Chapter 2: The Recording Process

Question 1

Cost Principal (Historical)

Answer 1

Companies must record assets at historical (purchase cost)

as opposed to fair value (the price the assets could sell for)

Question 2

Transaction

Answer 2

An event that affects the financial position of the company AND can be measured with faithful representation

Question 3

Double Entry Accounting

Answer 3

Each transaction affects two or more accounts - this keeps the accounting equation in balance

Debits must equal credits in each transaction

Question 4

General Ledger

Answer 4

System for tracking transactions sorted by account

Arranged in trial balance order

”$” symbol is not used

Question 5

Journal

Answer 5

Chronological record of all transactions

Debits always recorded first

”$” symbol not used

Question 6

Revenue Accounts

Answer 6

Debit Decrease | Credit Increase
Credit Normal Balance

Temporary account - closed at the end of each cycle

Question 7

Asset Accounts

Answer 7

Debit Increase | Credit Decrease
Debit Normal Balance

Asset: Something that provides future benefit for the company
-Permanent account shown on balance sheet

Question 8

Accounts that Increase Owner’s Equity

Answer 8

• Owner Investments (capital, stock)

- Revenue

Question 9

Accounts that Decrease Owner’s Equity

Answer 9

• Owners Drawings (Dividends)

- Business Expenses

Question 10

Liability Accounts

Answer 10

Debit Decrease | Credit Increase
Credit Normal Balance

Permanent account shown on balance sheet

Question 11

Owner’s Drawing Accounts

Answer 11

Debit Increase | Credit Decrease
Debit Normal Balance

Temporary account - closed at the end of the cycle

Question 12

Expense Accounts

Answer 12

Debit Increase | Credit Decrease
Debit Normal Balance

Temporary Account closed at the end of each cycle

Question 13

Normal Balance

Answer 13

Always on the increase side of account

Question 14

Owner’s Equity Accounts

Answer 14

Equity / Stocks / Capital

Debit Decrease | Credit Increase
Normal Balance

Permanent account shown on balance sheets

On classified balance sheet:
Proprietorship = one capital account
Partnership = one account per partner
Corporation = Capital stock account + retained earnings account

Question 15

Transaction Steps

Answer 15

1) Identify accounts affected and account types
2) Decide if each account increases or decreases
3) Record transaction in journal
4) Post journal entries to general ledger accounts
5) Assure accounting equation is still in balance

Question 16

Trial Balance Error Checks

Answer 16

Is the credit vs debit difference:

• Evenly divisible by 2: something is probably in the wrong column
• Evenly divisible by 9: transposition error

or check for missing accounts

Question 17

Trial Balance

Answer 17

• List of account balances at any given time
• In order of general ledger accounts
• Proves that debit balances = credit balances
• ”$” symbol on 1st item in the column and then on column totals

Question 18

Expanded Accounting Equation

Answer 18

Assets = Liabilities + Owner’s Capital - Owner’s Drawing + Revenues - Expenses

Retained Earnings = Revenues - Expenses - Owner’s Drawing