into the system
2) Force all expenses to 0, making corresponding entry to Income Summary (credit)
3) Force all revenues to 0, making corresponding entry to Income Statement (debit)
4) Force income summary to 0, making corresponding entry to retained earnings