Chapter 3--The Accounting Cycle

Question 1

What is an accounting transaction?

Answer 1

An economic event that effects the financial position of a company

Question 2

What happens to an economic event cannot be assigned a dollar value?

Answer 2

It is not an accounting transaction and is disregarded in the accounting cycle

Question 3

What is a ledger account, and what does it do?

Answer 3

A ledger account corresponds to a balance sheet item, and systematizes the accumulation of transactions

Question 4

What is a T-account?

Answer 4

It is a form of ledger account, named after its appearance. It has the name of the ledger account on top, a horizontal line, and the space under the horizontal line divided by a vertical line into debits and credits

Question 5

What are the rules for debits and credits for asset accounts?

Answer 5

Debits increase the value of the account, and are recorded on the left-hand side; credits decrease the value of the account and are recorded on the right-hand side

Question 6

What are the rules for debits and credits for liability accounts?

Answer 6

Debits decrease the value of the account and are recorded on the left-hand side; credits increase the value of the account and are recorded on the right-hand side

Question 7

What are the rules for debits and credits for owners’ equity accounts?

Answer 7

Debits decrease the value of the account and are recorded on the left-hand side; credits increase the value of the account and are recorded on the right-hand side

Question 8

What is the relationship between asset accounts, liability accounts, and owners’ equity accounts?

Answer 8

Based on the accounting formula, total assets must equal total liability plus total owners’ equity. So an adjustment in one ledger account must affect others to maintain homeostasis

Question 9

What are the two effects of a transaction on ledger accounts?

Answer 9

A right-hand side effect, and an equivalent left-hand side effect

Question 10

How are debit and credit used in ledger accounts?

Answer 10

A credit is a right-hand side entry, and a debit is a left-hand side entry. There is no value judgement associated. Whether a credit or debit increases the value of the ledger account depends on they type of account (i.e.: asset, liability, owners’ equity)

Question 11

What are the five steps of the accounting cycle?

Answer 11

1. Enter identified and measured transactions in a journal
2. Post journal entries to the appropriate ledger accounts in the general ledger
3. Adjusting accounts are recorded in the ledger accounts to reflect internal transactions
4. Trial balance is prepared using the accounts in the general ledger. This is used to determine errors in the ledger account entries
5. Financial statements are prepared from the ledger accounts and the trial balance

Question 12

All the information needed to create the Income Statement is found in which ledger account?

Answer 12

The Retained Earnings (OE) T-Account