Accounting Chapter 4-6

Question 1

Define revenue

Answer 1

The earnings of a business generated by selling products or providing services over a period of time.

Question 2

What does it mean to recognize revenue?

Answer 2

To record the revenue when it has been earned or expense in the accounting records (on the income statements).

Question 3

What are the 3 possible ways revenue can be recognized?

Answer 3

When customer…

1) pay cash now
2) pay cash later (accounts receivable)
3) prepays (pays before work) (unearned revenue)

Question 4

What is the entry to record revenue if a customer pays when the service is delivered?

Answer 4

Service revenue increases and cash increases.

Question 5

What is the entry to record revenue if a customer pays after the service is delivered?

Answer 5

Accounts receivable increases and service revenue increases.

Question 6

What is the entry if a customer pays before the service is delivered? What is the entry to record revenue when the service is finally delivered?

Answer 6

Cash is increased and unearned revenue is increased.

Service revenue increases and unearned revenue decreases.

Question 7

What type of account is unearned revenue? Why is it that type of account?

Answer 7

Liability account. If service isn’t performed the money is owed back.

Question 8

What are the three possible ways to pay for an expense?

Answer 8

1) Pay cash
2) Pay the cash after expense incurred
2) Prepaid the expense

Question 9

What does it mean to incur an expense?

Answer 9

If the activities related to the expense have been used or consumed (utilized or used).

Question 10

What is the entry to record an expense if a company pays when the expense is incurred?

Answer 10

increase in expense account and decrease cash account.

Question 11

What is the entry to record an expense if a company pays after the expense is incurred?

Answer 11

increase to accounts payable and increase to expense.

Question 12

What is the entry if a company pays before the expense is incurred? What is the entry to record an expense when the expense is finally incurred?

Answer 12

Cash decreases and prepaid accounts increase.

Prepaid account decreases and “whatever the expense is” increases.

Question 13

How does a company decide whether to include office supplies as a prepaid expense on the balance sheet (an asset) or an expense on the income statement?

Answer 13

The decision is dependent on the materiality.

Question 14

What is an accounting period?

Answer 14

Time period covered by the financial statements.

Question 15

State the purpose of adjustments.

Answer 15

To bring the accounts up to date.

Question 16

What does accrual accounting state regarding revenue and expenses?

Answer 16

Revenues recorded when they are earned, expenses recorded when incurred regardless of whether or not we have received money or paye out money.

Question 17

Provide 4 example of adjustments. (Bring accounts up to date.)

Answer 17

Supplies, insurance, accrued interest expense, depreciation.

Question 18

Define accrued expenses.

Answer 18

Expenses incurred in one period and paid in a later period.

Question 19

What is the entry to recognize accrued interest expense?

Answer 19

An increase to interest expense and an increase to interest payable.

Question 20

Provide the entry to recognize depreciation expense at the end of accounting period.

Answer 20

Increase depreciation expense account and increase accumulated depreciation account.

Question 21

What is the purpose of contra account?

Answer 21

A contra account is linked to another account and records decreases in the value of the account w/o changing the original value shown.

Question 22

True or False: All long term assets are depreciated.

Answer 22

False, because land is never depreciated, everything else does depreciate.

Question 23

What is the residual value of an asset?

Answer 23

Estimated amount that a long term asset could be sold for at the end of its useful life.

Question 24

What does the term debit refer to?

Answer 24

An entry that increases assets, expenses and the owner’s drawings account or decreases liabilities, revenue and the owner’s capital account; recorded on the left side of a T-account.

Question 25

True or False: A credit will always be an increase to any account.

Answer 25

False

Question 26

Which three types of accounts use the credit side of the T-Account to increase their value?

Answer 26

Liabilities, Credit, and Capital Account

Question 27

What is the normal balance of an asset?

Answer 27

Debit

Question 28

What is the normal balance of a liability?

Answer 28

Credit

Question 29

Explain the purpose of a chart of accounts.

Answer 29

It is a list of all the accounts used by a company and it includes the identification number assigned to each account.

Question 30

What are the six steps of the accounting cycle?

Answer 30

1) Journals, 2) General Ledger, 3)Trial Balance, 4) Income Statement, 5) Balance Sheet, 6) Post Closing Trial Balance

Question 31

In the accounting cycle, what is the purpose of creating journals?

Answer 31

To record all initial entries of every transaction (1 debit and 1 credit) and the purpose of the transactions.

Question 32

In the accounting cycle, what is the purpose of the general ledger?

Answer 32

To group the activities of each account together and record the account balances.

Question 33

In the accounting cycle, what is the purpose of the trial balance?

Answer 33

To make sure the total debits equal the total credits and that each entry posted from the journal were entered w/o a debit and a credit.

Question 34

In the journal, what information will be entered in the PR (posting reference) column?

Answer 34

The number assigned to the account from the chart of accounts.

Question 35

What is the relationship between the closing balance and the opening balance for an asset?

Answer 35

The closing balance for an asset at the end of a month is the beginning balance for the next month.

Question 36

If the trial balance balances, were all transactions correctly recorded? Explain.

