Chapter 2 Recording Business Transactions

Question 1

what is an account?

Answer 1

a detailed record of all increases and decreases that have occurred in an individual asset, liability, or equity during a specific period.

Question 2

what are common asset accounts?

Answer 2

cash, accounts receivable, notes receivable, prepaid expenses, land, building, furniture

Question 3

what are common liability accounts?

Answer 3

accounts payable, notes payable, taxes payable, salaries payable, unearned revenue

Question 4

what are common equity accounts?

Answer 4

common stock, dividends, revenues, expenses

Question 5

what is a chart of accounts?

Answer 5

lists a company’s accounts along with account numbers

Question 6

what is a ledger?

Answer 6

shows the increases and decreases in each account along with their balances

Question 7

what is double-entry accounting?

Answer 7

requires transactions to be recorded into at least two accounts.

Question 8

do assets, dividends, and expenses increase with a credit or debit?

Answer 8

increase with debit decrease with credit

Question 9

do liabilities, common stock, and revenues increase or decrease with a credit or debit?

Answer 9

increase with a credit and decrease with a debit

Question 10

what is the normal balance?

Answer 10

the increase side of an account

Question 11

how do you record transactions?

Answer 11

source documents provide the evidence data for transactions; they are recorded in the journal and then posted to the ledger.

Question 12

what are the 5 steps to journalizing and posting transactions?

Answer 12

Step 1: ID the accounts and the account type
Step 2: Decide if account increases/decreases on DR/CR
Step 3: record the transaction in the journal
step 4: post the journal entry to the ledger
Step 5: determine whether the accounting equation is in balance

Question 13

what is the trial balance?

Answer 13

summarizes the ledger by listing all the accounts with their balances; assets, liabilities, then equities. Ensures DR=CR to prepare financial statements

Question 14

how do you use the debt ratio to evaluate business performance?

Answer 14

the debt ratio can be used to evaluate a businesses ability to pay its debts; debt ratio = total liabilities / total assets

Question 15

what is an account?

Answer 15

a detailed record of all increases and decreases that have occurred in an individual asset, liability, or equity during a specified period.

Question 16

what is accrued liability?

Answer 16

a liability for which the business knows the amount owed but the bill has not been paid

Question 17

what is a chart of accounts?

Answer 17

a list of all of a company’s accounts with their account numbers

Question 18

what is a compound journal entry?

Answer 18

a journal entry that is characterized by having multiple debits and/or multiple credits

Question 19

which side of a T account is for Debits and Credits?

Answer 19

DR=L

CR=R

Question 20

what is debt ratio?

Answer 20

shows the proportion of assets financed with debt. Total liabilities / total assets

Question 21

what is a double-entry system?

Answer 21

a system of accounting in which every transaction affects at least two accounts?

Question 22

what is a journal?

Answer 22

a record of transactions in date order

Question 23

what is a ledger?

Answer 23

the record holding all the accounts of a business, the changes in those accounts, and their balances.

Question 24

what is a normal balance?

Answer 24

the balance that appears the increase side of an account

Question 25

what are notes receivable?

Answer 25

a written promise that a customer will pay a fixed amount of money and interest by a certain date in the future

Question 26

what are notes payable?

Answer 26

a written promise made by the business to pay a debt, usually involving interest, in the future

Question 27

what is posting?

Answer 27

transferring data from the journal to the ledger

Question 28

what is a prepaid expense?

Answer 28

a payment of an expense in advance

Question 29

what is a source document?

Answer 29

provides the evidence and data for accounting transactions

Question 30

what is a T account?

Answer 30

a summary device that is shaped like a capital T with debits posted on the left side of the vertical line and credits on the right side of the vertical line

Question 31

what is a trial balance?

Answer 31

a list of all the ledger accounts with their balances at a point in line

Question 32

what is unearned revenue?

Answer 32

a liability created when a business collects cash from customers in advance of providing services or delivering goods