Ch 2 - Accounting Cycle

Question 1

State the basic Accounting Equation

Answer 1

Assets = Liabilities + Equity

Question 2

State the equation for Stockholder’s Equity

Answer 2

Stockholder’s equity = Contributed capital + Retained Earnings

Question 3

State the Equation for Retained Earnings

Answer 3

Retained Earnings = Beginning Retained Earnings + Net Income for the period - Dividends

Question 4

State the equation for Net Income

Answer 4

Net Income = Revenues - Expenses + Other Income - Other Expenses + Gains - Losses

Question 5

What is double entry accounting?

Answer 5

every journal entry must have at least one debit and one credit

Question 6

How does a T-account work?

Answer 6

• debit on the left
• credit on the right

Question 7

State the equation for debits and credits

Answer 7

Dividends + Expenses + Assets = Liabilities + Owner’s Equity + Revenue

DEALER

Question 8

How do debits and credits affect Assets?

Answer 8

• debits (left) increase assets
• credits (right) decrease assets

Question 9

How do debits and credits affect Liabilities?

Answer 9

• credits (right) increase liabilities
• debits (left) decrease liabilities

Question 10

How do debits and credits affect Common Stock?

Answer 10

• credits (right) increase common stock
• debits (left) decrease common stock

Question 11

How do debits and credits affect Retained Earnings?

Answer 11

• credits (right) increase R/E
• debits (left) decrease R/E

Question 12

How do debits and credits affect Dividends?

Note: Dividends decrease stockholder’s equity

Answer 12

• debits (left) increase dividends
• credits (right) decrease dividends

Question 13

How do debits and credits affect revenue?

Note: revenue increases stockholder’s equity

Answer 13

• credits (right) increase revenue
• debits (left) decrease revenue

Question 14

How do debits and credits affect Expenses?

Note: expenses decrease stockholder’s equity

Answer 14

• debits (left) increase expenses
• credits (right) decrease expenses

Question 15

What is the “Normal Balance” side of Assets?

Answer 15

debit (left)

Question 16

What is the “Normal Balance” side of Expenses/Loss

Answer 16

debit (left)
- decreases equity

Question 17

What is the “Normal Balance” side of Dividends?

Answer 17

debit (left)
- decreases equity

Question 18

What is the “Normal Balance” side of Liabilities?

Answer 18

credit (right)

Question 19

What is the “Normal Balance” side of capital?

Answer 19

credit (right)

Question 20

What is the “Normal Balance” side of Retained Earnings?

Answer 20

credit (right)

Question 21

What is the “Normal Balance” side of Revenue/Gains?

Answer 21

credit (right)
- increases equity

Question 22

What are the Permanent Accounts?

Answer 22

• Assets
• Liabilities
• Owner’s Equity

carried over to future periods

Question 23

What are the Temporary Accounts?

Answer 23

• Revenues
• Expenses
• Gains & Losses
• Dividends

closed each period to retained earnings

Question 24

What occurs during the accounting period? (3)

Answer 24

• analyze transactions
• record journal entries
• post amounts to general ledger

Question 25

What occurs at the end of the accounting period? (5)

Answer 25

- prepare trial balance - record adjusting entries - close temporary accounts (bring to 0) - record adjusted trial balance - prepare the financial statements ## Footnote What are the temporary accounts?

Question 26

What are the 3 components of Adjusting Journal Entries?

Answer 26

- Prepayments - Accruals - Estimates

Question 27

What are prepayments? ## Footnote Provide Examples

Answer 27

Cash flow occurs **before** expense and revenue recognition ## Footnote Ex: prepaid rent; unearned revenue

Question 28

What are Accruals? ## Footnote Provide Examples

Answer 28

cash flows **after** expense and revenue recognition ## Footnote Ex: interest expense; interest revenue

Question 29

What is an exmple of an Estimate provided in an AJE?

Answer 29

bad debt expense

Question 30

What is the traditional approach to record prepayments?

Answer 30

Recognize asset first; then in AJE, recognize expense and decrease asset

Question 31

What is the alternative approach to record prepayments?

Answer 31

Recognize expense first; then in AJE, recognize asset and decrease expense

Question 32

Unadjusted trial account

Answer 32

The account balances before the company makes any adjusting journal entries (AJE) ## Footnote Making sure debits equal credits

Question 33

What does a Balance Sheet Show?

Answer 33

balances of Assets, Liabilities, Equity