Chapter 3: Double-Entry Accounting Plus Accounting Cycle

Question 1

Double-entry accounting system

Answer 1

An accounting system that maintains the equality of the basic equation by requiring that each entry have amounts of debits and credits

Question 2

Why is it called Double-entry accounting

Answer 2

One of the reasons it is called this is because it requires that each transaction be recorded in a way that affects at least two accounts, with the transaction amount recorded in each account.

Question 3

What is a limitation to the template method?

Answer 3

The most significant limitation of the template method is the number of columns that can be manageably used.

Question 4

The double-entry accounting system overcomes this limitation (of the template method) how?

Answer 4

By enabling companies to use hundreds or even thousands of accounts to capture information at the level of detail required to manage the business effectively.

Question 5

Normal Balence

Answer 5

The balance (debit or credit) that an account is normally expected to have. Assets, expenses, and losses normally have debit balances. Liabilities, shareholder equity, revenues, and gains normally have credit balances.

It is also used to indicate how the account is increased in an journal entry. The oppose of an account’s normal balance is used to record a decrease in the account

Question 6

Assets = (names for assets)

Answer 6

The Left SIde!
Debit
DR

Question 7

Liabilities = shareholder equity = (names for this)

Answer 7

The right side
Credit
CR

Question 8

EXAMPLE: To record cash (an asset) an increase would mean adding ____ and a decrease would mean to add ____

Answer 8

Add credit to increase

Add debit to decrease

Question 9

EXAMPLE: To record accounts payable (a liability) an increase would mean adding ____ and a decrease would mean to add ____

Answer 9

Add debit to increase

Add credit to decrease

Question 10

Liquidity

Answer 10

An organizations short-term ability to convert assets into cash to be able to meet its obligations and pay its liabilities

Question 11

General Ledger (aka G/L)

Answer 11

The financial records containing details on a company’s assets, liability, and shareholders equity, revenue, and expense accounts

Question 12

General ledger account

Answer 12

An account in the general ledger

Question 13

Another key difference between the template method and the double-entry accounting system is that there are:

Answer 13

cards for revenue accounts, expense accounts, and the Dividends Declared account. (not recorded in retained earnings as in template method)

Question 14

Retained earnings =

Answer 14

operating retained earnings + net income - dividends declared

Question 15

Revenues and their effect on retained earnings

Answer 15

Revenues ultimately increase Retained Earnings because they increase net income, which increases retained earnings.

Question 16

Expenses and their effect on retained earnings

Answer 16

Expenses ultimately decrease Retained Earnings because they decrease net income, and a lower net income means lower retained earnings.

Question 17

Dividends declared and their effect on retained earnings

Answer 17

Dividends declared decrease Retained Earnings because they are a distribution of retained earnings.

Question 18

Revenue accounts will normally have a credit balance. This is because revenue accounts increase Retained Earnings and Retained Earnings normally has a credit balance, so it must be credited to increase it.

Answer 18

Know this

Question 19

Expense accounts will normally have a debit balance. This is because expense accounts decrease Retained Earnings and Retained Earnings normally has a credit balance, so it must be debited to decrease it.

Answer 19

Know this

Question 20

Dividends Declared will normally have a debit balance. This is because Dividends Declared decreases Retained Earnings and Retained Earnings normally has a credit balance, so it must be debited to decrease it.

Answer 20

Know this

Question 21

Helpful HInt

Answer 21

Asset accounts normally have debit balances; increases in assets are also recorded as debits.

Question 22

Helpful HInt

Answer 22

Liability and shareholders’ equity accounts normally have credit balances; increases in liabilities and shareholders’ equity are also recorded as credits.

Question 23

Helpful HInt

Answer 23

Revenue accounts normally have credit balances; increases in revenue are recorded as credits.

Question 24

Helpful HInt

Answer 24

Expense and dividends declared accounts normally have debit balances; increases in expenses and dividends declared are recorded as debits.

Question 25

Accounting cycle

Answer 25

The sequence of steps that occur in measuring, recording, summarizing, and reporting of events in the accounting system

Question 26

Chart of accounts

Answer 26

A listing of the names of the accounts used in a particular accounting system

Question 27

Can Companies Change Their Chart of Accounts and What Are the Implications If They Do?

Answer 27

Yes, companies can and do make changes to their chart of accounts. Companies can add new accounts when they enter into new types of operations, open new locations, wish to capture information at a different level of detail, and so on.

Question 28

When a company begins operations,

Answer 28

None of its accounts will have an opening balance.

Question 29

Permanent accounts

Answer 29

Accounts whose balances carry over from one period to the next. All statement of financial position accounts are permanent accounts

Question 30

Temporary accounts

Answer 30

Accounts used to keep track of information temporarily during each accounting period. The balances in these accounts are eventually transferred to a permanent account (Retained Earnings) at the end of the period by making closing entries

Question 31

Dividends Declared account is a _______

Answer 31

temporary account

Question 32

Types of permanent accounts

Answer 32

Asset, liabilities, and shareholders’ equity accounts are permanent accounts.

Question 33

Types of temporary accounts

Answer 33

Revenue, expense, and dividends declared accounts are temporary accounts.

Question 34

transaction analysis

Answer 34

This involves identifying whether an event or transaction has occurred and, if so, determining its effects on the company’s accounts.

Question 35

source document

Answer 35

a document that is received or created by the company indicating that a transaction has taken place that needs to be recorded.

Question 36

Examples of source documents

Answer 36

include invoices, cheques, cash register tapes, bank deposit slips, time sheets, and shipping documents.

