Ch. 1: The Accounting Equation

Question 1

Expenses

Answer 1

The costs of doing business, that is, the costs that must be incurred in order for an organization to generate revenue. A retail store must incur the expense of renting the store in order to operate the business.

Question 2

Permanent Investment

Answer 2

An investment designated by management or the proprietor to remain with the company until the dissolution of the company.

Question 3

Notes Receivable

Answer 3

Written promises, in the hands of the creditors, that serve as evidence of debts.

Question 4

Capital

Answer 4

The ownership of assets of a business by the proprietor(s).

Question 5

Exchange of Assets

Answer 5

The process resulting from an asset or assets being given up and another asset or assets being acquired. For example, the receipt of the asset office supplies for which the asset cash is exchanged.

Question 6

Property, Plant, and Equipment

Answer 6

Assets that have a useful life of more than 1 year and are used in the continuing operations of the organization.

Question 7

Cost Principle

Answer 7

The cost assigned to an asset, including the purchase price, transportation charges, installation charges, and any other costs associated with placing the asset into use by the organization.

Question 8

Monetary Principle

Answer 8

An assumption made by the accounting profession that the dollar is a stable unit of value in measuring economic transactions.

Question 9

Intangible Asset

Answer 9

An asset that cannot readily be seen or touched. Examples include copyrights, franchises, patents, and trademarks. Intangible assets have no physical substance, but are of value to the owners of the organization. This value is based on rights or privileges belonging to the owner.

Question 10

Money Value

Answer 10

the value, expressed in monetary terms, of an item within the accounting environment. All assets, liabilities, and capital are expressed in monetary terms.

Question 11

Investments

Answer 11

Assets that are not used in the operation of a business, and are not expected to be converted into cash within 1 year.

Question 12

Asset

Answer 12

Anything that is owned and has money value.

Question 13

Permanent Capital

Answer 13

The owner’s equity in a business organization that is not expected to change other than as a result of an increase or a decrease in the owner’s investment in the business.

Question 14

Notes Payable

Answer 14

Written promises, in the hands of the makers, that serve as evidence of debts.

Question 15

Business Entity Concept

Answer 15

The accounting principle that says a business is separate and apart from the individual who owns (or the individuals who own) it. The assets of the owner(s) should not be combined with the assets of the business.

Question 16

Temporary Capital

Answer 16

Capital accounts that will be eliminated at the end of the accounting period. Examples include revenue, expenses, and proprietor’s drawing accounts.

Question 17

Current Asset

Answer 17

An asset that can reasonably be expected to be used up or converted into cash or sold within 1 year or less.

Question 18

Business Transaction

Answer 18

Any business activity that affects what a business owns or owes, as well as the ownership of the business.

Question 19

Accounting Equation

Answer 19

The relationship between the assets, liabilities, and capital of a business organization. The equation states: Assets = Liabilities + Capital.

Question 20

Profit

Answer 20

The excess revenue after expenses.

Question 21

Cash

Answer 21

An asset consisting of coins, bills, money orders, checks, certificates of deposit, or treasury bills.

Question 22

Ownership

Answer 22

The right to dispose of property as well as to determine its use.

Question 23

Accounts Payable

Answer 23

A current liability for which an oral promise to pay, made to the creditor, serves as evidence.

Question 24

Revenue

Answer 24

The receipt, from sales of a product or service, of assets such as cash or accounts receivable that will eventually have an effect on the owner’s equity.

Question 25

Accounts Receivable

Answer 25

A current asset for which an oral promise to pay, made by the customer, serves as evidence.

Question 26

Liabilities

Answer 26

Amounts due creditors and other interested parties; also, the ownership of certain assets of an organization by creditors. The ownership extends to the creditors’ right to collect what is due them before any distribution to the owners of the business.

Question 27

Account

Answer 27

An individual record of specific items that a business owns (assets) and owes (liabilities), as well as a recognition of ownership (capital).

Question 28

Accounting

Answer 28

The art of organizing, maintaining, recording, and analyzing financial activities.

Question 29

Temporary Investment

Answer 29

Money or other assets that are lent by the proprietor and are expected to be returned to him or her by the business.