Ch 2 - The Accounting Cycle: During The Period

Question 0

Define transaction.

Answer 0

Transaction refers to an external transaction between the company and a separate economic entity. The term internal transaction isn’t used anymore.

Question 1

Define accounting cycle.

Answer 1

The full set of procedures used to accomplish the measurement/communication process.

Question 2

What is an account?

Answer 2

An account summarizes all transactions related to a particular item over a period of time. Eg. Cash, Supplies, Equipment are all asset accounts.

Question 3

Define invoice.

Answer 3

An invoice is like a bill. It is not a receipt, because it is recording a transaction that hasn’t been paid yet?

Question 4

What is a chart of accounts?

Answer 4

A list of all account names used to record transactions of a company.

Question 5

Each transaction will have a dual effect. At least two accounts will be affected by every transaction or economic event. Keep this in mind.

Answer 5

n/a

Question 6

Describe the 6 steps in measuring external transactions.

Answer 6

1. Use source docs to identify accounts affected by the transaction.
2. Analyze the impact of the transaction on the accounting equation.
3. Assess if you’ll get a debit or credit to the account balance.
4. Record the transaction in a journal.
5. Post the transaction to the T-account in the general ledger.
6. Prepare a trial balance.

Question 7

When determining debit vs credit, always think from your company’s perspective.

Answer 7

n/a

Question 8

What is the revenue recognition principle?

Answer 8

Companies record revenue at the time it’s earned. Even if the customer hasn’t yet paid in cash at the time of the service, the company should still record that as revenue.

Question 9

What is unearned revenue?

Answer 9

Unearned revenue is a liability. It is not a revenue account. An example is when a customer pays the company in advance for 2 months worth of golf training in the future. Since the service has not yet been provided, the revenue is not yet earned. But cash/payment has been received. So the company has an obligation to provide the service in the future.

Question 10

Remember: dividends are not expenses.

Answer 10

Dividends reduce retained earnings similarly to expenses, but dividends are not considered to be an expense.

Question 11

Why are some things classified as an asset and some as an expense? Eg. prepaid rent.

Answer 11

An asset is something that has not yet been consumed, and so the company is holding on to it. An expense is something that has already been consumed by the company and thus must be recorded as an expense.

Question 12

Remember when to debit and credit an account balance.

Answer 12

Left side of the accounting equation (Assets) is debited when increased, and credited when decreased. 
Right side (Liabilities + SE) is in general credited when increased, and debited when decreased. However, Expenses and Dividends are the opposite of its right side family members B/C they reduce RE and thus SE. Since they swim against the current for RE, debit and credit mean the opposite.

Question 13

What does DEALOR mean?

Answer 13

An acronym for memorizing the debit/credit terminology.

DEA vs LOR
Left side = debit up
Right side = credit up

Dividends, Expenses, Assets
Liabilities, Owners’ Equity, Revenues

Question 14

What’s a journal and journal entry?

Answer 14

journal = a chronological record of all transactions affecting a firm.
journal entry = one transaction record. for each journal entry, total debits must always equal total credits. dual effect remember!

Question 15

What’s a general ledger?

Answer 15

The general ledger includes all accounts used to record the company’s transactions. So you can see the transactions for each account. The accounts’ names themselves are listed in the chart of accounts.

Question 16

What does posting mean?

Answer 16

Posting is the process of transferring the debit and credit info from the journal to individual accounts in the general ledger.

Question 17

What’s a T-account?

Answer 17

A T-account is a simplified form of a general ledger account with space at the top for the account title and with two sides for recording debits and credits. Left side is debit and right side is credit.

Question 18

What’s a trial balance?

Answer 18

A trial balance is a list of all accounts and their balances at a particular date, showing that total debits equal total credits. It will also help us prep for adjusting entries (Ch 3).

Question 19

So what’s the general order of preparation?

Answer 19

1. Journal entries noting which 2 accounts are affected by one transaction.
2. Journal entry info is posted to a general ledger which consists of a T-account for each separate account (eg. Cash, Accounts Payable, etc.).
3. The balance for each account is recorded in a trial balance to ensure that the sum of the accounts with debit balances should equal the sum of the accounts with credit balances.