Question 37

General journal

Answer 37

A chronological listing of all the events that are recorded in a company’s accounting system

Question 38

Journal entry

Answer 38

An entry made in the general journal to record a transaction or event

Question 39

When making journal entries

Answer 39

The customary practice is to list the accounts that are being debited before the accounts that are being credited, and to indent the accounts that are being credited.

Question 40

Key points to recording journal entries

Answer 40

• The total dollar value of debits must be equal to the total dollar value of credits within each journal entry.
• Record debits before credits.
• Indent all credit entries.

Question 41

Compound journal entry

Answer 41

A journal entry with more than two parts (that is, multiple debits or credits) that affects more than two accounts. As with any journal entry, the total amount debited must equal the total amount credited

Question 42

Why Are Transactions Also Recorded in the General Ledger?

Answer 42

While the general journal provides an important chronological record of the effects of each transaction, companies require summarized information.

Question 43

General journal contains what?

Answer 43

The general journal contains detailed information on each transaction.

Question 44

General ledger contains what?

Answer 44

The general ledger contains summary information for each account.

Question 45

Posting

Answer 45

The process of transferring the debit or credit information from the journal entries to the general ledger accounts

Question 46

Trial balance

Answer 46

A listing of all the general ledger accounts and their balances. Used to check weather the total of the debit balances is equal to the total of the credit balances

Question 47

Trial balance vs Balance sheet

Answer 47

Do not confuse a trial balance with a statement of financial position (also known as a balance sheet). A trial balance lists the balances in all the accounts, while a statement of financial position includes only the asset, liability, and shareholders’ equity accounts.

Question 48

If you prepare a trial balance that does not balance, here are some tips for finding your error:

Answer 48

First, calculate the difference between the total debits and the total credits, and look for a transaction for this amount that may have been recorded or posted incorrectly.
Divide the difference from the first step by 2, and check to see whether a debit for this amount has been recorded as a credit, or vice versa.
Divide the difference from the first step by 9. If it divides evenly—with no decimals—check for a transposition error: two digits that have been reversed.

Question 49

Adjusting entries

Answer 49

Journal entries made at the end of the accounting period to record an event or transaction that was not recorded during the period. Events or transactions that are not signalled in any other way are recorded through adjusting entries. The entries do not involve the Cash account

Question 50

Two types of adjusting entries

Answer 50

Accruals

Deferrals

Question 51

Accruals

Answer 51

Adjusting journal entries required when a company needs to recognize a revenue before the receipt of cash or an expense prior to the payment of cash

Question 52

Deferrals

Answer 52

Adjusting journal entries required when a company needs to recognize a revenue in an accounting period after the cash has been received or an expense in an accounting period after the cash has been paid

Question 53

Accrual entries are required when

Answer 53

Accrual entries are required when a revenue or expense needs to be recognized before cash is received or paid.

Question 54

Deferral entries are required when

Answer 54

a revenue or expense needs to be recorded after it has been received or paid.

Question 55

Adjusting journal entries:

Answer 55

never involve cash

are made at the end of each accounting period (such as each month, quarter, or year end)

Question 56

Accumulated depreciation account

Answer 56

A contra-asset account whose normal balance is a credit

Question 57

Contra-asset account

Answer 57

An account used to record record reductions is a related asset account
-But its normal balance is contrary or opposite to what an asset account would normally have. As such, a contra-asset account normally has a credit balance rather than a debit balance.

Question 58

Carrying amount

Answer 58

The full value of all of a company’s accounts receivable less the allowance for doubtful accounts. In the context of long-term assets, carrying amount or carrying value s equal to the asset’s cost, less accumulated depreciation, less accumulated impairment losses. It represents the portion of the asset’s cost that has yet to expensed.

Question 59

Adjusted trial balance

Answer 59

A listing of the accounts and their balances after the adjusting entries have been made, but before the closing entries have been made

Question 60

Closing entries

Answer 60

Entries made at the end of the accounting period to transfer the balances from temporary revenue, expense, and dividend declared accounts into retained earnings accounts. Resets the balance of all temporary accounts to zero

Question 61

On the statement of changes in equity, a company’s ending retained earnings balance is equal to:

Answer 61

= Beginning Retained Earnings + Net Income − Dividends Declared

Question 62

four closing entries

Answer 62

1. Close all revenue accounts to the Income Summary account.
2. Close all expense accounts to the Income Summary account.
3. Close the Income Summary account to Retained Earnings.
4. Close the Dividends Declared account to Retained Earnings.

Question 63

Income summary account

Answer 63

is a temporary account that is opened and closed on the last day of a company’s fiscal year. It is used to determine the amount of the company’s net income, which is then transferred to Retained Earnings.

Question 64

The closing entry process has achieved two key objectives

Answer 64

The balance in the Retained Earnings account has been brought up to date by adding the net income for the period and deducting the dividends declared during the period.
The balances in all of the temporary accounts have been reset to zero, so that the accounts are ready to use at the start of the next accounting period.

Question 65

Closing entries:

Answer 65

-transfer the balances in all temporary accounts to Retained Earnings
-reset all temporary account balances to zero
are made at the end of each year

Question 66

Accounting cycle

Answer 66

1) Transaction analysis
2) Summarize + post to G/C accounts
3) Trial balance (DR=CR)
4) Adjusting entries
5) Adjusting T/B
6) Prepare financial statements
7) Closing entries

Question 67

Which of the following accounts normally have a debit balance?

Answer 67

Dividend accounts
Asset account
Expenses