Answer 36

No, it would mean that each entry has a credit and a debit however a mistake could have been mad while recording transactions.

Question 37

9 steps

Answer 37

1) Analyze transactions
2) Prepare Journal Entries
3) Post J.E. into the General Ledger
4) Prepare unadjusted Trial Balance
5) Prepare Adjusting Journal Entries
6) Prepare Worksheets
7) Prepare 3 Financial statements
8) Close the Books
9) Prepare Post Closing Trial Balance

Question 38

What is the purpose of a worksheet?

Answer 38

To test that accounts balance and will continue to balance during th period end procedures.

Question 39

Why must adjustments be made at the end of the accounting period?

Answer 39

So that assess, liabilities, revenues, and expenses are updated to their correct balances.

Question 40

When making an adjustment to record unearned revenue that is now earned, which accounts are used and how are they affected?

Answer 40

Unearned Revenue is debited.

Earned Service Revenue is credited.

Question 41

When making an adjustment to record depreciation on property, plant and equipment, which accounts are used and how are they affected?

Answer 41

Credit - Accumulated Depreciation.
Debit - Depreciation Expense.
*Accumulated Depreciation is a contra account.

Question 42

When making an adjustment to record the used portion of prepaid insurance, which accounts are use and how are they affected?

Answer 42

Insurance Expense - Debit

Prepaid insurance - Credit

Question 43

When making an adjustment to record accrued interest on a bank loan, which accounts are used and how are they affected?

Answer 43

Interest Expense - Debit

Interest Payable - Credit

Question 44

What is an adjusted trial balance?

Answer 44

The adjustments previously recorded need to be added or subtracted to the original balance in a new column this is the adjusted trial balance.

Question 45

What does the income statement report?

Answer 45

Net income or loss. (revenues and expenses)

Question 46

Which statement is prepared after the income statement but before the balance sheet?

Answer 46

Statement of owner’s equity

Question 47

What does the statement of owner’s equity report?

Answer 47

Changes in equity over the reporting period.

Question 48

What two items will cause owner’s equity to increase?

Answer 48

1) if the owner invests more cash or assets into the business.
2) If the business earned a profit during the period.

Question 49

What two items will cause owner’s equity to decrease?

Answer 49

1) If owner withdrawals any capital from the business for personal use.
2) If the business suffered a loss during the period.

Question 50

Which categories of accounts will be reported on the balance sheet?

Answer 50

Assets, Liabilities, and Owner’s Equity

Question 51

How does accumulated depreciation affect the value of property, plant and equipment?

Answer 51

It lowers the book value

Question 52

What does it mean to close the books?

Answer 52

Updates the capital account (owner’s equity) and starts with a new income statement for the next accounting period.

Question 53

What are the 3 steps to close directly to the capital account?

Answer 53

1) Zero out the revenue account to capital account.
2) Zero out the expense accounts to capital account.
3) Zero out the owners drawings account to capital account.

Question 54

Which categories of accounts will appear on the post closing trial balance?

Answer 54

Only accounts that have a balance - Assets, Liabilities, and the Capital Account.

Question 55

Identify two benefits of a computerized accounting system.

Answer 55

1) Allows companies to transfer electronic information to each other.
2) Information is processed almost instantaneously and transfers it when and where it is needed.

Question 56

Net Worth:

Answer 56

Net worth = Assets-Liabilities

Question 57

Accounting Definition

Answer 57

Accounting is an information system which provides a report to users about economic conditions and financial activity of a business or organization.

Question 58

Journals-

Answer 58

Explains which accounts are affected and provides an explanation for each entry.

Question 59

General Ledger-

Answer 59

Groups the activities of each account together and records the account balances (like double entry T-account).

Question 60

Trial Balance-

Answer 60

A list of accounts and their balances at a point in time; the total debit balances should equal the total credit balances.

Question 61

Income Statement-

Answer 61

The temporary record (financial statement) used to record revenue and expenses thereby calculating a profit or loss for the accounting period.

Question 62

Balance Sheet-

Answer 62

A permanent document that shows what a company owns (assets) and what it owes (liabilities). The difference between assets and liabilities represents the net worth (or equity) at a specific point in time.

Question 63

Post-Closing trial balance-

Answer 63

Ensures the balance sheet is in balance after closing the previous period.

Question 64

Statement of Owner’s equity

Answer 64

Changes in equity over the reporting period

Ending O.E. = Beginning O.E. + Owner’s contribution + Net Income (loss) - Owner’s Withdrawals.

Question 65

Owner’s Equity: Which transactions increase it and which decrease it?

Answer 65

Owner’s equity will increase if owner invests more cash or assets int o the business, or if the business earned a profit during the period.
Owner’s equity will decrease if the owner withdrawals any capital (cash or assets) from the business for personal use, or if a business suffered a loss during the period.

Question 66

Balance Sheet-

Answer 66

Assets listed first, then Liabilities, then Owner’s Equity all presented vertically.

Question 67

Income Statement-

Answer 67

Revenue-Expenses=Net Income (loss)