Accounting Made Simple 12

Question 1

1. Why do we use a CREDIT when making a JOURNAL ENTRY to a REVENUE ACCOUNT (why do REVENUE ACCOUNTS increase with CREDITS)?

Answer 1

Because REVENUES serve to increase OWNER’S EQUITY.

Question 2

2. Why do we use a DEBIT when making a JOURNAL ENTRY to an EXPENSE ACCOUNT (why do expenses increase with debits)?

Answer 2

Because EXPENSES serve to DECREASE OWNER’S EQUITY, and OWNER’S EQUITY DECREASES with DEBITS.

Question 3

3. ABC Construction writes a CHECK for monthly rent. The JOURNAL ENTRY is:

Answer 3

rent expense (exp)…4,500
     cash (asset)………..4,500

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Question 4

ABC Construction makes a sale for 10k and is paid in cash. The entry is:

Answer 4

cash (asset)……10k
     sales revenue (rev)…..10k

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Question 5

5. ABC Construction sells an HVAC unit (NO LABOR) for 1000. They originally paid 450 for the unit. The JOURNAL ENTRY is:

Answer 5

THIS REQUIRES TWO ENTRIES.

a. cash (asset)……….1000
sales revenue (rev)….1000
b. cost of good sold…..450
inventory (asset)…….450

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Question 6

6. What is a GENERAL LEDGER?

Answer 6

It is the place where ALL of a company’s JOURNAL ENTRIES get recorded, and is the most important financial document, since the financial statements are created from the ledger.

Question 7

7. What is a TRIAL BALANCE?

Answer 7

It is a LIST indicating the balances of VERY SINGLE GENERAL LEDGER ACCOUNT AT A GIVEN POINT IN TIME.

Question 8

8. What is the purpose of the TRIAL BALANCE?

Answer 8

To check that DEBITS, in total, are equal to the total amount of CREDITS.

Question 9

9. While the TRIAL BALANCE is a helpful check, it is not perfect because:

Answer 9

there are numerous types of errors that a Trial Balance does not catch.

Question 10

10. What is an example of an error that a TRIAL BALANCE does not catch?

Answer 10

It does not alert you if the wrong asset account had been debited for a given transaction, as the error would not throw off the TOTAL amount of debits.

Question 11

11. What type of account is COGS?

Answer 11

It’s an expense because it is considered the cost of doing business. COGS for a manufacturing company would be the raw materials used to make the products they sell. For a retail company, COGS is the cost of buying the items they sell in their store. Either way, it’s still considered an expense and is deducted from revenue to find gross profit.